How to Choose a Financial Planner

If planning your finances in minute detail and researching investments that fit your goals and risk appetite is not your cup of tea, then it is better to hire a financial planner who will do the work for you. But how does one find a good adviser? What attributes make up a good financial planner? Here are some tips to help you get started.

 

Finding a Financial Planner

The best way to find a planner is referrals from friends, colleagues or family. The financial planner should have been handling their finances, and they should be happy and satisfied with the planner sufficiently, to have referred him/her to you. Don’t take a planner who is referred to you because they are a friend of a friend. The referrer should have experience with the financial planner.

 

The other way, is to use websites such as FPSB, Financial Wellbeing, advisorkhoj or several other ones you can find online. Find a planner who is in your city with a good amount of experience. Prefer some one who is self employed instead of a corporate CFP (certified financial planner). As an example, go to FPSB India and search for planners by city and state. Then sort the result by employment. Look for self-employed financial planners. Read about them and shortlist a few. Then, talk to them and see if you like their style. Of course, this method eliminates all non-certified financial planners, but you at least have a starting point. Note that having a certificate or MBA or other qualifications do not automatically make them a good financial planner.

 

Attributes of a Good Financial Planner 

There a few important things you want to look for in a good financial planner. One of them is the fees. There are many ways a financial planner can charge you, but there is only one that will benefit you. Here are some fee structures —

 

Commission

A financial planner who works on commissions will not charge you anything! When you hear that some one is offering a free service, you should always be doubtful. These financial planners will suggest you investments which pay a commission to the planner. You can be rest assured that these hidden commissions will reduce your returns. For example, they will always suggest a regular mutual fund instead of direct funds. And because the regular funds have higher expense ratio, the returns will be lower and the planner gets a commission (the difference between the expense ratio of regular fund and direct fund) which is quite significant if you are investing a large sum. These financial planners target individuals with high net worth. Don’t go with them.

 

Investments

The other way a financial planner targets high net worth individuals is by charging a percent of investments under their management as fees. For example, they may charge 1% of your investment as their fees, and if you have invested Rs. 1 crore under them, then they get Rs. 1 lakh as their fees! Managing bigger investment is no different that managing a small investment, and the planner should not be charging different rates based on investment size. Skip these folks.

 

Performance

Some financial planners charge a small flat fees or even zero fees and then tell you that they will take a portion of the profits when your assets increase, and will not charge you anything when there are losses. For example, they may take a 20% fees from the profits they make. So if you invest Rs. 10 lakhs and they gave a profit of Rs. 1 lakh, then they charge you Rs. 20,000 as their fees. If they are not able to make you a profit in a year then nothing will be charged (or some small fees might be charged).

 

This seems like a win-win situation for you because you only pay something if the planner is making money for you, and nothing if they lose your money. In your mind you are thinking that the planner will try and make money for you so they can get their fees. But the financial planner is not aligned with your goals, or safety of your investments. They are gambling with your money. They might take high risks and make good money when the going is good, and nothing in other cases. However, they may not be doing any favors to reach your goals. Avoid them.

 

Flat Fees

There are others who charge a flat fee to do your financial planning. These type of financial planners are the ones who are most aligned with your goals and success. Yes, there is a possibility that they will charge you a flat fees and not do a good job on your planning. But then, that would hurt their business because you might not hire them the next year and would not recommend to others. Since these planners don’t get any sales commission, they are not restricted to only certain investments. Their investment advice will be to help you reach your goal. Choose these kind of planners.

 

Beyond fees, you also should look for other attributes that make up a good financial planner. Make sure they give you personal advice based on your profile and that they have good knowledge in their domain. Some financial planners collect your data, run some calculators and robo advisor software to provide planning. Try and avoid such people. Every investor is different and there needs to be an understanding of the client’s requirement at a personal level.

 

A financial planner should be collecting a lot of information from you, including your current investments, goals, income and expenses, details of family members, insurance, will, life style preference, risk appetite etc. They will make you think a lot about many things and ask you to collect a lot information about yourself which you might not have thought about yourself. They should help you set your goals, and provide advice if your goals are too aggressive or don’t match up with your risk profile. Eventually, the financial planner will give you a plan and should do regular follow-ups as well as review your portfolio every few months. You should ask these questions when you are selecting a financial planner. When you talk to them, you should get a feeling for whether they are knowledgeable, friendly, and fit your style.

 

How Much to Pay

Financial planners usually charges anywhere between Rs. 10,000 and Rs. 35,000 a year (as of this writing) depending on how much time they are spending on your goals, planning, their experience etc. In the past, I have paid Rs. 20,000, but cancelled with in a month since I felt I had planned very well myself and the advisor did not add much value. In fact, the planner said so himself 🙂 after looking at all my projections and graphs. Find a financial planner with whom you are comfortable with. Don’t overpay or underpay.

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