How to Choose a Financial Planner

Financial planning is essential for everyone irrespective of one’s profession, social status, income and other demographics. To understand it better one should know what a financial plan means and why it is important. A financial plan is a comprehensive evaluation of an individual’s current financial status as well as his/her future life goals, with a set of strategies and methods to achieve these goals.

Financial planning is essential for everyone irrespective of one’s profession, social status, income and other demographics. To understand it better one should know what a financial plan means and why it is important.

For example future goals could be important events or future plans such as higher education, marriage, a planned vacation, purchase of house or other assets, etc.

So a financial plan is not about just investments, but broader in nature, covering all areas of your personal finances. In simple terms, a financial planner is an advisor or guide who will help you meet your financial goals.

Some of the criteria that you need to look for in a financial planner are discussed below:

Selection based on – Qualification/Certification

A financial planner’s role is like a doctor who takes care of your financial health and well being. This requires a combination of knowledge, qualifications, experience backed by trust and confidence.

Financial Planners need to take up a certification known as Certified Financial Planner (CFP), which is offered by Financial Planning Standards Board India.

The qualification requirements are just to ensure that financial advisors have the basic knowledge and rigor required for professional practice.

In addition to CFP, there are other finance professionals such as CAs, MBAs, CFAs, etc who may also provide financial planning solutions.

There is nothing wrong in hiring a non-CFP professional provided they have the right knowledge and credentials, and are well equipped to help you reach your financial milestones.

Selection based on – Compensation/Fees

Financial planners are compensated in different ways depending on where and how they work. Some of the common fee models are:-

1. Advisory/Consulting Fee (for preparing a financial plan & strategy)

  • Here your financial planner or advisor has a discussion with you to understand your current financial position and helps you set future financial goals and strategies required to achieve those goals. Strategies could involve advising you on managing your finances, loans, investments, assets, etc.
  • The fee will be based on the value of advise and counseling provided. (Its comparable to discussing a case with a lawyer – the complexity of your needs determine the fee)

2. Through Commissions (based on products sold)

  • Here the financial planner has a select set of products that serves various needs. He/she would recommend those products to you.
  • Here you don’t generally pay a fee to the financial planner which will be a % of the products sold or investments mobilized. The fee may also be passed through to the investor fully or partially.

3. Combination of both

Currently most planners rely on model 2 (commissions) because in India most people don’t seem to value the advice/consulting services provided. But experts predict that the advisory model will gradually become popular as the Indian market matures.

Who to Avoid?

1. A financial planner who doesn’t educate you: A financial planner that withholds information or doesn’t take the time to teach you the basics is not a good one. Withholding of information may involve withholding facts related to the product or service, its terms/condition, about the planner’s fee or commission, etc. The financial planner or advisor is also supposed to provide reasons and give preventive measures and tips that help you in managing your finances in case your original plan does not go as expected.

2. Friends and Family: You can trust these people, but don’t rely on them for your financial planning because you may tend to follow the crowd and get in to products/instruments that may not suit your personal needs. For e.g. you invest in a stock just because your cousin bought it a few months ago and seems to make profit on it.

3. Financial planner who is only concerned about commissions: Generally speaking, financial planners who are just selling products are compensated through commissions, are mere product pushers and not planners in true sense. They may be motivated naturally to recommend products that earn more commissions instead of offering solutions that suit your own needs. Hence, it is always recommended to choose an independent financial advisor, who is independent from association with any fund, investment house or broker.

Conclusion

Having understood the basic criteria, you should invest some time in having a personal meeting with an advisor to discuss your goals and financial plans. You can get profile and information on financial planners here .

Choosing a financial planner is as important as meeting a doctor for a generic check up or when you are feeling ill, because a good financial planner will provide all the required support and guidance to help you achieve your financial goals.

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About the Author

Sridhar is a financial analyst and his work experience spans areas of financial analysis, modeling, valuation and research on companies, specific sectors, etc. Sridhar is an MBA graduate with Finance major from Maharishi Institute of Management.

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