Money Talk. How to select an investment advisor

When it comes to wealth management in India, there is an interesting disconnect. India’s high household savings rate of about 25 per cent is among the highest in the world. But RBI data suggests that more than 50 per cent of that is either saved as hard currency or is lying in bank deposits.

A disproportionate amount of money is being left to depreciate against inflationary prices or is locked up in physical assets.

In other words, we are only good at accumulating wealth but not that good at managing it. Lack of understanding of the extent to which economic forces can irreversibly affect personal goals dilutes the case to look for expertise: investment advisers who could help. And even if one decides to actively look, is it easy to find a good expert?

First of all, it is important to understand areas where professional expertise can add value. First, experts can help build a detailed record of short and long-term objectives, unique circumstances, risk tolerance and preferences. Second, they can translate needs to investment objectives and help develop an investment policy statement.

Third, they can coach and protect against behavioural traps. Fourth, they are expected to provide insights into financial market forces that can affect investment objectives. And lastly they would be required to provide full disclosures and are expected to maintain the highest ethical standard.

Private wealth management is regulated in India under SEBI’s (Securities and Exchange Board of India) Investment Adviser Regulation 2013. Investment advice under SEBI regulations includes advice-related to investing as well as financial planning. Under these regulations, all investment advisors are required to register with the regulator.

SEBI is seeking to move toward an “advise for a fee” model that is aimed at further empowering the end investor.

A list of registered investment advisers can be browsed on the SEBI’s website. As of September end 2016, there were 515 registered investment advisers in India.

As with other professional services, referrals, first-hand inputs from colleagues, web searches, are all good starting points to look for wealth management expertise.

An emerging class of automated wealth management services — robo-advisors — is another option to consider. Understanding the expertise and the cost for each advisor is the next step. But it is not just expertise and cost that matter. The best wealth managers should be able to build and maintain trust.

A short meeting with the wealth manager can provide insightful inputs. There are at least five important areas to understand. First, the practitioner has to be registered with SEBI. Second, it is important to develop an objective understanding of the services being provided — case studies or samples of regular reports can help. Third, information on the advisor’s fee structure and compensation from other stakeholders will provide an understanding on cost versus value. Lastly, reference checks can give inputs on the advisor’s ability to deliver.

Emphasis on past performance, lack of a systematic disclosure system, self-aggrandisement and lack of a matured approach, are all warning signs that can be considered for short-listing practitioners. Vague answers to questions related to service levels and compensation are negatives as well.

Finding a trustworthy investment advisor who perfectly fits the requirement is a tough task. But that should not prevent people from trying. As India’s per capita income moves from low income status to mid income, regulatory thrust, technology and advances in wealth management practice are likely to make it easier for the investor to make informed decisions.

The writer is Director for content at CFA Institute