It Pays to Engage an Investment Advisor

Opting for a direct plan may be cheaper, but not necessarily the right route to take.
By Vicky Mehta |  06-12-13 | 
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About the Author
Vicky Mehta is a Senior Research Analyst with Morningstar. He would like to hear from you, but he cannot provide individual-portfolio or financial-planning advice.

Since January 2013, mutual fund investors have been able to invest in direct plans of mutual funds. In effect, they invest directly with the fund company bypassing the distributor. Investors benefit from direct plans on account of lower expenses charged versus distributor plans. While the introduction of direct plans could potentially change the conventional method of mutual fund investing wherein the distributor has always played a key role, it in no way lessens the importance of investment advice. This in turn underpins the need for a competent and experienced investment advisor.

In this article, let’s discuss why it is important to have access to a proficient investment advisor.

Several investors erroneously believe that mutual fund investing is all about filing an application form and signing a cheque. Nothing could be farther from the truth. To begin with, investors must understand that investing in mutual funds is not an ‘end’ rather it is a ‘means to achieve an end’. Simply put, investors should first decide why they are investing in mutual funds i.e. what are the investment objectives that they want to achieve – these could range from accumulating monies for a vacation, providing for children’s marriage to creating a retirement corpus. The investment advisor can help in formulating investment objectives.

The next step should be constructing a portfolio comprised of various mutual funds. At this stage, selecting the right funds is the key; this needs expertise which the investment advisor brings to the table. In a portfolio, while some funds will act as core holdings, others will play a supporting role. Also, the portfolio needs to be routinely monitored and modified (if and when required) to ensure that it stays the course and enables investors to achieve their investment objectives. Again, the investment advisor has a key role to play at these stages.

Clearly, not only is mutual fund investing an activity that demands time and effort, but also specialized knowledge. Hence, the need to engage an investment advisor. Furthermore, the advisor’s presence ensures that an expert oversees all aspects related to investments, leaving investors free to focus on their respective occupations. The investment advisor’s fee may seem like a small price to pay, when one considers that sound and timely advice can be the difference between achieving one’s investment goals and failing to do so.

Getting the right advisor

It is obvious that the investment advisor must come up to scratch. Investors would do well to thoroughly evaluate the advisor before signing up. Some seemingly elementary but important questions should be a part of the evaluation process. To begin with, investors would do well to seek clarity from the advisor on the terms of engagement: the services that the advisor will provide, number of portfolio reviews, and the time frame for which he will be engaged should be explicitly defined and agreed upon.

Investors must quiz the advisor on the basis for mutual fund recommendations. If the advisor claims to conduct in-house research, he should be questioned about the process. If the advisor relies on external sources, then the latter’s credibility should be verified. Figuring out how the advisor forms his recommendations will aid investors in evaluating the quality of service on offer.

If the investment advisor makes use of model portfolios, he should be questioned on their construction, especially if they entail multiple asset classes. Also, investors should ask the advisor to provide a track record of his recommendations over the years. This will help gauge his skill sets. Finally, it will help to ask for references of existing clients, so that the advisor’s credentials can be independently verified.

The investment advisor’s role in helping investors achieve their investment objectives is undisputed. On their part, investors would do well to engage one after due care and consideration.

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