People are very particular about the financial advisor they choose, we consider and evaluate alternatives, we take months to select the right financial advisor, we even change advisors if we are not satisfied. And we are right, we should care, because we are entrusting him with our hard earned money, our personal information, we are actually entrusting with him our lives, as he will be guiding us, he will be setting our investment path, so that we can actualize our life’s goals.
So, we need an advisor who is honest, ethical, knowledgeable and who keeps our interests at the center. So, a good financial advisor has to fulfill a number of prerequisites before getting onboard.
But then, the success of our investment plan not only depends on how good the advisor is, we as investors also have a very crucial role to play here. If the advisor has responsibilities, if he can be held accountable, then we too share certain responsibilities.
Apparently some investors do not reveal the complete list of facts and figures about their personal or financial life. This is a major financial mistake, and can sabotage your entire financial plan. The advice of the advisor is based on the facts provided by the investor, if the facts are false or incomplete, then the advice may not be the perfect path towards towards your goals. To get the best from the advisor, the investor should be honest with him. The investor should take care of the following things during the making of his financial plan:
We have a number of people who advise us for our finances, CAs, lawyers, bankers, insurance agents, and financial advisors. On your CA’s advise you invest money in a PPF, on your Uncle’s advise you have invested in a property in the suburbs, you bought a medical insurance policy on the insurance advisor’s advice and likewise. All these existing investments have an important role to play while devising your comprehensive financial plan, and they should be included as a part of your overall asset Portfolio. Consider an example, Arun is in his late 40’s and he decides to have a financial plan. So he sits with his advisor and discusses his requirements, and even on the advisor’s questioning, he does not reveal about a Rs 10 Lakh FD that he has and a house worth Rs 2 crores that he is expecting to inherit from his parents. This information makes his financial standing pretty sound, but because the advisor lacks this info, he lays down more of an aggressive financial plan for Arun. The Advisor presumes that Arun doesn’t have a strong financial standing, and he needs to create wealth to meet his goals in the next one or two decades. But considering his age and the fact that he has decent wealth, an aggressive plan is not ideal for him, rather he should have had a conservative plan which would have protected his wealth along providing with some growth. Had the advisor known the complete facts and figures, he would have deleted the risk element from his plan. Misrepresentation of wealth resulted in creation of a bad financial plan for Arun. When you hide some investments from your advisor, your financial plan will not reflect the true picture.
Communicate your priorities: Let’s say you want to buy a house in the next five years. So, you sit with your financial advisor and both of you lay down a plan of how will you be investing to achieve your goal, and you start following the investment plan. Now one year later, you tell your advisor that you need money from the home fund for a vacation to Europe with your wife as it is your 10th wedding anniversary, and you can’t postpone it because you promised this trip to your wife 5 years back. This vacation will disrupt your entire home plan, since the investment was created with a five year horizon and secondly withdrawing money now will result in a significant deficiency in the corpus at the time of buying the house. So, you should have communicated your vacation plans to your advisor when you were devising the plan. The advisor would have either provided for both goals in the plan or he would have asked you to postpone one of your goals. Therefore, the investor should communicate his priorities, his attitude towards risk, his nature, because all these characteristics exercise a significant influence on the investor’s financial plan.
Personal Information: The investor may feel that certain details are embarrassing or are not relevant, and he skips narrating that information to the advisor, but such information may be vital and should have been accounted for in the financial plan. For eg. If an investor does not have a very pleasant relationship with his wife and he is expecting a split in the future and he hides this fact from his financial advisor, then this concealment will have a negative impact on his finances. The advisor will not account for this upcoming financial emergency and may direct his money towards his long term goals, leading the investor into a difficult situation in the future. Or if the investor or any of his family members is suffering from a serious health issue, the investor may omit telling about it to his advisor because according to him it isn’t a material fact. But here too, providing for a health condition either in the form of insurance or an emergency fund is necessary to avoid pitfalls later.
There is a chance that you may want to entrust some part of your financial plan to some other service provider even though your financial advisor provides those services as well. Like you may want to buy an insurance policy from your insurance cousin, or you may want to plan for your taxes as per your CA only. So, you should be honest and should tell about it to your advisor point blank, because ultimately it is for your benefit. If there is a space for a particular insurance policy in your ideal Portfolio, the space should be utilized irrespective of the platform used. It will also give you a more holistic view of your finances and will depict deviations, if any.
So, the bottomline is your financial advisor is your best financial friend, who ought to know all about your finances, so that he can have your your back always.