Wednesday, November 14, 2007

Unbiased Financial Advice

Early this week, on Monday, Josh, a dear friend called me and asked me for some investment advice. He has just become a father and wants to create a fund so that it takes care of his daughter's education. Now, this is a kind of call that I keep getting regularly. Most of my friends (and friends' friends) ask me for investment advice thinking that I am an expert in the field!! I have got numerous offers to start a private (equity) fund from a few of my friends where they will "outsource" their headache of managing their savings. What I fail to explain to them is that there are no experts in the world of investments. Everyone is as good (0r bad) as the next person.

But this call got me thinking about investment advice and advisers in general. Apparently, my friend had been approached my a few financial advisers who had advised him to buy into certain mutual funds. Typically, these advisers are associated with financial brokerages and make money from commissions when people buy into funds. So, their incentive is to make people continuously churn their portfolios (because thats the only way they make any money).

I think its important that people stop taking their financial advice from their brokers. If you are seriously ill, do you go to a chemist? No. You go to a doctor. A doctor does not have (or atleast should not have) any incentive for selling medicines. The doctor would want to see you get better so that next time you fall ill you consult him. Similarly, for financial advice you should go to an independent financial adviser who charges you money for his advice and not from commissions for selling financial products. That is the only way can hope to get an unbiased financial advice.

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