Don't focus on market or product returns -- focus on your target rate of return, and then choose an investment, says Erik Hon.
Illustration by Uttam Ghosh/Rediff.com
Experienced advisors around the world agree that the initial few meetings between a financial advisor and their client should be about ‘expectation management’.
As a client, you go in with questions about the advisor’s credentials, their approach, previous successes, and give them a fairly clear idea of the outcome you want for your money.
It is at this point that the unbiased, customer-focused advisor will ask you to take a step back and really review the outcome you are talking about:
- Is the outcome tied to a goal?
- Is it tied to your reality in terms of capacity and mindset?
- Is it achievable in your time frame?
- Even if it is achievable, is it right for your circumstances?
Often, we present our desired outcome as a challenge to the advisor -- can you make this happen for me?
In today’s markets, with the large number of exotic and structured products available, any but the most unreasonable outcomes can be promised.
So, the fact that an advisor or distributor promises to achieve your outcome for you is not really the best proof of their capabilities.
What would be better, is if they take the time to frame your outcome in the goals and constraints of your life, and then promise to achieve it for you.
We conducted a series of informal interviews with our partner advisors across India to get a glimpse into how they approach this expectation management.
All of the advisors we spoke to are SEBI registered investment advisors with over 15 years of experience in advising clients and helping them achieve their financial goals.
We asked them questions like: Are there common misconceptions that investors bring regarding money management?
What are some of the pieces of advice that they end up giving most often to their clients?
Presenting 5 key insights from financial advisors that can help you focus on better, more relevant money outcomes:
1. Don't compare your finances with anyone else
How you view and relate to money is an intensely personal facet.
And whether or not you realise it, you will never really be happy with your investments until they have been chosen in a way that aligns with your needs and insecurities.
Also, your family has unique priorities and constraints, so don’t choose an investment only because it has worked for someone else, or because you would like to be able to talk about it.
2. Don’t rush into talking about investments
When talking to an advisor, be prepared to help him or her understand your attitude towards money, your life and your constraints.
Only then can you get a financial plan and portfolio that will work for you.
3. Be prepared to do nothing
Achieving financial goals is one, long, unchanging process of saving and investing with discipline.
Without this, you can never build wealth or achieve your goals.
During portfolio reviews, prepare yourself to not react to market movements or exciting, new investments.
Compare your returns to your goals and stick to your plan.
4. Protect your downside
Don’t focus on market or product returns -- focus on your target rate of return, and then choose an investment.
This ensures that you are not taking more risk than you need to.
In today’s markets, the opportunity costs of getting an investment wrong are huge, and you will need to earn a much higher return to recover.
5. Use asset allocation approach
The best way to ensure that you follow all of the above best practices is to follow an asset allocation plan.
Your advisor will choose how your investments should be divided across different asset classes like equity, fixed income, gold, land, etc. using an asset allocation strategy.
Once this ratio has been decided, it becomes much easier to stick to your investment plan and achieve your goals because you cannot be tempted by market swings to increase your investments randomly.
Erik Hon is managing director, iFAST Financial India Pvt Lt, a digital multi-asset advisory platform for investment advisers.