Choose your financial advisor carefully

Posted On Thursday, Apr 14, 2011


Here's an interesting analogy - choosing a financial advisor is like choosing a spouse! Because just like your spouse who knows every detail of your personal life, your financial advisor has access to all the intimate specifics of your financial life. If you are new to investing don't get unnerved (or overly impressed) by imposing titles like Analyst, Asset Planner, Financial Consultant, etc. No matter what, it's important to ask your financial advisor some basic questions before you take the plunge.

(Oh! And if you are a financial advisor yourself, then may be you could prepare to answer your investors these questions, even though they may not ask for it).

Whose side are you on?

Every business tries to make money; but making money is quite a risky business.
Investing (right) allows you to watch your savings grow into wealth. And your financial advisor is (supposedly) the guide on this long term wealth generation route. Hence, it is vital that both, you and your advisor, are focusing on the same goal. You both may have different perspectives, but that should never create a conflict of interest.
So, the next time your advisor invites you over for coffee (and to introduce a new investment option), here are a few very relevant questions which could set the tone for your financial future.

'How do earn your money to pay for such lovely coffee?'

Remember, mutual fund houses pay distributors attractive commissions to push sales of their funds. While this works brilliantly as a performance linked incentive plan, how well it suits your financial needs is the main question. Now, don't get us wrong, there is no harm in your advisor charging you a fee for his advise. Sure, he should. Our humble submission though, is that he should let you know as the client how much commission he earns from selling a fund. It's almost like the way you pay a doctor his fees and then visit the pharmacy of your choice to collect the prescribed medication.
The idea is to be sure that your advisor is giving you independent advice without leaning towards commission incentives.

"Were you in the financial advisory business when mails were usually sent by post?"

How long has your advisor been in this profession? A must-have for your financial advisor is - Experience! Determine whether he has managed money over different market cycles – Has he tried to ride the bull trend without considering risks? Has he lost sleep during the bear fall because of investment calls he should have avoided? It might not be an altogether bad idea to request a few client references from your advisor - Don't you do a background check before you buy a new mobile phone or laptop?

"The performance of this fund as of now looks good, but has it turned over a new leaf overnight?"

Now, almost every sensible person in the field of investments has practically gone hoarse screaming that you should always invest for the long term. Hence insist that your advisor shows you funds with a history of consistent performance. Don’t get floored with the size of the fund, or the fact that it has a star rating - these are myths of investing in mutual funds. And most importantly don’t agree to pick a fund just because your colleague/neighbour/friend has it - each of you have different risk appetites and investment needs. Try asking your financial planner to provide you with an evaluation of the fund type that suits you, and feel free to ask him why he thinks so.

"Would I be facing any risks while investing in this fund?"

If your advisor says - No/Not Really/I will take care of it - may be you should politely thank him for the coffee and head for the door. All investments in mutual funds face risks. You see, the last paragraph after every mutual fund ad; yes, the same paragraph that you simply ignore, explains the risk you would be taking by investing in the fund. So, be aware that there are risks involved, ask your advisor to provide you with a glimpse of how the fund's research team zeroes in on the companies they plan to invest in and also how they raise capital for their schemes. A strong foundation can withstand various ups and downs of the market, changes in government policies, interest rates, economic recession and competition. Get a complete analysis of how your investments will make money (through capital gains, dividends or interest earned on the investment) and how much it would cost you to purchase, maintain, and sell your funds.

"Great! I’m almost done. Just one thing, how often do you think we should re-look at my portfolio?"

A regular review is a must - because your disposable income levels could change, your investment needs may change, and your risk profile might just get altered. So, visit your advisor regularly for reviewing your path to profit. But, always remember that regular reviews do not necessarily equal regular portfolio alterations. When you invest in a fund, stay with it for the long term - trim it a little over time if you want - but continuous exits followed by new fund entries may not be the best solution. After all, your advisor had suggested the fund knowing that you would stay invested for the long term, so a new advice to switch funds because of market trends seems a little contradictory, doesn’t it?
Financial advisors are specialists who are in the profession of giving you financial advice. However, at the end of it all, the money that you entrust on their recommendation to various investment avenues is your hard earned savings.

These were just some of the important queries first time investors may come across, but the main question is "Which Financial advisor can give me an honest opinion on the Mutual Fund house I should invest in?"

As an investor, we're sure you prefer transparency, but in the mutual fund industry, there is lack of transparency on distribution costs. So, while mutual fund portfolios are transparent, distribution costs are not. Hence, when a fund is recommended to you, is it working for you or the distributor? And who can you trust to give you the correct picture?

The fact is that Quantum is the first and only mutual fund house to deal directly with the investor, so that all your money finds its way into the market. And there is complete clarity and transparency on all costs.

As India's first and only direct-to-investor mutual fund, Quantum works towards cleaning those opaque glasses so that they don't muddle your thoughts. Even though many believe that we are against distributors, the truth is that we are fighting for a better and transparent system. For instance, while most mutual fund costs are known, distribution commissions are generally never disclosed. So, you never know whether a distributor is recommending a fund because it deserves to be in your portfolio based on its merit, or simply because he is getting paid a higher commission. In the end, you pay the price for this lack of transparency.

As an investor with Quantum Mutual Fund, you know exactly what your money is doing - and who is being paid for what. Complete Transparency!

Hence, make sure you are aware about what lies in store before you sign on the dotted line. So have you had a cup of coffee with your financial advisor yet?

Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Please visit – to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the scheme's objective will be achieved and the NAV of the scheme(s) may go up or down depending upon the factors and forces affecting securities markets. Investment in mutual fund units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the Sponsor / AMC/ Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

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