Choosing the best financial advisor for retirement savings in India is quite confusing as you don’t know which advisor to go with. But don’t worry, as the Securities and Exchange Board of India (SEBI) is here to help you through the maze. With the SEBI Investment Adviser regulation of 2013, you can quickly separate the chaff from the grain.
Using SEBI’s website, you can verify the credentials of a SEBI Registered Investment Adviser (RIA) before shortlisting them for your financial planning needs. But don’t make your decision based on this list, as not all these RIA are fee-only financial advisors.
What is a fee-only financial advisor, and how do they differ from other advisors?
There are primarily two types of financial advisors or planners: a) fee-based and b) fee-only.
a) Fee-based financial advisor – earns from creating a financial plan and commission from suggested products as the investment is made through the advisor. For example, mutual fund distributor (MFD). Because they work for a commission, these advisors are more focused on suggesting products which help them earn high commissions. So, there is a conflict of interest with clients as the client is unsure whether the advice is in their interest or the advisor’s interest.
b) Fee-only financial advisor – gets paid a set fee directly from the client for the advice and receives no commission from the products they advise to clients as they invest on their own. For example, SEBI registered investment adviser. They either charge a % of assets under advice (AUA) or a flat fee. Because they get compensated directly by the clients, the advisor is focused on clients’ needs. So, the client is sure that there is no conflict of interest in the advice.
The benefits of working with a fee-only financial advisor for your retirement planning?
Retirement planning is one of life’s most important goals as one would retire at some point, and their income would stop. But their expenses would not stop and would continue for many years after retirement. Also, unlike other goals such as kids’ education, car purchase, or house buying, no bank will lend money to fund retirement needs. This makes saving for retirement a non-negotiable goal and must goal for attaining financial security for life.
The most important thing in investment is avoiding mistakes and high-cost products. Here fee-only financial advisor comes to help by suggesting products which are in the client’s interest. For example, mutual funds have two options: regular plans (with a higher expense ratio) and direct plans (with a lower expense ratio). Typically, the regular plan’s expense ratio is double that of the direct plans. So, over a 30-year period, one would save 26% extra by just investing in direct plans.
A fee-based financial planner would not advise a direct plan; as in that case, they would not get a commission, whereas a fee-only financial advisor would because he is getting paid directly by the client.
How can a fee-only financial advisor help you create a retirement savings plan that meets your goals and priorities?
A fee-only financial advisor acts as a fiduciary, meaning they keep their client’s interests ahead of their own. When you work with a fee-only financial planner for retirement planning, you know the charges upfront, and that the advice would be honest. He would first understand your needs, such as budgeting, debt management, tax planning, estate planning, financial independence, or portfolio diversification.
Then, the advisor would do a detailed assessment of your risk appetite to suggest right asset allocation before offering any products for retirement income.
He would then assess your existing savings (networth analysis) and savings potential (cash flow analysis). Then he would understand your financial goals and then discuss their priorities. After analysing these data points, he would discuss and prepare the plan for short-term (<2 years), medium-term (2-5 years) and long-term (> 5 years) goals.
Finally, based on your risk appetite and life stage of finances, he would suggest an investment strategy with specific investment products to meet your financial goals. This way, a fee-only financial planner also helps you with portfolio diversification.
Compared to this, a fee-based financial advisor tries to put the cart before the horse by focusing first on the products, which gets them more commission income than what is best for the client.
How can I find and select a reputable fee-only financial advisor?
To find the best financial advisor or to search for an expert in your area, check out SEBI’s website. You can search SEBI RIA by state or city. So, to search for a fee-only advisor, say in Delhi, you can put it in the Location field and then click on the go.
You will receive a list of SEBI RIA and can evaluate them before using their service.
But this list doesn’t differentiate between fee-based and fee-only financial advisors, so do your due diligence by checking out their website before going ahead with one of them. But this is difficult as currently there are 1000+ SEBI RIA’s, so when in doubt, use these guiding principles to stay away from an advisor who:
a) Assures Returns
Benjamin Franklin once said that “…nothing is certain except death and taxes”, so if you hear assured or guaranteed returns from an advisor, then run off in the opposite direction. The trap of guaranteed returns has been used time and again, but as Mark Twain once said, “History never repeats itself, but it does often rhyme”.
b) Suggests complex investment
“If you can’t convince them, confuse them” is the guiding principle of many financial advisors, but the best financial advisor knows that this is not good for the long-term benefit of the client. An honest financial advisor would help you build wealth for retirement by using simple investment products so that you can manage same on your own. This might not be good for his business, but as a fiduciary, he will keep the client’s interest above his own.
c) Promotes get-rich-quick schemes
Rome was not built in a day, and the same goes for building wealth. But still, many people, in their desperation, fall for these schemes. This happens because they focus too much on “how to retire early” or “how to lead a life like influencer”. Like in 2022, many poured their savings into cryptocurrency only to find that these were nothing but Ponzi or pyramid schemes, where initial investors are paid out from funds of recent investors.
Finally, most people focus too much on “finding best financial advisor in my area” and should instead spend more time on “how you find a good financial advisor” as in age of internet and technology and to protect your privacy you don’t really need an advisor from your area but an advisor who is honest and transparent in dealings.
What is the role fee-only financial advisor in helping you monitor and adjust your retirement plan as your needs and circumstances change over time?
A fee-only financial advisor’s role as a fiduciary is to help clients comfortably manage and achieve their financial goals. The world is evolving, and so are client’s needs and circumstances. As the saying goes,” When the facts change, I change my mind”. Likewise, a best-laid plan requires review and, if needed, switch to meet these ever-changing situations. Here again, a fee-only financial planner helps assess the risk appetite and then, as part of a risk management strategy to meet these changes, suggests asset rebalancing.
What are the tips for effective communication and collaboration with your fee-only financial advisor?
Trust but verify should be your first mantra while dealing with a financial advisor. So before signing up, check out the advisor’s website’s SEBI Disclosure page to know the complaint status. Also, communicate over email or through recorded online meetings so that you can refer to the discussion later. This would help in avoiding confusion in future while implementing the financial plan.
Also, ask for the rationale for investment and don’t take things at face value just because your advisor has said so. The best types of planners would give their investment rationale in writing as they don’t have anything to hide from you.
What are the common mistakes to avoid when working with a fee-only financial advisor on your retirement planning?
The most common mistake is to think that the financial plan is cast in stone and does not require review or update. So, while retirement planning is for the long term, that doesn’t mean you don’t touch base with your fee-only financial advisor once the plan is implemented. This is because we live in VUCA (Volatile, Uncertain, Complex and Ambiguous) world and if you don’t have time to review your portfolio, seek professional advice and, if required, change your investment strategy based on the recommendation.
To sum it up, although the go or no-go decision is yours, before going ahead with a financial planner, understand their business model. If that model is based on commission or % of assets under advice, then you can’t be sure of their intent. As honesty and transparency are paramount in any relationship, go ahead with a flat-fee-only financial planner as their incentive is aligned with yours.