Conventional thinking is that only the rich can afford a financial advisor. After all, a financial advisor helps accelerate wealth creation and protect the wealth that has been created. However, every person in every wealth category will benefit from a financial advisor. After all, what is the objective of wealth? Isn’t it to fund your life goals and make you contented? Who doesn’t want to enjoy financial security, enjoy a comfortable life and be happy?
“But wait, why do I need an advisor, when can I can do it on my own? Why should I pay someone else for this?”This is a common reaction because people are used to one of the following:
- Having no advisor – As per an RBI survey, 77% of Indians do not plan or save for retirement.
- Getting advice for free from a friend – Doesn’t matter if the friend is qualified or not
- Thinking that they have a free advisor in the form of a banker or an agent – This is how most people end up with dud insurance policies or costly Mutual Funds/PMS that leak brokerages and commissions
Who exactly is qualified to be called a Financial Advisor?
Depending on who you ask, the answer could range from your neighborhood smartie pants investor giving out stock tips, to Warren Buffett. Most people would assume any of the following certified people
- Chartered Accountants – they deal with ‘money’. Most practicing CAs may not make good financial advisors because the profession of accounting and taxation is so intense and so very different from what is required for Wealth management. It is often seen that the Chartered Accountants advise is geared towards tax savings, which is great, but need not be the best among various alternatives.
- Certified Financial Planners – they hold a certification on financial planning. CFPs are a good choice provided they play a fiduciary role like RIAs.
- SEBI Registered Investment Advisors – this is the Gold Standard as it assures knowledge and a guarantee that the advisor doesn’t take any hidden cuts out of your hard earned investments.
Why do we need a Financial Advisor?
So, why do we really need a Financial or Investment Advisor? The answer is similar to why we approach any other specialized professional, be it a doctor, lawyer or a plumber. We need professional expertise.
You must consider having a financial advisor:
- Because you may not have a plan and sticking to a Financial plan is tougher than creating one
- Because you can really get more out your money
- Because vital decisions need core expertise and a calm mind
- Because you may not have the time, or have a better use for it
- Because it helps you act in a timely manner
1. Because you may not have a plan and sticking to a Financial plan is tougher than creating one
A financial advisor helps you define the plan and then keep it on track. (S)He simplifies the complex maze of various financial products and financial markets, and contextualizes it for your situation. The context could be different for every person. Let us see a few examples:
- Young: A person who is young (less than 30 years old) may not have realized the importance of starting early. Not taking advantage of compounding could set him/her back by several years up to a decade or more, making it difficult to meet life goals in the future.
- Middle-aged: A middle-aged person may be tied up with huge monthly EMIs. He may worry about putting children through school and college while making ends meet.
- Nearing Retirement: Someone nearing retirement may be worried about leading a comfortable life after they stop working. This could be about a limited nest egg or increasing cost of living over an increased life expectancy while there are no pensions to rely upon.
- Wealth Aspirant: A wealth aspirant would be interested in knowing how to get there faster while meeting various financial goals. She may have the ability to explore ideas that are normally not suitable for the “not so wealthy”.
- Wealthy: A wealthy person may be interested in knowing how to protect the wealth, keeping the investments tax efficient and optimizing the best possible investment vehicles for optimal growth.
A financial advisor creates a customized plan based on the context.
2. Because you can really get more out your money
Having an expert as your advisor ensures that your earnings are channeled into the right investments while keeping them tax efficient. Many people may not be aware of how long term capital gains, short term capital gains impact them. They may incur significant taxes on dividends. However, it is not just about saving taxes. It is about getting higher post-tax returns, without compromising on the risks associated.
One huge advantage is to reduce portfolio risk with rebalancing. While it appears simple, an advisor can coach a person into taking the right decisions in terms of when to sell a high performing investment or get out of a low yield investment. Having a financial advisor who knows the hidden traps and pitfalls of investing is really helpful.
3. Because vital decisions need core expertise and a calm mind
Let us admit it. Taking decisions is stressful. Taking financial decisions is even more stressful. This is why most financial boats drift away into troubled waters.
For those who think they already have the expertise, that is great. But this too depends on the level of investment and risk you are taking, relative to your income and wealth.
You can take an over the counter tablet for a headache but would you perform surgery on yourself? There is a reason why even a doctor seeks help from another Doctor or takes a second opinion relating to his/her own health. Most of us are not aware of our own blind spots. Having a different person (ie Investment advisor) who can look at you neutrally and with a calm head can lead to some revealing perspectives about yourself. Hence having a trusted advisor who can analyze clinically and take decisions day in and day out with a calm mind is helpful.
4. Because you may not have the time, or have a better use for it
Today, Time is the most precious resource. Once a moment is gone, it is gone forever. The pressures of modern day living always take a toll on time. You may not have the time to do your own financial planning, simply because you may be really busy with your career. While one can always pick up new skills, the pertinent question again is: will you learn and fly your own plane or build your house. Also, is the available time better spent with family and friends or pursuing a hobby that makes you happy at your core?
In the earning years, your time is best spent doing things that maximize your income. When you are retired, you may want to use the time to do things that you always wanted to do but could not find the time.
5. Because it helps you act in a timely manner
In our busy lives, we often miss out on taking action on time. For a beginner, this could be missing out on starting early and investing regularly and hence missing out on the stupendous effects of compounding.
Someone else may miss out on changing investment allocations on time. Those who trim high equity exposures in peaking markets suffer less when corrections happen.
This is why the value of advice is not a function of time. The benefits are lumpy just like investment gains are. While an advisor works for you throughout the year, the benefit is maximized when key decisions are taken. The wealth creation or protection resulting from a timely intervention and rebalancing your mutual funds asset allocation can be quite large. Eg: advice to stay invested in tough times, or exit when everyone is getting excited.
You may lose money to the ‘industry’ because the advice was not 100% honest. Remember, if you are working on an ‘everything is free’ model, then you are the product. There are no free lunches.
A small fee for honest advice on what is best for YOU and not the advisor is the best investment you can ever make.