Many of you avail the services of investment professionals in the hope that professional advice will help you meet your investment objectives. In this article, we address the issues that you need to discuss with your investment adviser when you avail her services. The goal is to get the best out of your adviser so that you improve your chances of achieving your investment objectives.
Adviser issues
The structure of the financial market is such that many who offer professional advice also distribute financial products such as mutual funds and fixed deposits. There is, hence, a potential conflict of interest- some advisers may be tempted to recommend products to you that may fetch them higher incentive, but not necessarily help you in achieving your investment objectives! It is for you to ask appropriate questions to get the best out of your adviser. You should, hence, clarify the following issues, among others, with your adviser:
How is your adviser compensated for providing her services?
Potential conflict of interest is reduced if your adviser offers a fee-based service. Often, because individuals are reluctant to pay such fees, advisers who are also distributors are forced to sustain their revenues from incentives they receive from mutual fund companies. If you want to reduce your adviser’s potential conflict of interest, you should be willing to pay a fee for the advice that you seek!
Does your adviser carry conviction in her recommendation?
It does not matter if the adviser has recommended the same product to many clients. What matters is whether your adviser has bought the same product for her personal investments! Investing personal money in the products she offers you indicates her conviction in her recommendation. You need not insist on seeing her investment statements. Her body language is enough to tell you whether she is telling the truth!
Read the risk profiling questionnaire carefully.
The questions are supposed to help your adviser understand your willingness to take risk. Your risk appetite is a function of your willingness to take risk and your ability to take risk; the former is a psychological factor, while the latter is based on your current wealth and expected income. Does the risk profiling questionnaire ask questions that can meaningfully capture your willingness to take risk?
Does your adviser emphasis only on investment products to achieve your investment objectives?
It is just as important, if not more, to have a process that makes you save every month as it is to channel such savings into investments. Seek your adviser’s opinion on how you can adopt a disciplined savings process to ensure you balance your current consumption with your desire to accumulate wealth for the future. This includes having a plan today to increase your savings in the future as your income increases.
Conclusion
While it is important for you to understand how your adviser constructs client portfolios, it is equally important to know her rebalancing process - this is a process that your adviser will adopt at least once every year to take corrective action and keep your portfolio on track to achieve your investment objectives.
Suppose your adviser assumes that the compound annual return on your portfolio is 10 per cent. This means that your portfolio has to earn 10 per cent every year to achieve your investment objective. But what if your portfolio does not earn 10 per cent in, say, two out of the first five years? It would be difficult for you to achieve your objective unless your adviser takes some corrective action. Assumptions will go wrong, but clearly laid-out corrective action can still increase the likelihood that you will achieve your investment objectives. Ensure that your adviser has a correction action plan at the start of the investment process!
