It is human nature to procure good things at the least price. And if it’s free, you just made your day ! When it comes to financial advice, investors look unbelievingly if you say they will be charged for advice. Financial advice has always been free in India and it takes time for investors to warm up to the idea of paid financial services.
The pitfalls of free financial advice are many. Let’s see how in the long run it benefits you, if at all !
Free Financial Advice – The issue
Investors have had their financial planning done at the hands of relationship managers from banks, life advisors of insurance companies, tax consultants and even brokers from brokerage houses. All these have come for free.
First things first, there is nothing free in this world.
Relations managers have targets to meet each and every month and will sell products that will make them meet their targets; life advisors or insurance agents will sell insurance products that will fetch them the most commissions; stock analysts will ask you to buy and sell heavily wherein each transaction will fetch them commissions.
Everyone has a target to meet and no one is offering advice that is free. There are hidden costs behind the free financial advice.
Another important thing to keep in mind is that these professionals do not have a holistic picture of your financial disposition and so do not recommend products based on that. Now that is a blunder. Since all of them sell products to you randomly, over a period of time you are bloating at the seams with piles of insurance polices that you don’t need; innumerable stocks that might not be good for your risk taking ability and unwanted mutual funds that were sold during their NFOs.
Part of the problem stems from the fact that each and every one of the above mentioned professionals call themselves wealth advisors or financial planners. This concept of “I-can-be-your-planner” has been so rampantly used or misused that the investor is now confused as to who exactly is the right financial planner. And in this confusion, when he is asked to pay for advice by the right planner, he smirks as he thinks he has many who offer free advice !
The impact of free Financial Advice
Free financial advice often ends in selling inefficient products to the investor which he does not need.
You are sold an insurance policy with the question “How much premium can you pay ?” as against “How much insurance do you need ?”.
Imagine, you are sold a ULIP for your children’s education and marriage and another one for your retirement. There is nothing wrong with this product per se, but there could be better products in the market. Do you really need so many insurance policies ?
Being bundled with bad products means the investor is losing a chance to make more money in the long run. He is also losing time to invest in the right products and his goal based investing concept is not in line with his asset allocation.
The power of compounding works best when you start early so imagine what lost time might mean for you.
The problem with free advice is that none of it takes into account your risk taking capacity; none of them think on how many stocks and how many insurance policies you should have; none of them know how your money is spread across which sectors and whether it is well diversified – actually, none of the advice is actually free !
Opt for paid advice
Think for a moment. You pay your doctor fees for the drugs he prescribes for you; you pay your lawyer fees for talking to you, then why would you not want to pay your financial planner his fees to make your financial life a better one for you ?
Firstly, investors need to understand who in the financial world does what and why. They need to ask why is advice being offered free of cost.
A little clarity from the regulators will also help. Our Indian regulators haven’t been advertising the Certified Financial Planner profession very strongly. This is the only coveted and qualified tag in India that can offer financial advice that benefits the investors. And yes, it comes with a fee !
Remember that you will be much better off financially if you were to opt for paid advice. If it needs a mindset change at your end, do it. It’s better to rest in peace with the right paid advice than to be miserable with free ones.
Rightly pointed out that there are no free lunches in life. But how do we guarantee that paid advice will work? Unless there are performance based incentives, for few of my friends have burnt their hands even after paying. The reason why people buy from so called ‘free advice’ is that these people are easily accessible, an insurance agent will come to your house, the bank relation ship manager you meet at bank or they can come to your place!!
@bemoneyaware, Which means that even paid advice needs to be sought after careful thought and due diligence. Best to pay certified financial planners ?
@Radhey Sharma, Yes Radhey! Rightly pointed out that we need to find a good financial adviser..for their are complex financial products these days but we need to review our portfolio and see if we are on the right track.
Dear Concerned,
I would like to seek advise in financial management
I am a 36 years aged individual,
Having Wife, 2 kids (girls 7 years and 2 years), Father and mother (61 and 55 years)
I have a income of 12 lakhs per anum
I have 50,000 Rs/- LIc Jeevan anad policies per anum, since 7 years
120,000 (10,000 Rs/- per month Postal Fixed deposits) since 1 year
SIP 1,000/- per month Reliance small cap fund investment since 1 year
Will you please advise me where and all i should invest my money effectively, to get
Returns
Health security
children education
Children marriage
House
Pension plans
I do not have any pension plans ,mediclaims and home loans till date
With best regards
Nayab
@Nayab, You need to go for paid services – this requires a lot of analysis and consultation.
The problem is that nowadays even the agents/advisors are projecting as a financial planner and are trying to sell you a specific product. I met with a guy who told me that he is a financial planner and he will guide me in planning my financials. When I met with him all his plans were centered around a particular companie’s insurance product. Luckily I had educated myself on the personal finance and had done a bit of research on CFPs.When I questioned him about his plan and asked him to show me the CFP certification details he admitted to me that he is still working as a insurance agent but currently undergoing the CFP training ( Which I believe is a lie).
I think it will be helpful if you already have some ideas about personal finance before you go and take the help of a CFP. A CFP is not a magician who can guarantee that if you follow his advice you will hit the target. He can plan your finances well considering your future goals, risk apettite, current asset allocation etc. He can bring your finances to discipline but don’t expect a miracle. Once people realize this then the whole financial planning process becomes an educational as well as an eye opening experience.Like any professional services there will be a fee for the services you are asking since the CFP is providing you a professional service. By paying the fees for the service the CFP will give you unbiased plans with only one thing in his mind , ie help you achieve your financial goals.
@Shanil, I appreciate your thoughts on CFPs – I wish every investor was like you !
It is always beneficial to know a bit about personal finance before taking the service, it helps you challenge the financial planner and provide your own inputs.
As you rightly say, there are many fly by night operators who masquerade as financial planners so we need to be aware of them.
Nice write up!
Free advice is generally accompanied with product sale..
@Chirag, True, cannot agree more.
There are also few sites giving some useful information and it doesn’t usually give any advice. Advice is usually best given paid.
Once you have all the information and if you can get to the decision from it, then you are good. Otherwise you are in need of a financial planner or if you are going towards the free advice, you may end up losing more.
Like they say “There are no free lunches!”.
In fact you have to even take the PAID advise with a bit of caution. The paid advise would typically be based on the facts and data we provide to the planner/advisor. Any errors, omissions or mis-representation of the data that we provide can play havoc with the final outcome – the financial plan.
Additionally, sometimes we live under some assumptions and fail to provide the basis of such assumptions to the planner – which in turn can also hurt the output. This is what I myself recently experienced and I am glad Radhey was able to catch it and bring it to my attention.