The other day at a family dinner, my uncle told me he was going to get the help of a financial advisor.
"You mean a portfolio advisor or a financial planner?" I asked him.
Totally perplexed, he asked me if there was any difference.
There is -- and the difference is quite marked actually!
What is financial planning?
Financial planning takes a wholesome view of a person's financial health.
This will entail looking at the age, dependents, income, expenses, loans being serviced, goals for which the person is saving and whether the individual is adequately insured.
It will also look at the broad areas of investing. Given all the above criteria, how much of the individual's money must be invested in equity (shares and equity mutual funds) and debt (fixed return investments and mutual funds that invest in them).
For instance, let's say you plan to get married next year and want to put your financial house in order and approach a financial planner.
He will ask you what your major savings goals are. You list four.
1. Saving for a home
2. Saving for retirement
3. Saving for your child's education
4. Saving for your marriage.
The first thing the financial planner will do is prioritise your goals and, taking your age in to account, give a time frame for each.
So, now, your goals will be put in this order.
1. Saving for your marriage
2. Saving for a home
3. Saving for retirement
4. Saving for your child's education
He will also look at your earnings, whether or not you have to support your parents and if your spouse would be employed.
Depending on the time frame for each and how much of a risk you are willing to take, he will suggest a broad investment framework. This will include: How much you should invest in equity and how much in debt. What sort of investment instruments you should opt for. For instance, should you opt for a five year recurring deposit or a Fixed Maturity Plan?
He will also look at estate planning (Who have you nominated for your investments? Have you drawn a will? Should your house be jointly owned?) and insurance (Are you well insured? If not, what kind of plan is best suited? If yes, is it the right plan or should you opt out of it?).
If you are steeped in debt, he will help you prioritise your loans and tell you which ones to pay off first (high interest, no tax benefits) and which can be paid back over time (lower interest, tax benefits).
In a nutshell, a financial advisor will tell you how to get your finances in shape.
As Devang Shah of Right Returns Financial Planning says, "An essential part of my task is to put the cash flows in perspective and crystallise them." In other words, he will look at where your money is coming from and where it is going and how you can best utilise it to meet your goals.
But he will not tell you that this fund is a great investment or that a particular stock is good. You will not get specific investment tips.
Who is portfolio advisor?
This one is different.
He is least concerned where your money is coming from and where it is going. Your overall financial state is no concern of his.
He is here purely to advise you on where to put your money.
Portfolio advisory in India has come to mean advice on which shares to invest in. This service is mainly given by asset management companies (mutual fund houses), stock broking firms and private bankers.
So, if you want to know whether you should invest in Infosys or Satyam, or if you should invest more in the pharma sector than in the banking sector, a portfolio advisor is what you are looking for.
Here, there are two kind of services -- discretionary and non-discretionary.
Discretionary means the portfolio advisor has total control on where to invest your money. Non-discretionary means he has to take your permission on every trade (every time he buys or sells shares).
Besides advisors for stocks, you may even get fund advisors.
Wiseinvest is a firm that specialises in mutual fund advice. Taking your risk profile and other needs into account, they will suggest a mutual fund suited for your needs.
Hemant Rustagi, CEO, Wiseinvest, is clear they are not into one-time recommendations. "We offer fund analysis and recommend various mutual funds to our clients depending on their needs. We monitor their investments on an ongoing basis."
The cost
Nothing comes free.
For instance, where portfolio advisory is concerned, some will charge on a commission basis, others a flat fee.
If the advisor charges a flat fee and has made a killing on your portfolio, you benefit. But if he charges, say, 20% of your returns, then the more he makes for you, the more you pay him. On the flip side, it is a great motivation for him to work hard and well on your portfolio since he directly benefits from it.
A financial advisor will take an annual fee. Some also charge by the hour. So, if you just want a one-time consultation, then do pay by the hour.
Do you need a planner?
To avail of the services of a portfolio advisor (for stocks), you will have to come up with a few millions else you will not be entertained.
But, even with much smaller amounts of money to invest, you can try a financial planner. However, do so only if you find yourself in a financial soup and don't know how to get out.
If you are starting out and want to make sure you are on the right track, then just opt for a consultation.