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If you want serious advice,
pay for it. You will find plenty of financial
advisors who will be willing to offer financial
advice “free”. As you know such advisors are compensated
by commissions paid by product sellers like Mutual
Funds and Insurance Companies. While it may not
always be the case, advice compensated by commissions
is likely to biased by “Sales talk”.
Transparency
is important. If your advisor is compensated
by commissions and is transparent in terms of what
he will get as compensation from Mutual Funds, Insurance
Companies, etc., take that as a very positive sign.
For your information, advisors get compensated in
cash (by way of commissions) and in kind (by way
of incentives like gifts, holidays and conferences).
You will need to judge your advisor’s level of transparency
if you opt to compensate him with commissions.
You pay (nothing
is free). In either case, whether the product
seller takes your money and pays a commission to
your advisor or you pay your advisor a fee directly,
it is you who is paying. In commission compensation
you do not decide, in a fee scenario you decide.
Maximum Returns
usually means Maximum Risk. If all that your
advisor is talking about is Returns, Returns and
Returns, walk away. Your returns are very closely
linked to two variables. Time horizon and Risk.
If you want to change your returns you need to change
at least one of these two. A good advisor will not
maximize your return i.e. maximize your risk and
lengthen your time horizon, he will optimize the
return so that you have reasonable certainty of
achieving your goals and within the time horizon
envisaged by you.
Sharing profits
on your investments with your advisor does
not mean alignment of goals. It may motivate
the advisor to maximize your risk. If the risk materializes,
you will be left with losses. Are you comfortable
with that situation? You aren’t sharing losses,
are you? If your advisor is guaranteeing a minimum
return, is he backing that up with financial capital
or financial guarantees?
A well performing
investment and a well performing investor are not
the same thing. For these two to mean the
same thing, the investor needs to have made money
from the investment, he needs to have made enough
money to make some difference on his overall situation
and the results need to be consistently repeatable.
When stock markets are doing well, everybody knows
of some investment that has done very well. The
right questions to ask are – A. In last ten years,
how many times has the investment returned above
average and B. How much money was invested by that
person in that investment in those years. In other
words what matters to you are investments that can
predictably and consistently add to your wealth.
Else it is a directionless gamble.
Doing what
everybody is doing does not insulate you
from the consequences of your decision. We have
a short public memory. Most investing population
forgets the mass following of US 64 or technology
stocks in the year 2000. Did it protect those investors
from the losses in those investments? It did protect
one thing thought – their ego. They did what everyone
was doing, so they couldn’t have looked foolish.
Do not invest in stocks because everybody is investing,
do not buy advice from that big company because
everybody is investing. If everybody is wrong, everybody
will suffer. Multiplicity of errors does not make
a wrong thing right.
Your common
sense is your best advisor. Small children
often ask the best questions. Where do you want
to go? What are the
various ways to
get there? How will you choose the best way? What
would you look for in your advisor? How would such an
advisor
earn from his service? Why do companies issue
stocks? Why should I not buy gold?
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