How lack of formal financial advice can prove costly for many investors

Indians hate paying for financial advice, even when referred to a good adviser. Every other day, I receive calls from people who want financial advice but are not willing to pay for it. Take the case of Shobhit, 50, whose child has just joined medical studies. Shobhit wanted to exit his Public Provident Fund (PPF) and invest it in equity funds. He did not take a loan for his son’s education and felt equity funds could be a good way to increase the education corpus. His view was that PPF was returning 7.1% per annum (p.a.), whereas equity funds could give him 13-14% p.a. returns in the next two years.

In most cases, investors just want an affirmation of their views. Shobhit too wanted to know if his investment strategy was good. Without knowing his complete portfolio and financial goals, it was impossible to give my opinion. Shobhit was hesitant to work with a financial planner as he did not want to spend on financial advice, despite his multiple goals and insufficient corpus.

I see the same attitude in people when it comes to tax filing, wherein individuals are not ready to pay ₹8,000-10,000 per year to file returns correctly. I receive many queries from holders of foreign stocks (including in the form of ESOPs, or employee stock options), who, despite being told the complexity of income tax return (ITR) filing and the implications of improper disclosure, look for people who can do this at low cost. This is simply being penny wise and pound foolish! The omission of disclosure of foreign assets invites a ₹10 lakh penalty, and inaccurate filing comes with 30% additional tax and penalties. The defaulter can also be prosecuted under the Black Money Act. Saving a few thousands on tax filing of such complex transactions means leaving yourself open to larger problems in the future.

Choosing poor investments like investment-linked insurance plans or schemes which do not tie in with financial goals can cost much more than the cost of financial advice. Investment linked insurance schemes return 4-5% p.a. versus 9-10% p.a. that can be generated by equity mutual funds in the long term. Investing in an equity fund for 2-3 years based on recent performance means being exposed to high volatility and even negative returns. Constantly changing schemes based on past performance is the reason for investor returns that lag fund returns. The difference between the best and worst performing fund is around 6-7% p.a. and that is much more expensive than adviser fees.

Lack of knowledge and the overload of information is getting investors to believe they can manage everything themselves without professional help. The advent of private equity funded digital platforms, whose value proposition is free advice, is not helping matters. You don’t get something for nothing!

It is surprising that Indians have changed their thought process on so many aspects with the times but not on financial matters. Traditionally, financial advice was not taken and the general feeling is that financial advisers con people into investing in products where they make huge commissions and do not work in favour of the customer. Financial advisers also have a negative image in social media.

All advisers cannot be painted with the same brush. There are very good and reliable financial advisers with high integrity. For a start, understand that financial advice is not only about choosing schemes but about the professional guidance on how to plan for financial goals and hand-holding during volatile times. You would want to be respected for your professional expertise in your field and be paid for it accordingly. The same holds true for finance professionals. Anything free costs twice as much in the long run or turns out worthless!

Second, look for fee-only financial planners or ask for a reference from your circles for a financial adviser. A good financial adviser will talk about financial goals and long-term plans and not push insurance plans or other such financial products. Always understand how you will be charged for the services. Fee-based pricing over commissions is preferrable.

Read up to be an informed investor (the Mint personal finance page is a great resource!). Keep away from social media videos and reels. They are meant for those who want entertainment and not serious learning. Insist on a financial plan with the adviser. That is the value the adviser adds.

A combination of knowledge and good advice can make all the difference to your financial life.

Mrin Agarwal is founder director, Finsafe India.