ULIP : Unit Linked Insurance Plan.It is a product offered by insurance company which gives investor both insurance and investment under a single integrated plan.
Will : legal declaration of how a person wish his/her possession to be disposed after their death
Fund : An amount of money saved or collected for a particular purpose
Investor : An investor is any party that makes an investment.
Certified Financial Planner is professional certification mark of excellence for financial planners conferred by Financial Planning Standard Board (FPSB) of India. A person qualifying for CFP will have to undergo/ abide with Education, Experience, Examination & Ethics. CFP is the most prestigious & internationally accepted financial planning qualification.
Amount paid to the insurance company for the purpose of the person's insurance.
Who will bell my cat?
Perplexed? Can’t make up your mind? Yes, sometimes having plenty of choices can be unnerving. For helping out with financial and investment planning, you are now spoilt for choice. There are a number of specialists who are ready and willing to help, albeit a commission or fees. However, the choice ultimately rests with the individual and is purely based on the preference and requirement.
What are the options?
Whose help do you need?
Certified Financial Planner (CFP)? A Mutual Fund distributor or Insurance Agent; or do you need to seek the assistance of your bank’s relationship manager or a SEBI Registered Investment Adviser (RIA)?
A decade or so ago, a question of this sort would invite quizzical looks. Today, it is a question of considerable substance and importance.
Thanks to specialization and the increasing trend towards a horses-for-courses solution to different situations in life; now all the above types of investment-facilitators are relevant, albeit for different needs and situations.
There is the additional dilemma of choosing between a fee-based planner and a fee-only planner. All the above categories of investment-facilitators could be either fee-based or fee-only and they could be a combination of both at the same time. The only way to resolve this fix is to categorize them into two broad categories:
1. Commission based Investment Scheme Seller: They earn their commission by selling a financial product to the investor. Banks, Mutual Fund distributors, and Insurance agents belong to this category. They do not charge any separate fee for their services.
2. Fee-Based Financial Advisors: They charge only for the professional services in the form of financial planning advice that they provide. The CFPs’ and SEBI RIAs’ come under this category.
It is often that a Product Seller tries to go beyond his role and influence the investor to go for a particular investment. More often than not, this might be detrimental to the interest of the investor. The product seller will try to sell those products, which fetch him more commission, and this leads to a conflict-of-interest situation. The particular investment, which the seller is trying to sell, might be of little or no value in the investor’s scheme of things.
Pure advisors, on the contrary, are more focused and provide advice, as per the requirements of the investor. They can handle a bigger canvas, as products don’t tie them down.
Let us have a peek at the profile of the investment-facilitators whom we encounter in our daily lives:
Mutual Fund Distributors
Mutual Fund Distributors come under the category of Independent Financial Advisors (IFAs).
This tribe of advisors typically recommend different mutual fund schemes for making investments, either on a lump sum basis or periodically through SIPs’. They earn upfront and trailing commissions from the AMC (Asset Management Companies, i.e. the mutual fund houses). As long as the investor remains invested, the agents earn commissions out of the payments made by them. Other than the commissions earned, the Mutual Fund Distributors do not charge anything beyond that from the investors.
Insurance agents are, well just insurance agents. They help people to purchase insurance products and the good agents maintain their relationship with the client throughout the tenure of the policy. They even help at the time of lodging and settling claims.
Insurance commissions are front-loaded. This means that the agent earns the maximum commission out of the premium paid by the policyholders during the initial years. After this phase is over, it would not bother them if the insured/policyholder does not continue with his policy. This results in a substantial conflict of interest.
Unlike Mutual Fund distributors, Insurance agents do not have any compulsion to keep the policyholder invested and even if the policy lapses they are not affected.
Ideally one should not combine investments and insurance. It would be sensible to seek opinion on different insurance plans and policies from Insurance agents, but beyond that, they would not be of much help.
Relationship Managers (RM) at Bank Branches
It is often that our bank’s relationship managers reach out to us with an “i-have-your-best-interest-in-mind’, kind of approach. They try to gain the confidence of the customer through convincing sales talk and even manage to sell some investment products.
These products may not be remotely beneficial to the customer, but the RM is driven by his own targets and has scant regard for the customer's needs.
The RMs’ is also not a permanent fixture in the bank’s scheme of things. They jump the boat when they find a better opportunity and hence the relationship building is not a priority for them.
There are a lot of instances where the wrong product has to be recommended to a client, which has resulted in the considerable loss for them. It is like selling a long-term ULIP to a senior citizen who is above 70 years of age and who in the first place had sought the help of the bank to suggest good investment opportunities for his retirement corpus.
It is therefore advisable to stay away from Bank Relationship Managers as far as investment-planning advice is concerned.
SEBI Registered Investment Advisors (RIAs)
The RIAs’ are Fee-Only Financial planners meaning that they provide investment advice for a fee. This frees them from any ‘conflict-of-interest’ situations and can thus provide unbiased views, which are in line with the financial plans of the client.
The SEBI website (https://www.sebi.gov.in/sebi_data/attachdocs/1424862077270.pdf) provides a caveat to prospective investors before choosing a particular RIA. Even though RIAs’ are supposed to be unbiased about their opinions, in reality, they may not always be so.
Clients and investors often encounter RIAs’ who run their trade along with the distribution and brokerage business under their cloak. They provide financial advice for a fee and then ask the investor to purchase a particular investment product from their friend or family member.
If one chooses to go with a RIA then it is always advisable to negotiate a fee beforehand and make it implicit that investments will not be made through them or their recommended parties.
How to choose the most competent planner/advisor?
It is always a good idea to make your own research. Education and experience are the primary criteria that should be looked into before deciding on a particular planner/advisor.
It is worthwhile to talk to the planner to gauge his honesty and integrity. Whether he is forthcoming about the risks involved in a particular form of investment and has a clear idea about the planning process. Probe him to find out if he actually understands your needs and is drawing up a plan based on them.
The planner/advisor should under no circumstance be allowed to influence the purchase of investment products from someone recommended and insisted upon by him.
Overall discretion is advised before making the final choice.