‘The owner of this restaurant also eats here,’ some restaurants display this message to convince customers that they serve good quality food. A message like this could go a long way in building trust among clients.
How would you feel after taking health advice from a doctor when you discover that he is a chain smoker? Similarly, how comfortable would be your clients when they realize that you are not following the financial advice you dispense to them?
Many advisers are realizing that they need to show their own approach of managing finances to convince clients to follow their advice. Does that mean advisers have to invest in the same products they recommend? Do advisers have a financial plan in place for themselves? We spoke to a few leading advisers to understand whether they eat their own cooking.
Investing in products
Since there are many products in the market suited for different client profiles, does it make sense to invest in all products advisers recommend? Financial advisers say that while eating their own cooking does help instill confidence, it can be impractical since advisers recommend an array of products to hundreds of clients. "It is indeed reassuring that a fund manager or a fund house employee invests in the funds of their own house. An adviser who eats what he cooks will engender a similar level of comfort with his clients. That said, it is not practically possible for an adviser to invest in fifty schemes (assuming ten categories and five schemes per category) just to show his conviction to his scheme selection process," says Shyam Sunder of PeakAlpha.
Rohit Shah of Getting You Rich says that rather than investing in products recommended to clients, advisers should avoid conflict of interest. “It should not happen that adviser is redeeming from a fund and recommending it for investment to a client. It is fine if the adviser is redeeming because his/her goal is achieved. Rather, he says that advisers should implement the advice which they dispense to clients. For instance, separating business funds from personal funds, having a retirement/succession plan, etc.
Experts point out that distributors often sell new fund offers for which they receive some incentive contingent on sales targets. In such a case, it is pertinent to ask distributors if they have also invested in the fund or have recommended it to their family members.
Since the goals and risk appetite of an adviser may not match with each client’s situation, it is practically not possible for advisers to eat their own cooking. More than investing in products, advisers say that the product selection methodology should be same for them and the client.
Will
Many advisers and distributors would have apprised their clients about the importance of having a will so that the money and possessions go to the people they wish to. But not all distributors/advisers may have created their own will. This is something which is procrastinated and not taken up as a priority.
Succession plan
Succession planning is a process of identifying new leaders who would take over the business in the absence or retirement of the current leader. A proper succession plan ensures smooth business succession. Unfortunately, not all advisers have a succession plan. “Many distributors operate their business in individual capacity. They don’t know who in the family will take over the business. Their children may wish to pursue other career. If a family member has an inclination for finance, advisers should involve them in the business or corporatize their business. The business should run even without your business. This will ensure that clients don’t suffer,” points out Suresh Sadagopan of Ladder7 Financial Advisories.
This situation is not peculiar to India. Many studies conducted in foreign markets have found that a large majority of independent financial advisers and sole practitioners have no formal plans of retirement.
Mumbai-based trainer Amit Trivedi of Karmayog Knowledge Academy points out that many Independent Financial Advisers (IFAs) have nominated their family members for trail commission but it is not suffice. “The trail would go to the nominee but what if the nominee is not keen on continuing the business? Also, nomination is a right to receive and not a right to own. If clients don’t receive proper service and advice from the nominee, the assets would deplete, and the trail will eventually stop. To avoid this, distributors should have a proper succession plan,” says Amit.
Financial Plan
Investing without goals is like travelling without a destination. Thus, financial advisers chart out a well thought out action plan after understanding each client unique situation. But do advisers have their own financial plan in place? While some advisers would have but others could ignore. Even if they have a plan, do they follow it? Realistically, we all are human beings are prone to error. Even advisers could face biases while formulating their own financial plan. One of the ways of avoiding this bias is to get a plan prepared by another adviser.
Business Plan
Distributors/advisers draw up financial plans for their clients but do they have a business plan for their practice? Not many. “I attended a 'train the trainer' meeting which had a speaker from Canada. We were asked how many of you have a business plan. I was the only one who raised hand. In my experience of dealing with IFAs, I have noticed that many of them don't have a business plan. If IFAs don’t have a business plan for themselves how can they prepare financial plans for clients,?” asks Amit.
All business face challenges. In the mutual fund industry, distributors have faced numerous challenges like ban on entry load, no upfront commissions, introduction of direct plans, emergence of robo advisors and shrinking of margins due to TER rationalization. Also, distributors business is directly linked to the performance of markets. Given these challenges, it would be wise to have a business plan and stay focused on your goals.
Let us know your thoughts.