Who is an 'Independent' Financial Advisor?

Ramalingam K,
Certified Financial Planner and Investment Advisor
Director, Holistic Investment Planners
Chennai

What do investors expect from a Financial Advisor?

The straight forward answer for the above question will be “unbiased advice”. Investors expect the advice given by the financial advisor to be unbiased, neutral and independent.

What do they really get from Financial Advisors?

Most of the investors get only “misselling” in the form of financial advice. Most of the financial advisors or investment agents/brokers are following the commission based model. That is, they will recommend (sugar coated misselling) an investment scheme and you need to invest in that scheme through them. The investment company will give them commission.

As an investor if you invest in a mutual fund or any insurance scheme through the financial advisor, the advisor will get commission from Mutual Fund Company or insurance company.

The origin of Misselling or Biased Advice:

If the income of the financial advisor is based on the commission which he gets by selling investment products, then

there is a possibility that he will ‘recommend’ schemes where he gets more commission. The scheme which is giving him more commission will not be really suitable to you. The scheme which is really suitable to you will not be giving him more commission. There is a conflict of interest.

That’s why you will see more agents or financial advisors try to sell you ulips, in which they make around 25% to 60% commission. For the same reason the financial advisor will not recommend you term insurance, that too no one will even talk about online term insurance. Term insurance is the cheapest form of taking insurance. Online term insurance is cheaper by 50% to 65% when compared to the term insurance distributed through agents.

Of late, have you seen anyone recommending you PPF? Why? You will get to know the answer if you check, is there any commission for selling PPF.

Attachment Vs Independency:

If your financial advisor is an LIC agent he will be telling you ‘East or west, LIC schemes are the best’. If he is a mutual fund agent, then he may be telling you the mutual fund schemes are the best. If he is a stock broker, then he will claim ‘insurance and mutual fund will not give you better returns; share trading is the best way to make money’.

Your financial advisor should not be attached to a company or product for getting his income by way of commission. If you hire a fee based financial advisor, he will be attached to you as you are the person who is giving him fees. So he will not recommend you schemes with hidden charges. He will REALLY recommend you schemes with low charges or no charges.

Fee Based Advice and Optional Execution:

For the advice the fee based financial advisor offers, he will charge you a fee and he will give you an option for executing the investment transactions. That is he will not force you to invest through him. You can get advice from him and invest directly or invest through an investment agent or broker. If you want and feel comfortable then you may invest through your fee based financial advisor also. In the fee based model, as an investor you are directly paying him fees. So the financial advisor will really act in your best interest.

Which group are you in?

There are two kinds of investors. One is who really want independent financial advice and ready to pay fees. The other one is who also want independent financial advice but not ready to pay fees. So they look for a commission based agent to give them unbiased advice.

Fee based advice will make money for you. The commission based advice will make money for the broker. Do you want your investments to make money for yourself or your broker?

Investors, who want to save the fees, end up paying more than the fees in the form of hidden charges in the investment schemes.

Last but not the least:

Independent financial advice will reduce your overall cost, though you pay fees. Remember, if you don’t pay a fee, you don’t get advice; you will get only ‘misselling’.