Is Your Financial Advisor Unbiased? Here’s How to Find out
It’s a sad truth that mis-selling of Financial Products has cost thousands of unsuspecting Indian investors crores of rupees over the years. A recent study estimated that Indian investors incurred a staggering loss of about Rs.1.5 trillion (1.5 Lakh Crore) owing to mis-selling of Life Insurance products alone, between 2004 and 2012! And although Life Insurance has evolved as the poster child for mis-selling over the years, the fact remains that sharp selling practices exist in almost every sub domain of the financial advisory profession – stock broking, lending, real estate advisory and even mutual funds.
In such a scenario, what can investors do to safeguard their own interests and draw inferences about their Advisors? Although there’s no magic formula for assessing this, there are, fortunately, a few aspects of your advisor’s modus operandi that can help you assess whether his advice is biased or not.
If your Advisor is overtly focussed on moving you in and out of investments frequently, you need to be watchful. Especially within the stock broking industry, churning or trading is the de facto standard of the business even today, as brokers only really earn anything when you move in and out of stocks or derivatives frequently. Resultantly, clients often lose money by adopting purposeless strategies such as intraday flipping and buy today/sell tomorrow – whereas they could have stayed put in value stocks for the long term and made a lot more money. An unbiased Advisor will tend to be more passive, recommending portfolio changes only when the situation most definitely warrants it.
If your Financial Advisor recommends an Insurance Product such as a ULIP or an endowment plan as a ‘one size fits all’ solution for all your financial problems, you may have reason to worry. While Insurance (both Life and Health) are undoubtedly critical aspects of a Financial Plan, watch out for an Advisor who aims to position it as a solution for all your financial goals, without considering and presenting other options. Also, a non-conflicted Advisor will take care to ensure that the policy you are purchasing is solving the main purpose of insurance (i.e risk mitigation) while keeping the annual premiums low. In other words, an unbiased Advisor will only recommend pure insurance plans that have only a risk element and no savings or investment element – such as a term insurance policy or a Mediclaim.
No Clear Investment Philosophy or Strategy
A goal based financial planning led engagement model can be a very clear indicator that your Advisor is acting in a fiduciary capacity on YOUR behalf, and not as an ‘agent’ for a financial product manufacturer. An unbiased Financial Advisor will have in place some very clear criteria for making recommendations, including a robust risk profiling process and a clear asset allocation strategy, that’s based on your time horizon and the nature of your financial goals. On the other hand, if your Advisor lands up at your doorstep every time a new product is launched (“Sirji, ek badiya product launch hua hai”) you can be sure that your Advisor isn’t really an Advisor at all – but really just a sales person masquerading as one!
Extreme Secretiveness About Revenue Model
An unbiased Financial Adviser will have no qualms about disclosing his revenue model to you with 100% transparency, whereas a conflicted one will hem and haw, while protecting the nature of his revenue model like it’s a state secret! Good Advisors are completely unapologetic about making money from dispensing advice – after all, don’t all good things in life come at a price? Biased advisors, on the other hand, know deep down that they are commission motivated, and this stops them from being straightforward about how they make money, and how much they make.