Anita and Amit were a happily married couple. Both of them were in the software industry and based on their current income levels, they borrowed heavily to buy a lavish flat in Mumbai. But within a few years, Amit had to take a pay cut due to the downturn in Information Technology sector. The couple had a tough time repaying their loan.
They had to drastically cut down their expenses, and also stop paying mutual fund payments and insurance premiums. Since they had been paying premiums for less than three years, they lost a lot of money they had paid towards premiums until then. By stopping their mutual fund Systematic Investment Plans they lost the opportunity to build up savings.
Although Anita and Amit continued to service their home loan, they were left with zero savings. Although, they managed to save their home from being taken over by the bank, they would have been able to continue with their loan as well as their savings if they had consulted a financial advisor.
For instance, an advisor would have told them that they can negotiate with their bank to restructure their home loan by reducing the monthly outgo and increasing the tenure. Or they could have shifted their loan to a bank where the interest rates are lower. This would have also helped reduce the monthly EMI. Since home loan pre-payment does not attract any penalty now, they would not have lost any money.
Despite higher incomes, today, people also borrow more. A household with multiple loans (such as home, car, consumer durable, education) is very common. But despite the high income levels and borrowings, most of the households do not have a proper financial planning process.
This can be for two reasons lack of time to do so or lack of awareness. Also, people do not realise that financial planning is not a one time process, but a continuous one that requires timely review.
If you do not have a financial plan in place, there can be a major impact on your wealth creation process. So for people who do not have the time or do not understand financial nuances, seeking help of a financial advisor makes a lot of sense. Investment products are becoming more complex and to understand risk and return trade off, needs expertise. A financial advisor can provide the same.
While choosing a financial advisor need to look at the services that he or she offers and the fees charged. Ideally, a financial advisor should offer the following services:
- Expertise in determining the best asset allocation
- Professional help to sort out investment hassles and estate planning
- Professional advice to help maximise returns from your investments
- Advise on retirement planning
Before making specific recommendations, a good advisor will ask you questions to gain a whole picture of your past experience, lifestyle and goals, as well as your other investments and current financial situation.
You can consult an advisor even if you are just starting a career. For instance, Ajay a bachelor always felt that there was no need to save and used to spend recklessly. After all he had just started his career and had no dependents. Although his father was retired, the money from his savings took care of the household expenses. But suddenly Ajay's father fell ill and the family incurred huge medical expenses. His father did not have health insurance and the treatment ate up a huge chunk of his savings. It was then that Ajay realised the importance of saving and planning fore retirement, especially for eventualities like illnesses in old age.
On basis of the advise of his friend, he met Jagan a neighbourhood financial planner who made him understand the nuances of financial savings. Due to the savings, Ajay was able to meet his father's medical expenses and also started building his own corpus for future. How does a financial advisor help:
- Develops realistic expectations by providing proper perspective on the risks and rewards of each investment
- Helps you match your financials goals with right investment avenues
- Monitors your portfolio and provides information on the returns being generated
- Regularly reviews the portfolio to ensure optimal results for you
- Gives opinion on investments
- Provides professional advice
- Mitigates your investment risk
These are some normal services that investors should expect from their financial advisors. Other services could include advice on retirement plan, developing tax-efficient strategies, estate planning, home loan advice, etc. Services and charges:
The fees charged by the financial advisor depends on the type of service availed. Investors should opt for financial advisors with good credentials. Don't hesitate to ask what are the advisor's qualifications. Preferably, look for an advisor who is certified by the Financial Planning Standards Board India.
Make sure he recommend products only based on your needs. If your financial goals change, inform your advisor and take his help to change your savings accordingly. There is no need to stick to the same plan that has been made when you started taking advice. Have regular meetings with your advisor and review your investment portfolio in his presence on a regular basis.
One should be careful while choosing a financial advisor. Dont forget to check his track record and avoid those who assure high and unrealistic returns without explaining the product. Also, beware of fly by night operators
Financial advisors have an important role to play in terms of financial planning and implementation. There are plenty of financial advisors available. However, before selection of financial advisor, please check the credentials in order to ensure safety of your capital.