Moneycontrol

Budget 2021

Associate Partners:

  • SMC
  • Samsung
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Moneycontrol

Budget 2021

Associate Partners:

  • SMCSamsungVolvo
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Can a fee-only adviser give unbiased investment recommendations?

Fee-only advisers give advice for a fee, have no conflicts of interest and are client-centric

January 12, 2021 / 10:43 AM IST

Ramnarayan was rushing home. He was caught in a bit of traffic, which made him impatient and made him curse the rickshaw ahead, fully knowing that there was a long line of vehicles ahead of it.

Today was his son Harish’s birthday. There were things he was to do. This traffic jam was upsetting all the plans. The traffic started moving. He wanted to rev up. But it was just inching. In a few minutes, he was able to cruise along steadily, though not at high speed. He reached his home half-an-hour later than planned.

He was able to do his part and the birthday celebrations went off well.

Ramnarayan household had been planning this birthday bash for at least a month. They were justifiably happy that they pulled off a good show.

Does this planning extend to other areas? Oh, yes. They plan their vacations meticulously. They had put in so much effort with planning the marriage reception of Ram’s cousin Aditya. They even plan the evening outings.

Close

The only thing the family hasn’t planned is its finances! Is that not important? Ram says he realizes how important it is. He says he puts in a lot of effort to go through articles, surf business channels, attend seminars etc. to keep abreast.

But he is not sure if he is doing all the right things to make a good financial plan. He is not sure if his long-term goals will be achieved. Sometimes he wonders whether a financial advisor is needed. But so far, he has not searched for one.

People like Ram can be found all around us. They put in lots of effort to earn money. But, managing it is not what they know or even like.  Many do not have an advisor that they can consult. But then a credible advisor can immensely benefit such people.

Also read: SEBI’s Registered Investment Advisor norms: How the client-investment advisor relationship is set to change

Benefits of a credible advisor

There are advisors who do not sell products, are independent, craft a financial plan and deliver advice for a fee, have no conflicts of interest and are client-centric. These are a new set of Registered Investment Advisers (RIAs).

They have a fiduciary responsibility, whereby they put the client’s interests ahead of everything else, including their own.

Clients gain as they get access to someone who will understand their needs and put together a plan and portfolio to achieve their goals and objectives. They will also save a lot of money, as the products recommended by these advisers would be lower-cost, commission-free products. Also, the adviser would consider the tax incidence of products suggested, optimize tax outgo and money management itself.

Another important benefit is that a good advisor will stop the client from making many of the common mistakes they are wont to commit if they were on their own. Blunders which can set a person back by several years can now be avoided. A good adviser will be a sounding board for any financial decision and will be the client’s confidante.

Return expectations

Many people have high return expectations when they come to a fee-only financial adviser. But, a financial advisor crafts a plan and puts together a portfolio based on what is needed for that family. They need to consider their goals, risk profile, liquidity & tenure, taxation, income needs etc. apart from the returns the product can offer. Due to a different investment mix, returns itself will vary for each portfolio.

But, many people want to hire advisors based on what returns the advisor can ensure. That was the problem for Ramnarayan as well. He found a good advisor – Athreya. But, he wanted Athreya to deliver 2-4 percent more than what he was getting, which Athreya said may not be possible and certainly wouldn’t commit to.

Athreya had stated that he is for ensuring that all life goals are met rather than focusing on high returns. But that did not convince Ram.

Advisory Wealth Effect

When Ram was having all these discussions with Athreya, the advisor had talked about another aspect which had a deep impact on Ram.

Athreya talked about the Advisor Wealth Effect (AWE). He had explained that by themselves most people do not invest to their saving potential, keep an unnecessarily high amount of liquid money in the bank (which gets spent), do not have a regular, disciplined saving habit, do not have any budget and tend to go overboard etc.

Ram himself had very little savings at 42, though he and his wife were working and pulling in some serious money.

Athreya had said that having a plan, being disciplined with investments, and spending as per budgets allotted would ensure tremendous wealth creation for clients. This had astounded Ram. Athreya had said that it will start slowly, but will gradually gain momentum and help in accumulating some serious wealth. Outsized returns do not play any role here.

Advisory Wealth Effect (AWE) happens with every case, but over varying time frames based on the client’s situation. But it does happen. That is a magic that good advisors do conjure up!

Ram clearly understood what Athreya was saying. Left to himself, he may not have much money in his fifties too.  He was now ruing the fact that he learnt all this in his forties. Things could have been so much better had he known this while in his first job! But wishful thinking hardly helps. Action does. Ram now wanted that Advisory Wealth Effect for himself. He is hoping it is not too late!
Suresh Sadagopan is Founder, Ladder7 Financial Advisories. He is the author of the book: If God was your Financial Planner
first published: Jan 12, 2021 09:48 am

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