Why do we need a Financial Planner?

This is a very sensitive and a commonly discussed topic amongst personal finance groups. What is the value of what a financial planner or the financial advisor or the financial coach (whatever name they are called), brings to the table. I would like to put some of my thoughts. Often, people think that if they have Google (or any other search engine) with them, they can do all the research themselves and can make investments. What we get there is all data while what we need for investing is information.

What I have often seen in the name of research is to look at the ratings and the rankings provided by leading companies. Based on the same, then make the investment decisions. Please do understand that these can backfire if not done correctly. The rankings are often nothing but a descending order of returns. Investing mainly based on that without an understanding of your risk profile and the time horizon of investments can get you negative returns which can harm your goals and objectives.

We all know how 2018 markets were especially in the mid-cap and small-cap segments where the portfolio fell by large percentages. I have come across investors investing based on 2017 rankings for the money they had needed in a year, thus burning their fingers badly. Then it is the mutual funds that get a bad name and is even compared to gambling. Reality is far from that. I have personally invested in mutual funds for the past 15 years myself and consider it to be a great avenue for achieving your goals if done in a structured manner.

How is a financial planner different?

If a financial planner only provides the transaction support by way of buying and selling, filling up the forms, etc, then I agree there could be no value provided. You could be better off by investing on your own, as there could even be a scope of misselling happening in such cases. A good advisor should be investing based on your time horizon, your goals, understand your risk profile, and then make recommendations based on the research.

What does a financial planner do?

We all know past performance is not an indication of future performance and therefore ratings and rankings may not mean anything, but at best some guidance. A good financial advisor does the research based on various other parameters – both qualitative and quantitative.

A. Qualitative Analysis

Some of the qualitative analysis would be during the interactions with the fund managers – attending regular telephonic or in-person meetings specifically scheduled for them. This helps in understanding about their approach, philosophy, tenure with the company. Other sources of information are reading news articles and watching television programs regularly.

B. Quantitative Analysis

Quantitative analysis is more detailed oriented. Two such key metrics are alpha and beta. Alpha, also known as active returns, is a measure of returns from active management. It is the difference between the return from a portfolio and the benchmark portfolio. A positive alpha means that fund manager has outperformed the benchmark while negative alpha would mean under-performing. For long term products like equity, it needs to be seen over a long period, especially understanding the fund performance during the bearish phase in the market. But, as I said earlier, looking at past performance is just like driving a car looking at the rear-view mirror!

Another key ratio is Beta. Beta is a measure of the risk of a portfolio versus a market portfolio. A beta of 1 means a positive correlation whereas a beta of 0 means no correlation. If an investor is looking for a low risk, then look for a low beta and vice versa. Let me take an example here. If a fund has a beta of +2, it means that the volatility is 100 greater than the benchmark. So even if, the fund has performed at 18% versus 12% benchmark, then while it has a positive alpha, but is still 6% lower than the rate of return needed to compensate for the additional risk. There are some other ratios and quantitative data as well which need to be analysed before selecting a fund.

If we need a planner, what is better – a Registered Investment Advisor (RIA), or a Mutual Fund Distributor (MFD)

The short answer to this is that there is no right or wrong answer. Both are good and can add value if you have found the right one for your needs! It all depends on your rapport and comfort and the trust you have in a person. This is a long-term relation, possibly throughout your life and could be even future generations, so it should be done carefully. When selecting a planner, do take some time to understand the background qualification and the experience. Two qualifications such as a Certified Financial Planner (CFP) and Chartered Wealth Manager (CWM) certainly do add a lot of credibility to the planner. Though both certifications have different role and purpose, they provide a lot of emphasis on well structured planning.


Don’t look for quick short cuts through Google. While certainly there is convenience now with the advent of online platforms, a purchase is easy if you have money but knowing what to do with changing regulations, the market is also equally and even more important. A good financial planner should be able to guide you on all aspects related to money which do get complicated over a while or at least find someone competent for the same. This is something the algorithms cannot do as every human being is different and complex with varying behavioural aspects related to money (a separate topic for discussion).

I had my financial planner for many years while I was working in corporate life. While being from the finance and specifically working in the mutual fund industry, I had all the theoretical understanding required for my investments. What I lacked was not having dedicated time for researching at the industry, category, and fund level to make the best determination for me. Therefore, I was happy to outsource to someone I trusted and who could do it for me.

Look at your advisor as a friend with whom you can share your aspirations, fears, etc. Sometimes, I wonder about the similarity of our job with a doctor. You would agree that when we talk to our family doctor about any ailments, then it is our interest that we are transparent and open. If he does not have complete information, the diagnosis can be faulty. Similarly, a financial advisor also does a similar role and has a fiduciary responsibility. If we do not provide timely and accurate information, the financial assessment can be faulty. Therefore the recommendation which can have a detrimental impact on your financial planning.

Wishing you all the best in your journey towards financial planning which can help you achieve all your goals. I will be happy to answer any of your questions. My contact details are provided on my website www.financialradiance.com. Please also do read my other blogs which I have written on a variety of topics.




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