Right Way

Recently we got a mandate to express a second opinion about the Mutual Fund portfolio of a prospective client which had been constructed by a “big” distribution house.

We were amazed at the logic (or the absence of it) that went behind the process of portfolio creation. There were investments in short term funds, bond funds, and gilt funds. Equity exposure was restricted to small sectoral funds and only average diversified equity funds. It was evident that the portfolio was not a client-centric one but distributor-centric. To add to the unprofessionalism  the distributor was also charging fees. We had every reason to believe that the funds recommended had been shortlisted on payout model. Fund houses that do not support extra payouts were missing from the portfolio.

We are sure this is a common story with thousands of fellow investors who are not able to get the right person for advising them on their financial present and future and end up buying or investing in products which they do not want. Today we all are hard pressed for time but it’s high time that we realize that to earn money it takes time, then why don’t we give time to select the right person to deal with our financial lives. If the above story has got you thinking then read further for a few guidelines that you can follow in your pursuit to find the right financial advisor or planner

1.    Diversify across fund managers and not across funds

Today every investor has realized that diversification is good for a portfolio. Most people have a vague idea that it means that one should invest in a large variety of stocks and funds. Can diversification be defined as being proportional to the number of stocks or schemes and nothing else? If a portfolio with 5 stocks is better diversified than one with two, then one with 50 stocks must be much better diversified than either, right? As it turns out, it isn't as simple as that. Investors who wish to keep their life simple can do fine with just three or four funds. To sum up, diversification is not a goal in itself. It has its downside and is part of your workload as an investor. One should do the minimum required and no more.

2.    Be clear about reason for  investment

The portfolio should not be based on either or basis.  The advisor cannot and should not suggest mutually exclusive recommendation. For example, short term funds and bond funds cannot co-exist. This implies that the advisor has not done his due diligence about the client’s profile. Mere “parking” funds cannot be termed investment. The portfolio or proposal should reflect the thought process of the advisor/distributor. In absence of such clarity it will be imprudent on part of the agent/advisor to charge fees—if he is charging any.

  

3.    Do your own homework

A little homework about the fund selection would be beneficial for the investor himself. Factors like consistency of the returns, expense ratio vis-a-vis peer schemes would give a fair idea about the intention or capability of the advisor. It has been observed that a fund with not so good financial performance usually offers higher payout to the distributor as compared to the better performing ones within the fund house. Quality is non-negotiable while price is.

4.    Do you work with an advisor or an agent

This is very important for the safety & future performance of your investments.  An advisor will always place the client’s interest before him whereas an agent/distributor will place his own interest before that of his client’s. You do not need to be an Einstein to discover this trait of your consultant. A peer group comparison of suggested schemes would in all likelihood bring out this distinction.  Moreover, it is important to note that every meeting with your advisor need not result in new investments or churning of the existing ones.

5.    Get a Second opinion

Very often an investor wants to evaluate his existing portfolio or is approached by a bank or a big distribution house with an investment proposal which he cannot refuse. It is preferable in such cases to obtain a second opinion about the proposal/existing portfolio or We at AIMS offer “Second Opinion Service” (SOS) without any obligation on part of the investor (however the only obligation is towards our fees for this service). The portfolio/proposal is evaluated based on certain parameters and opinion expressed thereon. 

The above guidelines need to be followed if you are serious and concerned about your money. The time invested initially in finding the right person for your wealth management needs will hold you in good stead as such relationships lasts a lifetime. Also remember to be realistic in your expectations from your advisor. Don’t expect results overnight as you would have to be equally cooperative and serious about the recommendations provided.