7 principles of sound advice

Rishiraj Maheshwari, founder of RISCH Wealth and Family Office, shares seven practices that must be followed by every adviser to earn investors trust.
By Morningstar |  04-09-20 | 

A study conducted by Toronto-based Russell Investments found that advisers who perform comprehensive wealth management, behavioural coaching and tax-efficient investing add an alpha of 2.8%, almost triple the typical value of 1% advisory fee. In this pandemic related market turbulence, advisers guidance becomes even more valuable.

Here are seven principles that will help advisers generate this alpha and showcase their value add:

1. Client-first approach

A recent CFA Institute titled ‘Earning Investor’s Trust’ showed that strong performance track record, professional credentials, adoption of industry codes, and a strong brand have a positive impact on investor trust.

A business built on the foundation of trust and ethics not only sustains but thrives. Advisers should always hold client interest above their own. This means recommending them the right products and solutions which suit their unique goals and aspirations. This will help advisers earn client trust and referrals.

2. Understand investors

Advisers can make a fair assessment of the client’s risk-taking ability through risk profiling tools that are designed with behavioural science inputs. This exercise helps in understanding each client’s investment experience and expectations.

Some investors might be lured by past returns and temporarily inclined to take higher risk when markets are rallying. But such investors could hit the panic button at first sight of volatility. Typically, first-time equity investors could be susceptible to such behaviour. In the same vein, investors aiming to generate long term wealth should be ready to ride out the short-term market ups and downs. These traits can be judged by pointed questions to identify investors risk preference.

Another important dimension in risk profiling is time horizon. This helps advisers build portfolios that could provide liquidity when the client intends to withdraw. Some investors could expect astronomical returns but their time horizon could be short. In contrast, some investors might be willing to invest for the long term but may not be comfortable with taking high risks. Therefore, determining time horizon is important in guiding investors towards the right path. Risk profiling may not entirely bring out the concerns and clients thinking. In addition to using risk profiling tools, advisers should spend adequate time in understanding client psyche, their past investment experience and why they are changing their adviser before onboarding a prospect. This should help advisers set the expectations right at the very beginning and understand client concerns, thereby starting the relationship on a solid footing.

3. Behavioural coaching

While investors could express their willingness to withstand volatility in a risk profiling test, sudden market crashes can make them jittery. Investor may commit something on paper and react differently when markets drop, which is a natural human tendency. When a negative event strikes, information overdose from television and social media can accentuate clients fear. This could push investors to take action by either pausing their existing investments or cash out to move towards safe haven. Neither adviser nor the fund manager can predict markets. While advisers can’t control markets, they can certainly control client behaviour through learning behavioural concepts. Advisers need to navigate investors through such ups and downs. While strong processes and sound portfolio construction through diversification help, ultimately it is an adviser’s skill to help clients make rational investment decisions that help in getting better investment outcome.  This whitepaper will help you understand the sources of client anxiety and guide them better.

4. Diversify

Diversification is the foundation for constructing a sound investment strategy. The goal of diversification is not to maximise returns but to help mitigate risk and volatility in the portfolio.

An ideal portfolio should have a mix of asset classes such as domestic equity, fixed income, and international equities to provide full diversification to clients. Advisers would do well to have pre-designed model asset allocation portfolios for clients with varying risk appetite and time horizon. This makes it easier for an adviser to put investors into these model buckets based on a thorough analysis of their goals.

5. Ongoing monitoring

While clients may invest for long term and thus portfolio churn should be avoided, it becomes equally important for advisers to monitor the portfolio by keeping an eye on scheme performance, changing valuations, interest rate trajectory and economic indicators. Proactive rebalancing should be carried out to cash in on tactical opportunities as well as to keep the asset allocation intact.

6. Maintain independence

Under no circumstances should advisers recommend products that are offering attractive commissions or fall prey to manufacturers marketing tactics. The scheme selection process should be scientific. Among the key parameters advisers ought to analyse are downside risk protection, upside capture, performance consistency, information ratio, risk-adjusted returns, portfolio style, performance consistency, performance in relation to peer group, fund manager skills, fund house pedigree, the investment management team, total expense ratio and liquidity risk, while shortlisting schemes.  In the end, advisers will thrive only if investor interest is taken care of.

7. Minimise costs

The CFA study also found that high fees are one of the top reasons investors give for leaving an investment firm. Indeed, margins have been shrinking across sectors and financial services sector is not immune to this trend. Globally, the proliferation of digital advisers has democratised investing by offering advice at a low cost. We are witnessing this trend in India too. In order to be competitive, advisers should look at cutting costs in all areas by adopting technology and processes. One key trend that is gaining ground globally is the concept of outsourcing investment management activities. By doing this, advisers focus on business development and meeting clients while portfolio management and research is outsourced. This helps the adviser channelize her effort in activities where they excel and save on time and costs associated with managing portfolios all by themselves.

Rishiraj Maheshwari is founder of RISCH Wealth and Family Office. He can reached at rischwealth@gmail.com

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