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Does your money doctor have the intention and ability to advice you well?
Many times that I review client portfolios invested via multiple different advisors, some of the common pain points that exist are not because of market risk, but just simply because of bad advise. It has made me realise the following: Being able to differentiate between a good and a bad advisor, is the single most important factor that you can control as an investor. Think about it, the only difference between people who bleed severely during a market crash vs those who probably only take a small beating, is - which advisor did they place their trust in?
All investors must ask themselves an extremely important, but often overlooked question: Does my money manager have the 1). The Ability and 2). The Intention to manage my money correctly? Ability matters because obviously the advisor must have a holistic understanding of different assets, macro economic trends, market fundamentals and valuations, and risk management in order to guide you correctly. Intention matters because even if they have the ability, the advisor's goals (profit making) might not align with what your goals are as a client (maximise returns, and minimise risk).
Either with logic or experience, the investor will always ultimately learn to separate the good advice from the bad. The problem is by the time you’ve learnt the difference, you’ve also lost a lot of money. And that’s an irrecoverable pain. In this post I talk about cues that can help you recognise a bad advisor, so you can have a smoother investing experience:
Recognising a Bad Advisor:
Unfortunately in India, most advisors are extremely poor at their core job. They have absolutely no understanding of the global or domestic macro economy, equity markets valuations, interest rates and inflation, debt quality assessment, etc. Forget being poor at their jobs, I don't think they know what their jobs are! The number one job of a financial advisor is to put you in the right asset class at the right valuations and control the risk in your portfolio. But I doubt that majority of them even know how to do this. That is because most advisors are actually sales executives masked as 'experts' on investments.
Bank/Wealth Management Firm’s Relationship Managers: This is actually an easy one to understand. The designation itself is called ‘Relationship Manager’. Meaning this person is 100% committed to managing you, and 0% committed to managing your money! These people do what will make you feel good and happy, not what is required to be done to make the best decision for your money. Your advisor’s focus needs to be on getting results for your money, not sucking up to you.
Many wealth management counters or advisors would not touch your portfolio if you did not make a minimum sized investment with them, but size of the portfolio cannot be the only metric to screen/drop clients. I mean think about it - even before beginning the relationship, the advisor has put their needs before yours. What do you think they will do when they have to choose between selecting a low commission paying product (which is usually good for you as an investor) and a high commission paying product (which is usually bad for you as an investor)? Such relationships are doomed from the get go.
Many times bankers request clients to invest in certain products, as payback for a job they helped the client with, in their personal/corporate banking requirements. While I understand the pressure you might feel to reciprocate for the job done for you, please understand that when a banker helps you with a banking service, he is NOT doing you a favour, but his job. The bank also has interest in retaining you as a client, since that is their primary business, so they will service you irrespective of whether you give them your investment business or not. Of course the relation will not be as smooth as it would have been had you obliged him, but that small inconvenience is worth it for protecting your hard earned money. When bank managers start cross selling, you need to strictly say no or be prepared to bleed in high commission products. In case you are forced to work with a banker for investments, get an independent financial advisor to vet the investment decisions before committing the money with the bank.
Wealth counter relationship managers often label certain investments as ‘exclusive’ products for ‘select clients’, which generally have a high cut off for the initial buy-in (lets say minimum investment is 1 crore). The moment you come across this pitch, get up and leave. There is no money to be made in the long run there. Trust me. Most of these products have high costs, poor returns, negligible risk management and zero liquidity with high exit loads or lock-ins.
An advisor that recommends you 10-20 different funds or has a new pitch every time you meet them. Good advice is timeless and should typically not change every time you meet someone. How can you get consistent returns with inconsistent advice?
Anybody recommending you a ULIP (insurance and investment mix), is a complete red flag. ULIPs are high commission products with negligible returns for investors and are often mis sold as tax saving products. If you calculate the compounded annual growth rate for these products, it is perhaps lesser than a bank FD, with the risk of the equity markets.
When an advisor pushes you to to take more risk than what your risk profile or investment goals permit. I have heard so many stories where investors who should have ideally been in debt have been made to buy equity with the lure of potentially higher returns, for example: retirees are often mis sold equity the most. The end result is usually the client not having access to funds when needed, without booking a permanent loss on capital.
An advisor who makes you chase them for advice, account statements, updates, transaction requests, etc. especially if you want to sell an investment from their portfolio. They do not provide prompt service to take timely actions on your investments.
The advisor who only talks to you when the market is going up or your portfolio is doing well. Instead of bringing you information and risk updates during difficult times, they shy away hoping that the problems will automatically disappear from your portfolio over time and the client will not notice the issue.
I am not saying that a good advisor can help you eliminate ALL market risk and you will never see losses in your portfolio. All I am saying is that the chances of successful wealth management are higher if you receive the correct guidance.
Key Takeaways:
Reassess your financial advisor. Find someone who has the ability and intention to make your money work for you.
Don’t let bankers, relationship managers, sales executives from wealth counters touch your hard earned money if they are not competent.
Improve your returns by improving your advisor. Bad Advisor < DIY Investing < Good Advisor