How do you choose the right advisory service for your portfolio?

It’s your friend’s wedding, and you went shopping. You remember seeing a beautiful off-white dress someone wore and looked gorgeous, so you started looking for the same. But when you finally found it and tried it on, it didn’t suit you as much as the other girl. The store manager, being an expert, said that as per color theory, your face will glow much more in bright shades. And guess what? You tried orange, and wow!

Why are we suddenly starting with fashion? Here, we understand the benefits of having an expert by our side, be it building a closet for yourself or a portfolio for your finances.

Benefits of teaming with an investment advisory:

  • Professional advisors with keen market insight offer expertise covering financial aspects such as taxation and retirement planning.
  • They guide goal setting, aligning investment plans for objectives like property acquisition or retirement.
  • They help with risk management that involves diversifying portfolios based on tolerance and financial goals, with regular monitoring and adjustments for optimal performance.
  • A SEBI-registered advisory facilitates objective decision-making, detaching from emotions, and making logical adjustments.
  • They also aid in legal tax minimization, providing time-saving and convenient support for market-related queries.

Hiring an advisory service can be the right start if you seek efficient and knowledgeable financial guidance at the start of your journey or to enhance your portfolio. But the question is, how do you make the right choice?

Steps to selecting a suitable financial advisory:

1.   Identify your financial requirements:

Before seeking an advisor, consider your goals for the relationship. Financial advisors offer diverse services, so knowing your needs is crucial in the search. Some focus on areas like debt or investments, while others provide comprehensive guidance from savings to retirement. Pose key questions to pinpoint your financial needs:

  • Do you require budget assistance?
  • Are you seeking investment guidance?
  • Do you want to formulate a financial plan?
  • Are there savings goals you need help achieving?
  • Do you want to create a trust or need help with estate planning?
  • Do you need tax assistance?
  • Are you looking for advice on personal finance?

These answers guide you to a suitable advisor. A robo-advisor may suffice if investing, but an online or traditional advisor is preferred for comprehensive financial concerns.

2.   Know the type of services:

You can either engage an individual financial advisor or opt for a SEBI-registered advisory with dedicated teams managing portfolios. In both cases, various financial advisors specialize in specific services. Three primary types include:

  • Traditional Financial Advisors- Experienced in-person advisors adept at navigating complex financial scenarios, offering assistance in conventional personal finance areas.
  • Online Financial Advisors- Provide virtual consultations, crafting comprehensive financial plans with services generally more cost-effective than traditional advisors.
  • Robo-advisors- AI-driven, sophisticated algorithms can construct investment portfolios based on your needs. While cost-effective, robo-advisors may not handle intricate financial situations like traditional advisors.

3.   Check the experience and qualifications:

In India, a portfolio manager must have at least five years of SEBI registration experience in the securities market. It’s crucial to assess the portfolio management team’s credentials and expertise. Ensure the PMS (Portfolio Management Service) provider is SEBI-registered for regulatory compliance and prioritizes longer-standing companies that often showcase credibility and stability.

Additionally, SEBI mandates PMS providers to disclose track records in marketing material, including performance and fees. While past performance doesn’t predict the future, it provides insights into their investment capabilities, especially under various market conditions. In case you are hiring an individual or independent financial advisor, look for qualifications like CFA (Chartered Financial Analyst), CFP (Certified Financial Planner), or CIMA (Certified Investment Management Analyst) along with experience before proceeding.

4.   Check the fee structure:

PMS fees have two parts: the starting fee and the performance fee. What you  pay depends on whether you’re getting discretionary or non-discretionary services. Here, discretionary service will mean that the investment decision lies in the hands of the financial advisor.

In contrast, in the case of non-discretionary services, the final call is that of the client, you. While a lower fee might seem attractive, comparing it with industry standards is crucial. Fees for discretionary PMS range from 2-2.5% for management and 10-20% for performance, whereas non-discretionary PMS fees are 0.5-1%.

Higher fees don’t guarantee superior performance, so align them with your investment goals. Additionally, consider entry and exit loads and other factors before committing to a PMS to make informed decisions about your investment strategy.

5.   Check their investment strategies and performance reviews:

Diverse investment strategies exist among financial advisory services, with no absolute good or bad—just what suits you. Evaluate different services according to your needs. Inquire about risk management and how they navigate challenges. Ask yourself and your potential manager:

  • Are you conservative or aggressive?
  • Do you prefer active or passive management?
  • Do you focus on growth or income?
  • Do you favor domestic or international markets?
  • Do you have social or environmental preferences?

Ensuring alignment on these aspects helps the advisors understand your risk tolerance, time horizon, and objectives, ensuring a tailored portfolio that fits your needs and preferences.

Due to industry uncertainties, exercising caution is crucial when selecting a financial advisor who aligns with your fiduciary and financial needs. Scheduling initial consultations with multiple candidates is advisable. Once you find the right advisor, they will play a key role in achieving your monetary goals and securing your loved ones’ future.

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