People are accustomed to investing on their own. Most investors are do-it-yourselfers. But then, most people don’t do the due diligence regarding the products they are investing in.
The ability to go through a brochure, understand it, find out if the product is suited to their situation and if so, act on it is something that many people don’t follow. Mostly investors ask their friends, colleagues and do as per what they hear. This is the most common shortcut to investing.
Very few consult advisers – the right kind of advisers.
Many of them may even claim that they have an adviser. But most times, they would be mistaking a product seller for an adviser. A distributor is interested in selling the products that they have in their bouquet. The investor may not even realise that the distributor is asking them to buy something, not because it is the right product for them but because they have that product to sell!
They are in fact happy that these ‘advisers’ don’t charge a fee!
True advisers would have the client’s interests at the core of their practice. To be a true adviser acting only in the client’s best interests, they need to be fee-only advisers and Fiduciaries.
Fee-only advisers earn only from the fees that they charge their clients. They do not earn through commissions, brokerages or other means. This does not sound like a big deal. But it is.
The way an intermediary is remunerated would change their behavior towards their clients. A distributor earning commissions is an agent of a principal (companies issuing the products) and would act as per their bidding.
They represent their principals and sell to the clients. Hence, this alignment is problematic.
A fee-only adviser has no linkages with product providers and work for the clients. They act only in their best interests. Hence, their advice would be unbiased, conflict-free & what is best for the clients.
There are so many benefits of dealing with a fee-only adviser.
Such advisers advice after fully understanding the client’s complete situation and requirements, their risk profile, goals, liquidity and tenure needs, etc., and suggest an aligned plan of action. Such advisers suggest the best possible products most suited to the client situation, suggest cost efficient products, help them manage their money efficiently, help optimize the tax incidence and ensure that they avoid mistakes which they are prone to, in the absence of a credible adviser.
I would like to highlight two very important ways in which an adviser helps their clients.
Adviser wealth effect: Most clients do not reach the potential of their wealth creation, if they do not have credible advisers at hand. These people invest the amount that they think they can.
But the amount they end up investing is much less than their potential to invest.
The reasons are many. Most are worried about liquidity and prefer to keep a large amount uninvested, in the bank account. They do not believe that they have so much surplus and don’t have the confidence enough to invest to potential.
Many are unsure of where to invest and end up investing only a small portion. Whatever they do invest, they do so in vehicles they are comfortable with, like fixed deposits.
Due to all this, a person not having access to a professional adviser ends up with a much smaller wealth pool over time.
A professional adviser will ensure that the portfolio suggested is properly diversified into the right asset classes, has enough liquidity, is optimised for tenure, taxes, risk and returns, and gives enough confidence to clients to invest to potential, as all the required checks and balances are in place.
This also results in better tax optimised return, due to which the client can reach a much higher level of wealth, than without an adviser. This is called the Advisory wealth effect.
Adviser Decision support: We all tend to take a lot of financial decisions, throughout life. Many times, we find that we do not have the wherewithal to take informed decisions as either the subject matter is not something we may understand correctly or the consequences now and in future of a financial decision is not clear.
We find that clients do not have any one to turn to when they need unbiased advice on financial matters. They hence rely on friends, colleagues and family members as also distributors of products, bank personnel, etc., for enlightenment on financial matters.
Many times, those advising do not know anything better and just give their general opinion. Others like distributors would want to sell their products and their ‘advice’ would be self-serving.
Decisions taken thus would impact a person in a major way.
We have found that a credible adviser who is unbiased and acts only in client’s best interest as a Fiduciary, will save the client from a ruinous path and put them on the road to financial freedom.
There are so many other benefits of engaging an adviser. But, even if one were to look at these two, hiring an financial adviser would make a world of difference to a client!