1. Should a DIY (Do-It-Yourself) investor engage with a Fee-Only Financial (Advice-Only) Planner?
- A significant majority of my clients were quite knowledgeable about personal finance and investing, even before they contacted me
- If you are not able to correctly answer all the questions in this quiz, then you are likely to benefit from engaging with a competent Fee-Only (Advice-Only) Financial Planner
- While I have answered many of those quiz questions in various articles, if you have dedicated less than 10,000 man-hours (i.e. 5 man-years) to studying investing & personal finance, then it is not possible to correctly answer all the questions in that quiz
- If you are in the less than 0.001% of (i.e. one in one-lakh) people who are able to correctly answer all the questions in that quiz, then you are in a good position to decide for yourself whether to engage with a competent Fee-Only (Advice-Only) Financial Planner. There is a high probability that you will benefit from such an engagement (there are aspects that you may not have thought through, for example mitigating 'sequence of return risk' during retirement)
- The suggestions above deal with an initial engagement of six-months. They do not deal with the more subjective question of whether or not you will gain from continuing the engagement beyond the initial six-months
2. Should I engage with a Fee-Only (Advice-Only) Financial Planner instead of relying on a robo-adviser?
- The most important question in asset allocation is whether you are taking too much of risk. This is a complex question. Hence, I have not yet come across a robo-adviser (in India / the US) that uses the most important variables to determine asset allocation for a particular couple
- Further, there are many aspects that a robo-adviser does not cover. For example, it does not tell you to minimize bad investments, in the flavor-of-the-decade, such as crypto-currencies, structured products, peer-to-peer lending and most angel investment opportunities
- Finally, the quality of the robo-adviser depends on the competence / judgement of the human-adviser who provided the approach / algorithm. For example, if that human-adviser believes the myth that equity is safe in the long-term, then the robo-adviser is likely to recommend a very high equity allocation. So you still have to find out which human-adviser provided the approach / algorithm to the robo-adviser and whether you trust that person's competence / judgement
3. Should I engage with a Fee-Only (Advice-Only) Financial Planner who is in the same city?
- There are only 13 established Advice-Only Financial Planners in India. And most of them conduct almost all their work over audio / video calls and email i.e. they rarely meet clients face-to-face. So being in the same city is not relevant. More tangibly, I have pointed a few potential clients in Bangalore (where I am based) to another Advice-Only Financial Planner who was more suitable for them, in some other city.
- Further, if you are in the top 100 people in terms of competence in financial planning and investing, then limiting your search to the advisers in your city may make it difficult to find an adviser who is more competent than you are and is in the top 1-3
4. Are there any objective factors to indicate that you as an adviser may be more competent than I am?
- I have been as an investor for 15 years including a decade as a Partner and one of the five members of the founding team at a top 5-10 independent Indian Private Equity & Venture Capital fund
- Further, I have a two-year full-time (i.e. the flagship course) MBA in Finance from Indian Institute of Management Bangalore (IIMB) and I have been a practitioner / student of finance and investing for more than three decades. This provides me with an advantage in understanding theoretical aspects of finance e.g. why it is a myth that equity is safe in the long-term or why smart-beta is just smart-marketing
- Finally, all my working hours are focused on financial planning and investing. So, I can focus on aspects that my clients don't focus on e.g. mitigating 'sequence of return risk' during retirement
5. Are there really only 13 established Advice-Only Financial Planners in India?
- This list is the only authoritative list (since 2014) of established Advice-Only Financial Planners in India, including myself (Note: For legacy reasons from 2014, this list uses the over simplified term 'Fee-Only' but this list means 'Advice-Only'. Accordingly there is an asterisk marked against two names in the list because they are not 'Advice-Only')
- If a person is not listed on this list, it is because:
- They are not an Advice-Only Financial Planner (e.g. this list largely excludes people whose fees are a percentage of the client's assets under management and further there are many nuances about fees that a layman may not understand but this list filters for) or
- They are amongst the one dozen other people who are in process of getting established (this is a subjective threshold by the person who maintains this list) as an Advice-Only Financial Planner
6. But most experts say that active mutual funds are better than index funds. How can all of them be wrong?
- The only relevant point is what does the data show. But from a lay persons point of view, how do you make sure that what you are looking at is the correct data?
- On this topic, there is professional / robust data (by S&P) and there is amature / biased data (all the other data). And those with a conflict of interest on this topic will almost always point to the biased data. So from a lay person's point of view, it is useful to first understand who is making the case. Do they have a conflict of interest (which may tempt them to point to biased data)? And do they have the qualifications to understand the data?
- It is natural that groups that have a high conflict of interest will claim that active mutual funds are better than index funds. Some of these groups with a high conflict of interest are:
- RIAs that charge a percentage of the client's net worth since they have to over-complicate their advice to justify a high fee (this is explained in this bit of this podcast)
- Active mutual fund houses / managers
- Databases / media / journalists that either (a) depend on active mutual funds for advertising revenue or (b) have to create exciting content to attract viewers so as to attract any advertisers
- Distributors since they are just mutual fund salesmen
- Hence, the only relevant experts are Advice-Only RIAs since they have the lowest conflict of interest (To clarify, they may still be tempted to provide over-complicated advice to try to maximize renewal by existing clients i.e. they may also have a small conflict of interest)
- Among Advice-Only RIAs, I have (by far) the highest investment work-experience and educational qualifications. I have written half-a-dozen articles which quote robust data and explain why index funds make more sense than active funds and how the opposite arguments are deceptive (e.g. article in Business Standard which will download as a PDF file and another article which explains the data)
- Only one other Advice-Only RIA has written briefly on this topic and it was in favor of index funds. No other Advice-Only RIA has written a detailed article quoting robust data that disagrees with this view. So for all practical purposes, there is no relevant and credible expert who has made a robust case for active mutual funds
7. What if I am not convinced that index funds make more sense than active mutual funds?
- Some of my clients are completely convinced about index funds while others are largely convinced about index funds (but are not completely convinced about it)
- If you are currently completely convinced that you only want to invest in active mutual funds, then it does not make sense to even do an introductory call with me
- If you are currently equally convinced by index funds and active mutual funds, then you could read a few articles that I have written on the topic (relevant article in Business Standard which will download as a PDF file and another article which explains the data) and subsequently do an introductory call
- By the time you have to make a final decision whether to formally enter into an engagement (i.e. not now), it makes sense to enter into a formal engagement only if you are largely convinced about index funds (it is ok if you are not completely convinced about index funds)
- As I mention in this bit of this podcast, I specialize in engaging with the most mature clients e.g. some of my clients are fund managers. And index funds are a natural fit for the most mature investors / clients