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Personal Finance

Will you pay for ULIP or Investment Advice?

I’m just working through my inbox and at least 200 emails are still pending, with people asking me what I suggest they do about their policies. The requests come with a varying degree of detail, some with details of how much has been invested and what the current value is, and others simply saying they bought such-and-such ULIP, and should they continue.

My answer till now has been a canned “Please contact a financial advisor” reply, primarily because I don’t have the time to help each person individually. It takes between 15 minutes to an hour to research and understand what a person has done, and then perhaps longer to work out what that person actually requires – there is no one-solution-fits-all.

In this context, I wonder if my reply is useful. Most “advisors” are not really advisors, they are product distribution agents. They don’t really want to work to the benefit of the customer. They only want to sell a product. How do you find out if an advisor is truly working for you?

I can suggest that you tell him you will only pay him for his advice. But you will buy products from someone else. (say a family member is an agent or something). The reaction will tell you if the person cares – if he quotes a price, and says ok, he’s probably honest. If he refuses for any reason, then he doesn’t want to represent you – just the end customer.

Advice can be at various levels, from “what should I do with this product?” to a full investment plan containing goals, allocations and tracking. At a cost level, I imagine that a service can cost:

  • Rs. 200-500 for a single time advice.
    • Eg. I invested in this ULIP, what should I do now?
    • Answer comes with – If you exit now, this is the cost. In one year, two years, five years, this is the cost. Also here is the comparison with putting the money in a mutual fund instead, going forward. Recommended exit after X years only. With an Excel sheet.
  • Rs. 3,000 per year for a detailed financial plan, with a monthly analysis of your performance (“tracking”).
    • Eg. I am 35 years old, I have X EMIs monthly. I need to buy a car in 2 years. Need to plan education needs for my 2 year old. Need to plan for a week in Disneyland or Europe every year, starting six years from now. Need to plan for my retirement. My monthly expenses are Y, I made Z rupees etc.
    • Answer should come with a plan segregating how much you need for each goal, and in order to get there, how much you need to save per month. Should have an allocation for emergency buffer for 6 months, a short term plan (assuming 6-7% return) for anything less than 5 years, a longer term plan (assuming 12% returns) for retirement/child education options and an insurance term plan suggestion. Comes with a tracking plan to help see where you SHOULD be every month, so you can track versus where you are. And so on.

This I imagine would apply to portfolios involving just mutual funds and insurance. It’s more complex if you add stocks, bonds and all that.

But the real question is – will people pay? I think the cleanest and most honest method is only if the customer pays for advice. The cost should not be a percentage of investment – advisors don’t work harder for 5 lakhs invested versus 1 lakh. And the advisor should not require the customer to buy the product from him – one way is to mark mutual fund investments “DIRECT”.

When I ask this: I have got multiple responses – most people say “No”, most advisors say No, and some others do say yes. While I’ve evaluated some business plans that specifically charge the customer, I’m not sure that will work. So I thought I’ll ask you – will you pay for such advice with the above prices?

Please comment below or mail me at deepakshenoy [at] gmail.com. I appreciate all responses.

There are multiple reasons for this question – one, to understand if there is a business model in providing advice at a cost; I am interested in this space, and any responses will help.

Another reason is to help honest advisors understand if there is a business model too. A lot of smart individuals run away from this field because the economics don’t make sense, unless they get commissions. Charging customers is something people shy away from. It’s also less effort to get commissions, you don’t have to make a detailed financial plan, etc. – but if there is decent monetary reward, there is space for a cleaner and better business model.

Also, there’s a way to leverage technology in this space. Like auto-calculating where one should be, tracking and maintaining portfolios, providing investment feedback, decoding ULIPs. But till now all such services are free, and that model makes me cringe. Free is good, but free does not sustain; but if there is willingness to pay a cost for a complete package, then the technology will help in lowering the cost of delivering the service. I’m a tech person, and I can see how technology can help this space – but if the only expectation is to get this for free, then why bother.

Lastly, paying for advice allows people to rate a product negatively. Advisors usually know which product is horrible and which is good. As a private distributor of mutual funds (something I set up only for family stuff) I get emails of sudden 2% commissions “just for this month” etc. The minute I get this, I know the product is screwed up, because they will somehow extract that commission from the product. But will an advisor tell a client this, if his biggest source of income is commissions?

Note: there still needs to be hand-holding for people who don’t know where else to buy products. But there are many “honest” places nowadays – from online brokers to “DIRECT” investments. 

  • Srini says:

    >While I have just one ULIP for my kids' education purposes (the monthly premium would continue to be paid even after I'm not around, cant get the same with Mutual funds), rest of my investment is in equities (stock and MF). 3K definitely looks like a right number for a service like this.

  • medpal says:

    >Hi Deepak,

    I have been reading your thoughts for quite some time now.

    I am a doctor, and in a sense financial advisory can be compared with our profession. You expect a doctor to give honest, unbiased judgement about your health, Sameway we also expect financial advisors to give honest, unbiased evaluation of client`s financial health.

    I will be happy to pay for such services which carries assessment of income sources, debt burden, targets, achievements, and investment scrutiny.

    Your judgement about pricing seems just about perfect, can be varied according to the job involved and also the geographical location.

    Will be watching this space for more thoughts and discussion.

  • Yusuf says:

    >Deepak, I think you got the number right. I don't mind paying about 3K per year to get the right advice.

  • Debashish says:

    >I feel i am can 5 to 10K is for a personalised financial plan . But the question is where I can get a quilified and exprienced advisor for the same . I will not like to pay a fees if all the finance planner does is put my income, asset , liability , goals in to a Software tool and get a computer generated plan .

  • Blabber Guy says:

    >Hi Deepak,

    I don't mind paying 3K/year to find out if i am on the right path towards my financial goals.

    Regards,

    Mohan.

  • Vip says:

    >Deepak,
    I would pay for such a service, but I am only interested in "investment advise and tracking".

    Thanks,
    ~Vip

  • Oracle says:

    >I think there should not be any harm in paying Rs 100-300 plus service tax etc for per sitting or per hour charge. Rs 3000 for whole year looks really meagre if you are putting ARN- or Broker code in your MF portfolio or folio. Most of the people just don't think about what they want and they just want only thing i.e. high rate of return without any commitments like SIP. So there should be something with percentage of asset and something linked to performance.

  • Sambaran says:

    >I won't pay 200-500 for single-seating-advice or 3000 for yearly financial plan.
    I am however ready to pay 200-500 for a book which covers personal finance topics. Something like Ashu Dutt's 'Penguin guide to personal finance'.

  • Srikanth says:

    >Deepak,

    First off, welcome back!! 🙂

    Let's do some math, shall we?

    Let's assume a person is willing to pay Rs. 3000 a year for personalized advice.

    Let's take a look at the advisor – a qualified professional who does needs analysis, designs and recommends a portfolio and then monitors and maintains it.

    Let's assume this advisor is working solo, in his house, in a previously bought computer. All he needs is life sustenance – let's say in a mythical suburb called Noida. He'd need at least 50K a month – totalling to Rs. 6 lakhs a year.

    To earn 6 lakhs a year at the rate of 3000 per customer, he would need 200 customers. He can spend, on an average, about 10-12 hours per customer per year (assuming a standard 2000-2400 hours per year work).

    Can a single individual cater to the needs of 200 clients, and monitor 200 portfolios? Difficult, but possible if he has the technology. And, technology is not some online calculators, but would need to be a bit high level. At some level, this advisor needs to be tech-savvy – able to write simple programs, say in PHP or Python or atleast excel VB macros.

    And this – supporting 200 clients a year – would probably be the max he can do as an individual. Anything more, and he would need to start hiring people. Also, remember, to submit "Direct" applications to MFs, you would need to go the paper route with several mutual fund companies (I don't understand what financial benefit there is to going Direct as opposed to no-fee online brokers, but my bias will be showing then 🙂 ). That means, collecting paper forms from customers at their houses, who as paying customers expect personalized services.

    Also, as someone who is engaging directly with customers, he would have to be one hell of a good communicator.

    The question now becomes, why would a tech-savvy financial domain savvy person with good communication skills work for 6 lakhs a year when he can parlay his talents for a much higher sum (atleast twice that) in the IT market? The only reason is if there is a infinite growth (entrepreneurial) possibility. For that, the model needs to be a scalable model. Is it? How many clients can be supported on such a fixed fee model? Only other thing that can go up is this model is the fee from 3K to say 5K or 10K. And that would reduce the client base (price/demand and all that jazz)

    To me, this is the central unintended consequence of SEBI's recent clamping on MF industry practices. They have made MFs a strictly upper middle class product – only they can be served by advisors in a reasonably sustainable way. Because they are the ones who can afford to shell out 5-10K a year for advice (their total savings a year is likely to be less than a lakh – shelling out 5-10 K would mean 5-10% of their savings!). May be SEBI thinks that middle class folks can live mired in the non-alpha world of savings accounts and fixed deposits.

  • Annu says:

    >Definitely reasonably priced services (both individual consultation and annual fee ) but like friend Shrikant says, I wonder if this will be sufficiently remunerative for the consultant if he makes an all out sincere effort consuming so much time for each client. Maybe, aggregation of cases close enough to each other to require very similar, if not the same guidance can make it possible. Worth pursuing, in my opinion.

    annumallya@gmail.com

  • Vishal says:

    >I agree with what Srikanth says.

    Looking it as a business proposition, it should generate decent income for any advisory to start the business. If 3K is low an annual fee, then by increasing it, one will not get many clients and there may be only handful of wealthy clients whom you may know and who will invest.

    I had one more point. Why the fee can't be based on quantum of funds managed or as profit percentage with a small fixed annual fee. In the latter option, the client will be more assured about the advice since part of the payment is in form of profit distribution which will be depend on advice given. I understand both the options has its own pitfalls, but need a debate on why it can not be an option at all.

  • Anonymous says:

    >am also ready to pay around 3K to % K for an year. But I am against the methodology of charging it based on %of retirement benefit or what ever…

    @Srikant..
    I think example needs to be refined more.. Does an advisor living in his own need 50K per month for life sustaining??? That amount will be defitnely more than majority of Indians earn:-)

  • Anonymous says:

    >Deepak: If it's you, I would be more interested in some kind of PMS service rather than just financial planning. Let's say I give you 5 lacs to be managed with some indicative returns: you take a cut if y-o-y returns are +ve and make zilch if returns are -ve (talking at a very high-level, details like timeframe etc. would obviously have to be spelt out). That would be more interesting in my view. I think most junta online have basic financial know-how to do their own planning. And as Srikanth mentioned, financial planning alone is difficult to scale with fixed fees.

  • Anonymous says:

    >- MF etc, I can do myself and already doing with knowledge accumulated over 2-3 years by continuous reading of mags/blogs etc.
    – I am looking for stock advice, stocks which have high probability of going up very well within 1-2 years.
    – Knowing your own portfolio would be a worthwhile thing and directions on when you exit/enter etc
    – Not looking for day trading or 5% gain, looking for bets for 30 – 40% + gain in < 1 year etc.

    (pls do not laugh at above :-), even with a very small set of midcap stocks i monitor, i see some going down and then zooming up 50% within short period. It would be nice to know those kind of things ahead to profit, and I get the feeling some sharp people, eg promoters know it in some way)