Jagoinvestor
April 9, 2012
Which Model of Financial Advice do you like ?
There are many different ways financial advisory runs in India (and worldwide). You must have encountered one of them for sure at some point of time. I have been able to pick 5 financial advisory models and wanted to highlight them and want you to tell me which advisory model you like and which one you hate? & why?
1. Financial adviser earning commissions out of products sold to you
This is the most common advisory model. Also, due to the widespread know how of this model, majority of Indian’s are stuck with bad and unwanted products. In this model the advisor/agent/planner comes to you, pitches the product, makes it look amazing through graphs/projections/emotional-blackmailing and then you buy it. In this model, the commissions are the main source of compensation for the seller. There is no fees paid by you directly to him and you feel like a KING.
2. Financial Advisor with fixed yearly charges
This model is not much widespread, but some people do it. In this model, the advisor/planner (whatever you call), will be available for you throughout the year, whether you need him/her or not. Its kind of yearly contract where he advises you on anything you ask him on your financial life. If in some year you ask more, that’s fine, you pay same fixed cost and in some years if you don’t “consume” his services much, still you pay him the same money. With this model, you are clear about the fixed cost you will incur on your financial advisor and even advisor knows that his cash flows are fixed. This model as per me is one of the best, but sadly this does not work much in Indian environment.
3. Financial Advisor on demand (pay when you want advice)
This model is very much like the above one, but in this you pay your advisor “on the go”. So whenever you take his advice or use his time for asking anything, you pay only for that much time, nothing less and nothing more. Again this model is not that much widespread, but some courageous advisors take this route. This model from one angle is really “american” style, where each thing is paid on “hourly” basis. So if you take 20 hours of your advisor in some year, pay for 20 hours. And if in some year you take only 5 hours, just pay for 5 hours. For advisor it makes his life easy as he spends his time only for what he is paid for and is really committed to produce the value for that time. Indian’s laugh on this model as of now.
4. Financial Advisor on One time payment basis
A lot of advisors work on one time basis, you approach an advisor, you take the service/advice and he works with you till you get what you need and then tata-bye-bye-see you. Financial advisors really try to make sure that there are yearly relationships, but most of the times clients don’t come back after a year as they feel it’s a waste doing it again and again. But some advisors just run on this model. So it really ends up like – “Come, pay the fees, take what you want, and that’s all”.
5. Fees charged as percentage of Portfolio Worth
Call it wealth management or Financial Planning + Wealth Management, in this model a fixed percentage of your net-worth is charged. The yearly fixed fees can be present or missing, but a percentage of your AUM (total worth) are taken by the advisor/planner/wealth-manager. A lot of people feel comfortable with this model as this is linked to their net worth. If there is no increase in their net worth, then no fees to be paid, but if the net worth increases, you give away a part of it in fees.
Which model do you like and why?
Now the question is which model do you like and why? What is the reason you like a particular model and why do you think it should really be encouraged? A plain brainstorming! let’s do it. Leave your comments and express yourself!
I felt % of the profit or % of the losses occured is the best plan to go ahead.
as the advisor is like partner in here there will be always a possibility of best result out of it.
Also, it is only possibile to go ahead with the TRUSTED one..otehrwise not really a fesible solution out here.
Do u also think that majority if people are of similar mind set?
Yes.. as per the survey done by me earliar , I can see the trend like that in poeple thinking
Hi Manish,
I have been following this blog for past 2 months…very interesting and informative. I am in a bad financial situation ..hope you can give me some advice.
My father is a retired employee and the pension he earns is sufficient for their (my parents) expenses.They stay in my hometown and I stay in city.
I am 26 yrs old guy settled well now with around 33K takehome and I dont have any savings with me.
I(we) have a debt of around 6L. I am committed to chits of value 20K PM and my monthly expenditure is around 8K.
Out of this 6L 1L is Education loan.So can you suggest me how to proceed to clear off my debts.
You can question me why I was committed to chits of that much value.AS I said I have no savings with me and that is for my marriage expenses.
I have a strong desire to become an entrepeneur, but with these debts all are laughing at me.
This could be helpful to young guys who were drowned by debts.
Regards
Vijay
Hmm, debt is really an issue .. I would say you should do the background work for 2-3 yrs first and in the meanwhile get rid of this debt asap .
Hi Manish,
When we met in Pune, by mistake I told you wrongly the person who advised me about this blog. Actually it was Abhinav.
For pure Financial Plan preparation, I think following variable annual fee structure is better: Basic FP Fee + some %age of combined annual income & investable assets.
Above structure gives incentive to advisor to work for increasing client’s investable assets. Also by keeping Basic FP Fee a bit lower, it charges lesser to lower income clients and higher to others.
Sukhvinder
Hi Manish
Thats a really informative thread and gives really valuable insights to an investor as well as a financial planner.
I as an investor will look at a one time plan preparation charge (which includes some kind of an annual contract), whereby I can anytime call up my planner (of-course during work hours) for any issues I face. The plan preparation fee might either include this AMC cost, or broken up, to help the customer guage that from second year onwards, he need to pay the AMC fee, in case he/ she wishes to continue his/her association.
One very fundamental thing, is that investor and planner should, in the initial meeting, set the expectations right. If the investor’s expectations are increase in net worth, he/she might feel disappointed in paying a yearly charge, even if the planner has meticulously tried to plan his financial life in overall and not just the investments.
Now, its also important to understand that all investors may be falling at different points on the financial awareness curve. Some might be seeking instant gratification in terms of increase in their portfolio return, others might not be OK with yearly charge (fearing of a fixed outgo)….that is where the financial planner has to also be a bit flexible, and may-be explore a mix of models like yearly charge and pay-per-use, as per customer’s requirements (this will definitely entail problems for financial planner to plan his cash flows, but well, thats how it is)…
The bottom line is trust and a long-term relationship…there cannot be one right model..both investor and planner need to set expectations at the outset, agree on a model, and stick to it…
thanks for the post again!
Abhinav
Thanks for sharing your views .. agree that most of the investors expect the instant gratification with their portfolio increase !
Hi,
I feel the fee specially for financial planning should be based on the effort involved in building the plan and the kind of hand holding the client would require even during the execution. Hence there can be a slab within which the fee can be charged.
This in my view would motivate the planner to put the best of efforts and also ensure the clients/investors getting the right unbiased advice.
Yes , the fee has to be dependent on that ,and what planner thinks its worth too .. but what is the fees range . How much are you ready to compensate a planner with ?
My take is that, the relationship is like with one with your family Doctor. It needs to build with time, and you need to be very comfortable trusting the person providing these financial recommendations.
Of course there are tons of good resources available, but you still need a validator to check/advise/devil’s-advocate pros-cons of various options. I would expect my financial advisor to help with this.
I would prefer a yearly arrangement.
Geeram
Thanks for your views .. agree that trust is of extreme importance !
I would use the analogy of Mobile services …. the service providers are using prepaid and post paid services .. the prepaid service has a one time subscription with also life long subscription alongwith many products with pay as you use…..
also they have other VAS or value added services which can be topped up on the base service.
Similarly there are post paid plans which are generally used by high value subscribers and these also have different plans sometimes bundled with internet and other services.
So basically a combination approach with options for all types of services depending on the customer requirements should work….. personally i would go for a yearly subscription coupled with the pay as you use model like in the prepaid cause i can have the ability to change my service provider if I am not happy with his service of performance
Thameen
Good thought .. can you share more on how in reality this can be implemented ?
I really don’t know, I am falling in the smallest % of votes, but I think there may be one segment of customers who may be expecting lump sum retiremet amount and want to live simple life post retirement, and only interested in just protecting and may be covering up projected inflation for may be for adecade or so.Primarily not eroding his hard earned amount, tell me where I have to vote?
Kautilya
Yea , thats one case .. but the above model is actually for some one who is in starting years .. what you are talking about is just “retirement planning” .
Manish
Who can help in retirement planning?
Kautilya
A financial advisor can help you in that
I hope manish dosentblock me for this comment
Guys take a week…read all the blogs on the forum…..u wont ever need a financial advicer…:))
i know there wud be few takers for this advice but still…..just purchase nd read jago investor frmmanish and do diligent reding on this blog……nd mind diligent means DILIGENT….:))
Sachin
No .. you have point .. Anyone who wants to become his own master , thats the best choice .. the above 5 models are for those who know they can get better results from some one else ..
So learnings things on your own is something very much encouraged ! ..
Manish
True.
It is best if one can learn and take informed decisions. This gives one good understanding of things and ground to improve on.
Let me take an example. I am an engineer. I wish i could guide my son though his education. Some do too. However, at some point, one may need the help of an expert. This may be the case for some after 5th. For some after 8th. For some after 10th. For some, it is not required.
Like wise taking help of an expert is also subjective. For some it is not required. But many get benefited from the help. Some times, without expert help, one may not be able to spot oppertunities.
Informed decision making is crucial.
Yes Srinivas
Thanks for your views .. agree that its subjective when one wants any external help !
all are confusing suggestion
Ramamyan
Can you suggest which one do you suggest or suggest your own model .
Hi Manish..
I would go with paying fixed yearly charges to Financial Planner (Though not hv hired anybody yet, still..) Reason being paying the fixed amount every year & having consultation “N” no. of times will be much better & convinient..
Regards,
Aparna
Yes .. just make sure you are clear with the number of times the planner will help you , there can be a limit or his own structure on that .. just dont assume that once you pay the yearly fees, you can go 50 times to him … there can be a limit to it or the hours defined ! .
In Financial planning , mostly the most of the work is completed in few weeks itself and then all you need to do it implement the plan or suggestions ..
Manish
I’d go for a combination as well. For first time I’d prefer to pay a percentage of net worth to create a portfolio and streamline investments etc. Once that is done and client has some knowledge, he/she can pay on need basis.
Vivek
Ok .. so you will go with 5th model only ..
My vote goes to none of them or probably mix of 3, 4 and 5 (partially).
Even financial advise plan also should be customizable
– To start the relationship, I would prefer to have a one time fee as it requires time from advisor end.
– Annual fixed fee, because advisor will be engaged with client throughout the year (Passive engagement where advisor will be evaluating his research output from client’s perspective)
– Fee based on net worth increment (no fee increase if net worth increased by capital injection)
Again this should be customizable depending on capital investment.
I am yet to find such advisor 🙂 but hope one day I’ll.
Rajeev
I can see that you are looking at the advice only in INVESTMENTS , you are looking at only SUGGESTIONS and which stocks/funds/policies to buy, thats all .. Is it the case or not ? what do you expect from advisor ?
Partially yes but not exactly
Suggestions and advice is mostly for part 3 where fee is linked with net worth.
But if you look at part 1 and 2
Part 1 (One time fee): Understanding client, his financial behaviour, aspirations and lot more to build the foundation for other 2 parts.
Part 2 (Annual fixed fee): Reviewing changes in client’s functional behaviour, economy, changes in income tax, new trends etc. (More as ongoing changes in the whole ecosystem)
Part 3: yes suggestions on MF, Stocks, Options, Gold, SWP, SIP etc. (Again should be based on first 2 parts as he should suggest a midcap/smallcap to relatively safer investor)
Part 2 and 3 has bit common as very long term suggestions might fall under part 2
What is important that you stick to a model chosen, I know distributors who “graduated” from the Distributor model( No 1 in this case) and after doing their CFP are now calling other distributors names because they have been unable to switch over to a fee based model. Then there are others who say they charge a fee (Nos 2-5) depending on the amount of Business given by the client, so it varies with the volume given. Other times a family member Acts as an Advisor and the distributor is a relative (Wife or Husband) who earns commissions from the Business canvassed by the Advisor, so everything goes.
Deepak
thanks for your views .. but this article just wants to capture what you like personally , which model out of these 5 ?
It think for someone who has been in Distributor model for years it is DIFFICULT to move overnight to another model there has to be a transition phase, slowly moving from 1 to finally 3 or 4 or 5, whereas for someone who is just about starting then he can choose 3 or 4 or 5 any one that he or she is comfortable with, I personally am in the transition phase, finally wanting to move to 5.
Deepak
Ohh ok .. so you are an advisor ? I thought you are an investor ! 🙂
If I am not making mistake, Jagoinvestor services follow model:
4. Financial Advisor on One time payment basis?
Correct me if I am wrong.
Jeetu
Jeetu
No , we prefer yearly model , but when people do not want to pay from 2nd year and dont turn up , it becomes “one time” for them . But we always want to be on yearly model
Manish,
Correct me if my understanding is not right.
If I subscribe a service on yearly model and paying the same fee every year, I should be able to see the same value which I got in first year.
If my advisor is more towards long term investments and education, I might not see the same value in second year onwards.
Is it really possible for a customer to get same value (quantitatively and qualitatively both.) every year from the investment advisor (long term)? If not dont you think the pricing structure also should be different.
Rajeev
You are talking about portfolio manager in that case .. financial planner is someone who is there to assist you and guide you , see him as a mentor or a dedicated person who will help you when you are stuck . Thats all ..
People have this myth where they see Planners/advisors to just see as “portfolio managers” . About fees structure .. I can not comment at all , because its a choice which you make, if you can see any sense in the price structure , you accept it , else you reject it , very simple ..
You cant comment on it , because you are not clear how it was made . What do you say ?
Manish
Interesting and thought provoking as usual.
I feel that, first, one should be(or one should prepare himself to be) in a position to make an informed decision as to which one suits him best. Similar to any other financial decision, this too needs some work to arrive at a rational decision and this will have long term impact.
Of the models presented, the first one, donot pay for advise,(though apparently cheap) proves to be very costly in the long run. However, it is not very easy for someone to realise this and make a different choice. This is because, generally people think in a short sighted manner and unless they get a jolt, rarely change their view point.(I am an example for this).
Now for the other choices. The decision needs to depend on complexity of the economic profile of the user.
However, it is rquired that one understand basics of financial planning like goal, compounding, insurance, investment etc properly before understanding the options and making a choice.
For someone with simple income, expenses and goals, there can be a once a year plan and review and one time small fee model works. They can sit with the planner once a year to review previous plan and adjust it if need be.
For someone who just started his journey in financial investments, financial advise is needed more than once in a year. Thus he can follow the pay per visit model.
For someone who had already started in his planning and who is expanding his foot print and who needs advise on better avenues to invest and create wealth, it is advisable to follow a % on potfolio model.
Howevr, it is required that once from the first option slowly moves to second and third options in financial life and thus change his model based on the requirements of the period. From a differnt view point, this can be seen as a continuum from the beginning of an earning career to expansion and consolidation.
Point to be noted is, one can be rated on his financial growth based on the model one adopts. Of course this doesnot apply to one who tries to learn and do things on his own.
Srinivas
Thansk for your detailed comment .. Yes I agree that before deciding on any model a person has to be self sufficient in understanding the basics himself and take informed decisions himself !
i do feel that if you want to be guided to do the right things you must be willing to pay. but the thing is with fixed amounts there are great chances that the advisor may become complacent. to start with for a year you can catch up on your basic fundas and then decide where you want to go from here.
Smita
So you are advocating for the “yearly fees” model ?
I like “Fees charged as percentage of Portfolio Worth” as I see more commitment from Advisor in this option, as his stake (his income) is also on risk. In all other options, he will get his fee and it doesn’t matter if client is profit or in loss after some point of time.
Sachin
Yes .. if you look at advisor as only INVESTMENT ADVISOR , then this model really looks better .
but how are both different? please explain if you have time?
Sachin
An Investment advisor will just tell you where to invest , thats all .. each and everything will revolve around just one thing .. where to invest . No other specific area of your financial life will be taken care of .
However a financial Planner will touch area’s like Insurance, health insurance, WILLs , Simplicity of your financial life , how to get rid of bad products you already have, making you more disciplined, a little bit of education and hand holding in other area’s .. its a 360 degree view !
Manish
Reality check:
1. Sadly people are lazy to manage their own money and what a HOLY GRAIL which can earn TOP rate for them forever
2. People do not want to take pains to understand their options and methods to implement on their financial portfolio
3. People like “free” or “cheap” advice, doesn’t matter if they don’t understand
Option 5:
Looks like the best option as it gives an incentive to the Advisor to manage our financial portfolio and earn more if his advice is in effect increasing our financial worth.
Option 1: Best of the advisors worse for general public
Complete BS and for sure most people end up doing what they do not understand and in effect end up with a loss or bad investments
Option 2:
May work for individuals who understand or have some knowledge of how to manage financial portfolio
Option 3 & 4 :
This is “trial and error”, if it works great if not forget it…
Bottom line, YOU need to be in-charge of your money and STOP relying on others for acting in your best interest. Ofcourse get an advice but make sure you understand what you are getting into rather than blindly following the advice. ASK questions and verify information, be vigilant and open for suggestions which you may or may not like….
Thanks for ur views
Hi,
I prefer “Financial Advisor on demand (pay when you use)”.
For example, we go to Hospital for our health check up and pay 300-400/- for consultation fees. If we are satisfied with him, then we will meet him next time, otherwise look for another specialist.
Like that, In real life, we meet one Financial Advisor and pay him consultation fees. If we are satisfied with him, then we will meet him next time, otherwise look for another Financial Advisor. It may also increase the competition between Advisors.
Yes, We can prefer “Financial Advisor with fixed yearly charges”. But there is problem with it. If we are not satisfied, then we need to look for another advisor and again we need to pay yearly charges. It would be double cost.
Thanks,
Sekhar
Dear Sekhar, your hospital example is good. If you are suffering from a backache & the doctor/hospital is able to provide you solution in 1-2 days, you are satisfied & may visit again else ‘ll look for a change.
In case of Financial world, how ‘ll you measure the success of a planner overnight? Financial planning is a long term game not a T20 one. 🙂
Thanks
Ashal
Hi,
You raised good point.
Sekhar
An advisor has to be choosen only when you are fully satisfied with him