Most Indians believe that the financial advice should either be free or in most cases, is not needed at all!
In fact, it’s quite common to come across people who will tell you (if asked) that: Why should I take financial advice from anyone? I already know it and isn’t that difficult. My father (or other relatives) does this and that. They can’t be wrong. And even if I do have to take advice from someone else, why should I pay for it? It is available freely.
I won’t deny that there is plenty of free financial advice available. Family members, colleagues, friends - just reach out to them and boom! You will have tons of advice about what to do with your money. Then of course there is the internet.
The real problem with such free advice is that it isn’t necessarily coming from knowledgeable or reliable people.
Many feel that their insurance agents and mutual fund distributors are giving them free advice (as they don’t charge anything). But these people are intermediaries and are compensated by financial companies via commissions. So there is always that angle of conflict of interest that one needs to be aware of. You really don’t know whether what they are selling to you (as the next ‘perfect’ investment) is really good for you or good for them as a commission-generating sale! As they say, you should never ask the barber if you need a haircut.
What does ‘free’ financial advice or remaining unadvised cost you?
This is the most important question that you should be asking.
Let us try to answer it:
Cost of investing in the wrong products is very high. For example, the average 10-year returns (at time of writing) of Mid-Cap equity funds is about 16.1%. And the difference between the best and the worst performing mid-cap equity fund (in last 10 years) is about 9.9 percent (ranging from 10.3 percent to 20.2 percent). This means that had you invested Rs 10 lakh in the best one, it’s value today would be Rs 63 lakh. But instead if remained with the worst one, it would only have yielded Rs 27 lakh. The difference isn’t small. Of course taking professional advice doesn’t guarantee the best fund selection. But a good adviser can help you avoid bad funds easily (and that in itself can help you earn a lot more over the long term).
Cost of investing in wrong assets is very high too. Suppose you wish to save for some goal that is 20 years away. If you know your stuff, then you would agree that equity is a better option in such a case. But if your friendly and free-advice-giving insurance ‘uncle’ sells you an endowment plan instead, then you lose out big time. Such insurance products give just about 5-6 percent returns whereas equity funds deliver closer to 12 percent.
At a very broad level, money is there to help achieve your financial goals. And to properly deploy your money between investments, savings and insurance (yes these are different animals), you need to know the answers to questions like ‘Am I saving enough for my children’s education?’, ‘Am I on track for saving for a decent retirement?’, ‘Do I know how much life insurance I need so that my family lives comfortably even if I were to die tomorrow?’. What happens if you can’t answer these questions? You will invest your money randomly here and there and make wrong financial decisions that will cost you more than just your money.
Not knowing whether you are investing enough for your goals and investing in wrong products results in you ending up well short of the requirements on goal day. And that is the biggest cost you pay.
The cost of ‘being wrong financially’ is very high in your personal life. And two major reasons for ‘being wrong financially’ are:
i) Taking free advice from the wrong people, and/or
ii) Not taking advice at all (even when you can’t handle it yourself)
They say that knowing when to ask for medical and legal advice is very important. I would add financial advice to it too.
A good investment advisor doesn’t come free. But the cost of having a poor financial product (due to taking free or no advice) is much higher than the cost of professional investment advice. It can derail your financial goals and make it very difficult to catch up with your financial needs in later years.
And when you stand to gain more than the fee charged, the time is right to seek out professional advice. Just remember that a few important pieces of good financial advice can offset many years of the fee that you may pay.
(Dev Ashish is a SEBI-registered Investment Advisor and founder of StableInvestor.com.)