The cost of investing in the wrong financial products is a lot higher than the cost of getting professional investment advice.
That might sound a bit odd but it isn’t. And we will see why.
Most Indians don’t want to pay for proper investment advice. They believe that financial advice (unlike medical or legal), should be free. There is also the belief that product sellers such as insurance agents, etc., who claim to offer free advice, are sufficient to propel your investments in the right direction.
Nothing could be further from the truth. And I will show this with an example I recently came across.
The fallout of investing in the wrong financial product
A family friend has been paying about Rs 1.2 lakh as annual premium for LIC’s traditional endowment policy. He has been doing this for the last seven years. The policy tenure is 28 years, so there are about 21 more years for the policy to mature.
We tried to explain that traditional insurance (endowment) plans are not good investments for the long term. Remember, his policy’s tenure is 28 years. Such policies also give mere 4-5% returns. This pales when you compare it with equity investment returns, which were in the region of around 10-11% over the same period.
My friend doesn’t have an investment advisor to guide him. Why? Because, he says, he doesn’t believe in paying a fee for financial advice. And he also was not sure whether the advisor’s fee would be worth the advice given.
Are financial advisors really that costly?
I took a piece of paper and showed him that his Rs 1.2 lakh annual premium in an endowment plan (which was the wrong product to be in) for 28 years will result in a maturity payout of close to Rs 75-80 lakh. Looking at just that absolute number, he said it was a big amount.
But when I showed him that the same Rs 1.2 lakh annual investment instead in equity funds could have generated almost Rs 1.8-2 crore, he did not believe me at first. He was a bit shocked to see how the difference between the two could be so large (Rs 73 lakh vs Rs 1.8-2 crore).
I explained a bit about equity returns. More importantly, I showed him how one single piece of right and timely advice from an investment advisor (even though it comes for a fee) would have helped him invest in the right product from the start. And as a result, he would have a lot more money later on than he would have had without that advisory intervention.
People are willing to invest in the wrong product but don’t want to pay a small fee to know better. One reason for this is that many people don’t even know how to evaluate their investments properly, leave alone plan for their financial goals.
Do you need a financial advisor?
Some people know how to manage their investments properly and choose the right products. They are what can be called the small-but-growing DIY (do it yourself) investor community.
But there is a very large number of people who do not know how to pick the right products, how much to invest regularly to achieve their goals, how much insurance to have, etc. A timely, unbiased and objective professional advisory intervention can be the difference between them meeting or missing their financial goals.
These people will also show patterns in their investment decisions that are obvious signs of the need to have an investment advisor.
I have said this often but will repeat it: the cost of investing in the wrong products is very high; and the cost of investing in the wrong assets can be disastrous for your financial goals.A good investment advisor will never come free. But the real cost of investing in the wrong financial product is far higher than the cost of getting professional investment advice.