Categories: Personal Finance

How lack of formal financial advice can prove costly for many investors

Most people hate paying for financial advice, even when referred by a good advisor. Every day, I get calls from people who want financial advice but aren’t willing to pay for it. Take the case of Shobhit, 50, whose son recently joined medical studies. Shobhit wants to get out of his Public Provident Fund (PPF) and invest it in equity funds. He did not take loan for his child’s education and felt that equity funds would be a good way to increase the education corpus. His view is that PPF returns 7.1% per annum (pa), while equity funds can give him 13-14% pa returns in the next two years.

In most cases, investors just want confirmation of their views. Shobhit also wants to know if his investment strategy is sound. Without knowing his complete portfolio and financial goals, it is impossible to give my opinion. Shobhit hesitates to work with a financial planner because he does not want to spend money on financial advice, despite his many goals and insufficient corpus.

I see the same attitude of people when it comes to tax filing, where individuals are not willing to pay ₹8,000-10,000 per year to file a proper return. I have received many questions from holders of foreign stocks (including in the form of ESOPs, or employee stock options), who, despite being told the complexity of filing the income tax return (ITR) and the implications of incorrect disclosure, are looking for people who can do it at low cost. It is simply penny wise and pound foolish! De-disclosure of foreign assets invites a ₹10 lakh penalty, and inaccurate filing incurs 30% additional tax and penalties. Violators can also be charged under the Black Money Act. Saving a few thousand in filing taxes on such complex transactions means leaving yourself open to big problems in the future.

Choosing bad investments such as investment-linked insurance plans or schemes that are not linked to financial goals can be more expensive than the cost of financial advice. Investment linked insurance schemes return 4-5% more versus 9-10% more that equity mutual funds can get in the long term. Investing in an equity fund for 2-3 years based on recent performance means being exposed to high volatility and even negative returns. Constantly changing schemes based on past performance is the reason investors return that the fund’s return lags. The difference between the best and worst performing funds is around 6-7% more and that is more expensive than adviser fees.

The lack of knowledge and the overload of information make investors believe that they can manage everything on their own without professional help. The advent of private equity funded digital platforms, whose value proposition is free advice, doesn’t help matters. You can’t get something for free!

It is surprising that Indians have changed their thought process in many aspects with times but not in financial matters. Traditionally, financial advice is not taken and the general feeling is that financial advisers persuade people to invest in products where they make large commissions and do not work in favor of the customer. Financial advisors also have a negative image on social media.

All counselors cannot be painted with the same brush. There are excellent and reliable financial advisors with high integrity. To begin with, understand that financial advice is not only about choosing schemes but about professional guidance on how to plan for financial goals and hold hands in times that are easy. You want to be respected for your professional expertise in your field and be paid accordingly. The same is true for financial professionals. Any free cost doubles over time or becomes worthless!

Second, look for fee-only financial planners or ask for a referral from your groups for a financial advisor. A good financial advisor will talk about financial goals and long-term plans and not push insurance plans or other such financial products. Always understand how you will be paid for services. Fee-based pricing rather than commissions is better.

Read on to become an informed investor (Mint’s personal finance page is a great resource!). Avoid social media videos and reels. It is intended for those who want fun and not serious learning. Insist on a financial plan with the advisor. That’s the value the advisor adds.

A combination of knowledge and sound advice can make all the difference in your financial life.

Mrin Agarwal is the founder director, Finsafe India.