Why is it important to go to a fee-only financial advisor?
Written By Suresh Sadagopan
There are many people we depend on while we go through life. There are specialists who help us in many areas of life – doctors, lawyers, architects, CAs, career counsellors, medical counsellors, physiotherapists, gym trainers, nutritionists etc. We also routinely take the help of a car mechanic, caterer, drivers, travel agent etc. to make our life easy.
We can do some of these ourselves. But most of them require special knowledge & expertise. For instance, if there is a problem with the car, most of us will be flummoxed. There is no alternative than to drive it to the garage and get the problem attended to. Without these professionals, our life would come to a grinding halt!
What we expect in such engagements is that the person concerned will act professionally and do the right thing by you. This is very important in these relationships. These are relationships where there is asymmetric knowledge where one person ( customer ) knows almost nothing about the subject and the other is an expert ( who knows virtually everything there is to know on the subject ). In such situations, the customer has no other option but to trust the professional implicitly.
For instance, the garage informs you that car air conditioner is clogged and requires cleaning or the brake linings have to be changed, we need to be able to trust them and go ahead. One has no options.
Selecting the right one becomes important – That is precisely why, one should put in a lot of effort to find out the right kind of professional for every area. Once such professionals are identified, one can repose implicit faith on them and go ahead as per their counsel.
Usually, the discovery of the right professionals is a time consuming process. Also, the process of validating whether the professional has the requisite capabilities and temperament is difficult to establish for a normal person. That is precisely why most people resort to selecting such professionals through references. This means that someone has dealt with them and has had a good experience. That does not ofcourse guarantee that it will work well in their case too; but it does indicate a certain level of maturity, service delivery capability & competence.
Looking for the Right Qualities
A professional may be competent & service delivery may also be good. The professional may even be good to deal with. But these are not sufficient conditions to evaluate and conclude that s/he is the one to go to. There are a couple of qualities which are important in a professional before they can be truly trusted. They are ethics & integrity.
Ethics/ Integrity is what sets one professional apart from the other. This is what engenders trust and allows the customer to entrust the job completely in the secure knowledge that the professional will take care of them; that they will act in their best interests.
A True Advisor
While every field has experts to go to who can be expected to offer unbiased, client-centric advice, the financial services area was marked by the absence of any such advisor. The only people who offered “advice”were product sellers. When they provide “advice” and sell the product there is an inherent conflict of interest. There is an inherent contradiction here when a product seller representing his/her principal is also donning the cap of an advisor.
This is ironic as Financial Services area is huge and the requirement for an ethical advisor is acute. A good advisor here can completely change the complexion of the financial future of customers. However, there is nobody for customers to turn to when they wanted to seek advice regarding their money matters. They had to make do with product sellers masquerading as advisors thus far.
Recognising this landscape, SEBI has brought in a new class of Advisors through it’s IA Regulations 2013, who would be fee-only, conflict free & would have fiduciary responsibility. Only such an advisor can verily act in an ethical manner. This was a momentous decision for the Indian consumers in that they would now have access to a true advisor, who can advice in their best interests.
Pay Directly for Advice
Consumers need to understand that financial intermediaries are not doing charity. If they are giving “advice”, they get something out of the products sold. It is still fine if the product sold is suitable. Often times, it is not. There lies the catch.
Indirect remuneration can be a lot & hence costly for the client. Also, the allegiance of the product seller is with the product manufacturer, who pays them.
Customers need to understand that delinking the advice & the product is in their best interest. They need to choose the right advisor & pay a fee directly for good advice. Else, they will really pay – through their noses!