Later part of the last week I was on vacation to attend a wedding of one of my cousin at Ahmedabad.
After one late night event, another cousin of mine (professionally a practicing doctor) gave me a ride to the place I was putting up, let’s name my cousin Amit. On road casually I changed the topic and drifted to Personal Finance related discussion and started discussing his future plans and kind of investments he is making to achieve them. After few fund names and discussing casual review of them I casually asked him how did you end up with such funds, and as I expected for most of them he just checked their returns on the internet and decided to invest in them because of their good returns irrespective of risk being involved and whether it’s within one’s risk capacity or not. He did try to approach few financial planners to help organize his finances but they could not establish a trustful environment with him and hence he decided to do investment planning on his own. But one thing my Doctor cousin forgot is the way he expects a sick person to visit a doctor instead of taking medicine on his own similarly when you are sick with investments you need to see a Personal Finance doctor, that is an Advisor. For him finding an Advisor itself was a challenge, forget about finding the best Advisor. Finding a good Advisor is as complex to him as finding a good doctor for any non-medical person.
I tried to explain him at a high level difference between a Distributor and an Advisor, but it kept on adding more confusion to him. So to put it in his medical perspective, a Distributor is similar to a doctor who prescribes those medicines which are available only on the next door medical store for which doctor gets commission similarly, a Distributor only suggests fund where he can get maximum commission. Wherein, an Advisor is an only fee based doctor who prescribes generic medicines which are available in most of the medical stores. As I understand, unless we have blind faith in a doctor we usually prefer to go to the doctor who prescribes generic medicines, which is an Advisor in Personal Finance case.
Based on above discussion I decided to put up a basic list of questions to be asked to the Personal Finance Doctor to understand whether he is an Advisor or a Distributor.
- How he chooses funds?
It’s essential to know whether the Personal Finance Doctor is able to explain the process based on which he chooses the funds. If he is not able to explain the process or his process does not take your short term and long term goals then he is just a Distributor. He should be able to take your goals into consideration and tag them to the funds he is suggesting you to invest in.
- Can I invest in a similar fund from a different AMC (Asset Management Company)?
If he plainly says “HELL YES” then he could be an Advisor, but if he lists down only a few other funds then he might be acting as a Distributor. To probe further ask him any good fund from different AMC name you might have read or heard and observe his behavior and response. If he starts feeling uneasy or says too many bad things about a well performing known fund then he is surely playing as a Distributor. An Advisor will be open for selection of different fund from similar category irrespective of the AMC.
- Can I invest in Direct Plan?
This question is sure shot to get you clarity on the role your doctor is playing. There is a small but substantial difference on expense ratio for Direct Plan compare to Regular Plan, which directly gives boost to the returns so it’s always advisable to go for Direct Plan. Read here for further clarity on Direct Plan vs Regular Plan.
- Does he get a commission from AMC in addition to the fee from us?
In a way, this question is directly linked to the above question, but in case he fumbled on answering above question then any answer other than “HELL NO” clearly means that he is acting as a Distributor and not an Advisor.
Not all Funds are Equity fund. And, not all funds are suited for all goals. So it’s essential to understand Types of Mutual Funds, and their ideal case choice for goals. And as I said earlier, in case you are sick then it’s better to meet your doctor sooner to avoid further damages, not only in health wise but wealth wise too.
Go ahead and evaluate your Personal Finance doctor next time. In case you find your doctor to be an Advisor (and not a Distributor) within acceptable fee then book an appointment immediately and follow his prescription (read: advice) blindly for few years, and get it reviewed every few years similar to the body checkups we do every few years.
Image Credit: Economic Times, Times of India.
Also published on Medium.