Over the years, we’ve been dependent on agents, distributors or financial advisors to buy financial products. In this post, we will discuss the ways we can consume various financial products and why we should prefer DIY or Do It Yourself!
Here I want to emphasize that I’m not against agents, distributors or financial advisors, they have done a great job in promoting financial literacy and they deserve an applause for that. However, I’m here to discuss the advantages of DIY and its impact on personal finance. After reading this post, you may decide which path you wish to take, same old traditional path or DIY!
Let’s get started!
Distributors and Commission Agents
Most of you would have seen your parents buying different insurance policies from LIC agents. Similarly, many of you might have invested in regular mutual funds with the help of mutual fund distributors. These agents or distributors visit your homes and suggest right products for you. They facilitate all the documentation and process and help you get going. In return, they don’t directly charge you anything, but get a part or percentage of your policy premium or investment as commission.
There are three basic flaws in this approach –
- Selling these products is how agents earn commissions and their livelihood. Hence, agents may always prefer to sell products which can earn them more commissions. They might not be always concerned about what product is right for you or in fact they might not even know that. I remember having faced this situation myself few years back, when I wanted to buy a pure term plan from an LIC agent, but he kept pushing me to buy an endowment plan just because it was more profitable for him! I ended up not buying any plan at all! There would always be a conflict of interest.
- An agent most of the times will represent a specific company, for example, LIC agents will sell LIC policies, HDFC mutual fund agents will sell HDFC mutual funds and so on. Hence your options will be restricted if you buy from agents, and you won’t be able to compare various products available in market.
- A chunk of your money will go to agents’ commission, thus increasing your overall cost. This has a huge impact on long term investments such as mutual fund SIPs. Consider this-
|SIP Amount||Tenure||CAGR||Total Returns (Approx.)|
In above example, a difference of 1% in CAGR which goes to commissions, will reduce your returns by Rs.1,68,000 in 20 years! Here the SIP amount is a meagre Rs.1000, think about larger amounts and longer periods.
Registered Investment Advisors or Fee Only Advisors
Prior to 2013, there was no concept of Registered Investment Advisors in India and anyone could potentially claim to be one and give investment advice. Also, agents used to promote specific products for their own benefits. To tackle these problems, SEBI introduced SEBI (Investment Advisers) Regulations 2013. These regulations mandate that investment advisors must be registered with SEBI. These advisors are referred to as RIA or Registered Investment Advisors. As per SEBI regulations, RIA can not receive any commission or compensation from any person other than the client being advised. RIA has to act as a fiduciary, i.e. keep client’s interests above their own.
Taking advice from RIA to identify correct financial products and manage your portfolio is better option than buying from agents. It will only incur a one-time cost for you, that too free from any conflict of interest. You may opt for a one time review or take regular plans from any of RIAs.
DIY-Do It Yourself
DIY in Personal Finance management is the method which encourages identifying correct financial products for yourself and buying them directly from provider. It involves building your own portfolio and constantly reviewing it for any changes required. Basically, you eliminate any need to take services of agents, distributors or financial advisors to buy any financial product or manage your money. You DIY!
DIY can be difficult in the beginning, but given that we are living in information age, doesn’t it make the most sense? It just requires some time and dedication from you, that’s it! Almost every financial product that you need today can be bought directly from the provider, whether it is insurance or mutual funds. DIY not only saves lot of your costs but also provides you a better control over your finances. You are in charge and can take decisions in time, no dependency on anyone.
One argument usually given against DIY is that a common individual doesn’t have expertise and knowledge to make correct decisions. If you feel that you are one of those, I would suggest you stay away from DIY. But if you like to reason, understand and make informed decisions, if you are ready to invest some time, you should DIY. In any case, even agents or advisors will not take any guarantee of returns on your investments, no one really can! So why not understand and do it yourself?
This is what this blog is all about, to make you ready for DIY and give you the base that you can build upon. Stay tuned!
Your feedback, comments and questions are most welcome!