Financial advice is often sought for free. Almost every day, I receive emails and messages asking me to ‘suggest’ a few stocks for investment. Some of them are specific requests—‘for the medium term’ or ‘should double in one year’. Many of them also want to know how a small sum of money needs to be invested to make sure that it would grow enough to buy a house. I wish life were that simple. If I had such abilities, I would be holidaying all my life, gallivanting around the world. There is no ‘holy grail’ that has been discovered to ensure ‘sure-shot’ returns from any market-related investment, whether shares, currencies, or commodities, etc.

Whilst they all want advice, none of them discloses anything about themselves or their financial needs and status, not even the barest detail. I do not know what the person’s financial health is; about his motivations for investing; his other savings; or the kind of risks he can take, etc. I do not know how much money they want to invest either. Of course, no one wants to even know whether there is a fee for the knowledge or skill; they do not even bother to think about why I should help them out. There is a great deal of responsibility in ‘giving’ advice, especially when it comes to matters of money.

It is like calling a doctor and asking him for a prescription drug. Without knowing your symptoms, there is no way a doctor can help you professionally. And he does not do it for free. If you are a regular patient, he may prescribe on phone, in case of an emergency, but if you do it often, he will not take your calls.
On the subject of advice, what kind of advice can someone give? Is there any guarantee of the outcome? Is it the best advice? Unfortunately, there is no reason to say yes to one or all of these questions. Financial advisora seek to make a living by helping out people with their financial planning and investment needs. The advisor is no magician and can, at best, help you to understand the risks and probabilities involved in each financial instrument so that you can invest as per your risk appetite and understanding. Unfortunately, since advice is not paid for, those who proffer it, instead, make a living on earning commissions by selling investment products. When the investor wants ‘free’ advice, s/he will only get sold products that may or may not be suitable. The large-scale mis-selling of unit-linked insurance plans (ULIPs), especially by your trusted bankers, is testimony to this. After all, advisors have to make a living. If you do not pay for advice, they will find ways to make money off you and, in the process, compromise on the quality of advice.

Once you decide on an advisor, make sure that you spend time sharing your financial data. It does not pay to hide stuff simply because a good advisor can help you to rationalise your investment strategy. Do not ask the financial advisor for specific goals. Let the advisor tell you what is possible with the resources you can spare and the choices available.

For each recommendation, it is important for you to understand the risks involved. Once you take this approach, you will find fewer problems with your finances. However, if you tell him about your aspirations, there is a high possibility that high-risk and, often, unworkable strategies or asset allocation may be recommended. It is important for you to understand some basics about money and investments, since it is your money and involves your future. A rudimentary comprehension of various asset classes can be a good beginning.

Many wealthy people too do not share all the information with advisors because they are reluctant to pay a percentage-based fee on the amount invested. They are willing to open up when they negotiate an annual fee for the services rendered. But they never disclose the full picture because they like to keep the extent of money they have under wraps. I guess, this mindset will not change soon.

Whilst choosing a financial advisor, I would urge investors and savers to choose someone who has been in the financial markets for at least 15 years as it is a long enough time to cover around two business cycles. An experienced advisor, who understands history, would understand the risks better.

The last point about choosing an advisor is whether we should go for a one-man outfit with a couple of assistants or for a corporate set-up. Personally, I do not think that the big corporate set-ups offer anything extra. Their staff is given commission-driven ‘targets’ and there is no continuity or consistency in the quality of advice. Most corporate ‘advisors’ merely use their tag to rope in clients to sell products.

Every year, they are given specific ‘extraction’ targets from each client; this forces them to advise clients to churn their portfolio frequently. Also, in the big corporate set-ups, we cannot choose the advisor to deal with. In all probability, there would be a continuously changing ‘financial advisor’ who has his work cut out for him in terms of targets to meet and products to sell.

Finally, what kinds of people need financial advice? It is a wide spectrum. There are many beginners who cannot afford to pay for the advice. It is best that they stick to mutual funds or mutual fund advisors who do not charge a fee because they are paid by the fund house. I would recommend going to a professional advisor only if you have at least around Rs25 lakh or so to spare.
A good financial advisor should get at least around Rs25,000 per annum in fees from a client, so that he can remain honest and competent. A professional advisor would spend, maybe, a couple of sessions with his knowledge and remains available to you on call. A good advisor, who is paid for advisory services, will find the best products for you without hankering for commission on products. A good advisor should also offer the execution of the transaction to the customer. The customer, in turn, can go to his banker (who offers everything from fixed deposits to stock broking) or do it himself online. Once the advisor gives such freedom to the client, the client also gains confidence about the quality of advice.

Today, the ‘financial advice’ service is in turmoil. Many independent financial advisors have suffered because regulatory changes in the mutual fund industry have blocked off a steady income stream. Increased awareness about the mis-selling of ULIPs is another factor. Many of them were focused on product commissions rather than on providing ‘advice’. The customer segment is yet to come to a stage of maturity where they are willing to pay for ‘advice’, since they equate quality advice with ‘tips’ that bring quick profits. They are also smug in their assumption that advisors get paid handsomely by the ‘producers’. It will be a while before the concept of ‘fee-only advisors’ catches up. Until then, we will continue to see a domination of advisors who are sales agents.