Navigating Your Finances: 10 Questions To Ask Your Financial Advisor
A world champion athlete has a coach. You may wonder why someone who is dominating in the game needs coaching. Similarly, you would have noticed cricket or football leagues talking up their support staff. There are skill-specific coaches to train the sports talent. For example, a league cricket team would appoint a head coach and a coach separately for bowling, batting and fielding.
Your financial life needs a coach, too. A financial advisor is vital in bringing an unbiased perspective to your investments. You need to team up with them and work on a plan. That should help you achieve the desired outcome from your investments. You must prepare yourself well ahead of your meeting. If you read up on basic theoretical stuff, you can get more action-oriented advice from your advisor.
Here are ten things you should ask your financial advisor:
- What difference have you made to your clients so far?
This question will address the issue of your advisor’s credibility. They will explain their pitch to you and the role they have played so far in their clients’ lives. It is crucial to have an advisor with a strong pedigree. They should be registered with relevant authorities like SEBI, AMFI, RBI, IRDA or any other competent authority. You must ensure the advisor has the right temperament to answer your questions.
- How do you create an investment philosophy?
Your relationship with your advisor is likely to be a long one. By posing the question on investment philosophy, you can learn about the abilities of your advisor and their approach towards the advice made to clients. Focus on how they helped other clients create their investment philosophy rather than indulging in a generic conversation.
- What should be the approach towards financial planning?
Your advisor should not merely tell you about a bunch of financial products. If you have not done financial planning before, you need to start defining financial goals. Your financial planning has to align with your financial goals. They could be long-term goals like retirement or short-term goals like buying a car or a vacation.
- Are you getting your asset allocation right?
Before you even meet your financial advisor, you should be on top of the concept of asset allocation. Your financial goals determine the appropriate allocation of money. Your long-term goals need a higher equity allocation, and short-term goals require you to protect capital through fixed income. A meaningful discussion with your financial advisor would mean a specific outcome for you on where to put your money.
- What recommendations would you make to someone like me and why?
This question will determine the capability of your advisor. They would determine your risk appetite based on inputs you give them regarding your financial goals and income. They should then create a tailor-made portfolio that ensures you achieve your financial goals when needed. It will require you to read up a bit to avoid investing in anything you do not understand. Do not let your advisor control your investments.
- What is over-diversification?
If you are a regular investor, you may have sporadically bought shares or mutual funds as and when you received a bonus or lump sum money. When you review your portfolio with your financial advisor, you must find out if you are over-diversified. Owning too many mutual fund schemes or stocks minimises risk and gives moderate returns. Creating a focused investment portfolio based on your risk profile is a good idea.
- Should I buy through mutual funds or invest in stocks directly?
Before you discuss this, get familiar with mutual funds and fundamentals of companies. Having this conversation when you are well-prepared will be a good idea. This conversation makes sense only if you are creating a long-term portfolio. Your financial advisor should be able to make suggestions based on your risk appetite and financial goals.
- How do I pay you for your services?
It is a good idea to be clear upfront on the cost of financial advice. Your bank, mutual fund or stockbroker sends some financial advisors to you. In such a situation, they may not take any upfront fee from you. However, they may recommend products that are part of their distribution network. It is a good idea to clarify how your financial advisor is compensated.
- How often will you review my portfolio and meet?
A periodic review of the portfolio is essential. Financial markets go through cycles, and there are times when you need to make minor changes to your portfolio if you are a long-term investor. If you are a short-term investor, the portfolio review matters much more to you. Insist on regular interactions online or physically to ensure that you are not missing out on opportunities.
- What do you recommend as investment reading and why?
Getting recommendations from your financial advisor on the reading material may be a good idea. The genuine concern for you would be reflected in your advisor’s recommendations to push up your knowledge quotient. Without adequate knowledge, you cannot get value from your portfolio.
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