Friday, February 25, 2011

Of Financial Advise and advisors

Of late, I have noticed a marked animosity from self styled “Independent Financial Analysts” or IFA’s in response to my writings about them. Most of them are angry and upset because I have written about my perception of what they sell to investors. Let me put the record straight. I AM AGAINST ANYONE WHO CALLS HIMSELF AN ‘IFA’ AND IS A SELLER OF A PRODUCT, WHETHER IT BE A MUTUAL FUND OR AN INSURANCE POLICY. I can excuse or tolerate a mutual fund, but there is absolutely no excuse for an IFA being an insurance peddler. Advice and selling are two distinct activities, totally unrelated.
The answer is simple. In the case of mutual funds, the IFA at least hawks competing products, if not all the products. The IFA who is a seller of products cannot be objective. When selling mutual funds, he is going to avoid some mutual funds on grounds other than performance. The moment subjectivity comes in, the IFA ceases to be ‘independent’. If it is insurance, then the IFA is like a blind person. The ridiculously high commission, forces the IFA to sell investment products which are in EVERY respect inferior to a mutual fund investment. I have yet to come across an investment product that is superior to a combination of a pure term policy and a mutual fund investment. So, if an IFA becomes a broker of an insurance company, he ceases to be an ‘independent’ advisor.
The other thing I dislike is dealing with ‘individual’ agents who do sell advice. There is no guarantee that I can get continuing service. I may move cities or he may. Or he may simply lose interest in the business and do something else. I have been at the receiving end of having foolishly succumbed to a couple of insurance conmen. In my early working days, a LIC agent sold me an endowment policy on the basis of the tax deductions available. After the second year, he lost interest in me, since I did not want to buy anything else from him. And having paid two years premium, I foolishly assumed that it was sensible to continue paying premiums. I had to do everything myself. If the LIC reminder reached me, I was lucky. Changing houses, cities etc, I somewhere lost track. Then after a stage when I started having time on hand, I had to go to LIC, work out the economics and revive the policy. I tried tracing the bloody agent, but he was untraceable.
Somewhere in 2001, I had (for business relationship reasons) to buy a policy from Metlife India. The first two years, the agent came home to collect the premium cheque. After that, I have no option but to do it myself. I wrote to Metlife to appoint another agent or at least give me back the amount that the agent was being paid on an annual basis as ‘trail’ commission. Metlife did not respond. I marked a copy to IRDA. No reply from them either! So, if you buy a policy from an agent, there is no guarantee of continuing service.
On the other hand, I make some investments through my banker. Over the last few years, the ‘relationship’ manager has changed several times. However, service from the banker has never suffered. Whoever is in place has picked up the threads and continues to give me service. Hence, ALWAYS DEAL WITH AN INSTITUTIONAL AGENT, if you want continuity in service.
Now, let us discuss the quality of advice. For advice alone, it is worth going to IFA’s. However, the customer has to learn to pay for advice. It is strange that we never negotiate or think twice about paying a doctor or a lawyer for advice. We pay the lawyer for advice and then go to the chemist for buying the medicine. So, we should be ready to pay the IFA or an advisor for advice on managing money. Buying should be done elsewhere. This will ensure that the quality of advice is not diluted. Since you have denied the agent any other avenue for making money, he will be focused on doing the best for you.
The other alternative for you is to do all the work yourself. And then go to an institution for buying the product. Often, what happens is that we let ourselves in for a ride by not planning out the entire spectrum, but looking at each thing discretely, as and when we feel like. We go by the last thing that we have heard.
Now, it is likely that in a few months, with a new SEBI chief, who has been a part of the mutual fund industry for some time, things will change. Maybe entry load for investments through agents or brokers would be rightfully restored. Hopefully, the NFO rip-offs will not be restored. Maybe we will have qualified persons to manage our money. Maybe PMS Managers would be subjected to full disclosures. But, none of these are going to impact what an IFA can or cannot deliver. An investor is still faced with the same choice.

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