The Securities and Exchange Board of India (SEBI) clarifying that people who educate others on the stock market must use stock prices with a three-month lag has once again highlighted the importance of registered financial advisors.
Last year, the regulator barred market infrastructure institutions (MIIs), including recognised stock exchanges, clearing corporations and depositories, from having any direct or indirect association with persons who provide stock advice or recommendations unless he or she is registered with SEBI or approved by the board.
Over the past year, the markets regulator has consistently intervened to curb the spread of stock advice that may be deceitful or misleading content on finance by financial influencers, or finfluencers as the mostly online grouping has come to be known as. Many of these self-claimed influencers have been providing stock tips and investment advice without due diligence, putting investors’ money at risk.
As per a Moneycontrol report, the SEBI circular dated January 29 signals the end for various finfluencers who run unregistered investment advisories under the garb of stock market education.
Why financial advisors?
According to experts, genuine financial advisors offer more value and reliability than finfluencers for several reasons. First, those falling in the former category have the requisite qualifications (for instance, CFP or certified financial planner, CFA or certified financial analyst) and are regulated by industry bodies. They are required to maintain professional standards and ongoing education.
On the other hand, finfluencers may not have formal training. Many base their advice on personal experiences without regulatory oversight. Further, finfluencers provide general advice that may not suit your specific situation. Also, they often focus on high-reward trends, like crypto or stock picking, without offering balanced advice. Experts warn that finfluencers operate with minimal regulation, which can lead to misinformation or scams.
Picking the right financial advisor
Picking a financial advisor is not an easy task. An advisor’s true worth is realised only after a few years, depending on how your investments have weathered the market volatility and whether your financial goals are achieved. So its important to do some homework to land a good financial advisor.
Such persons can be mutual fund distributors (MFDs), registered investment advisors (RIAs) or CFPs. Remember, you would find MFDs and RIAs who are CFPs as well. You might also find an investment firm that gives you the services of both MFDs and RIAs.
It’s not that hard to find an advisor in your neighbourhood. The catch is how to screen them, and how to sort out the good advisors from the average ones.
For someone in their 20s just starting out with a small sum to invest every month, an online investment platform where you can set up your account and start investing in minutes works. But as you grow older, and your family and financial responsibilities grow, you might need someone offline.
Evaluate if you wish to meet your advisor in person regularly or if a virtual meet is fine. If you aren’t so hung up on your advisor being physically close to you, your options open up. But much of the communication happens over email and the internet this way. So if you’re not well-versed with mobile and internet communication, stick to someone local.
Red flags
Many times, prospective advisors within the first few minutes start to talk about products. That’s not necessarily a bad thing. But if they talk about insurance products or a new fund offer (NFO), a newly-launched mutual fund (MF) scheme, or even a scheme that’s recently launched, that’s a red flag.
Another red flag is how much the advisor is focused on product features when he or she is speaking with you in the initial meetings. For instance, if an advisor tries to sell you a life insurance policy, stressing only on the tax-deduction benefits, instead of whether you actually need the policy or not, that’s a warning sign.
Keep in mind
Bundled insurance policies that combine insurance and investment do not give more than around 5 percent return and pale in comparison to pure investments like MFs.
Another class of instruments you should be wary of your advisor talking about are complex products. Many advisors sell portfolio management schemes (PMS) these days. These are concentrated portfolios that are devised based on high-risk strategies. Many PMS have a good track record, but their strategy might just be too risky for you; moreover, the minimum investment required is Rs 50 lakh.
If you haven’t yet invested in market-linked investments or have very little invested in MFs, a PMS is a big jump best avoided.
Advisor’s qualifications
While an MFD is registered with the Association of Mutual Funds in India, an RIA is registered with SEBI. While an MFD largely sells you MFs and works on a commission model, she is supposed to do basic risk-profiling to ensure that you buy the fund that fits you the best. An RIA is an investment advisor with basic qualifications required to get a licence. She charges you a fee, but invests your money in direct plans of MFs that do not have agent commission embedded in them.
While MFDs and RIAs are focused more on investments, a CFP’s approach is more holistic. A CFP focuses on your life goals, takes into account your financial needs across all your goals like retirement planning, regular holidays, loan repayments, insurance, estate planning and so on. Investment planning is just one part of your overall financial plan. The whole package is a CFP’s focus area. Some CFPs who work as investment advisors are either RIAs or MFDs; most others are part of larger teams at banks and other investment advisory firms.
The world of finance is vast, and specialisations vary. So avoid chartered accountants for investment and wealth management. Their expertise lies in taxation.