How does a Real Advisor add value to you? Ssanjay Sharrma September 12, 2022

How does a Real Advisor add value to you?

A lot of folks in the financial services space brag about their performance and how they can help you beat the markets or provide access to special products. Some will even go to the extent of telling you how special you are and that you need a product just made for you.

In short, all these client acquisition strategies revolve around delivering outstanding performance (hitting 6 sixes in 6 balls. Almost an impossible feat achieved by just a few including the legendary Yuvraj Singh). People want the best and they also want to hear they are special, and these institutions exactly feed into that desire or want.

However, wise clients understand that Real Financial Advisors might deliver lower returns because they are managing portfolios from a risk management perspective. The wise advisor will always invest to manage risk (so you never get OUT whether bowled or even Hit Wicket – The wise advisor will not even let YOU come between your goals and you).

The first thing they do is set the right expectations with a prospective client in terms of what they can do for you. They never promise they will give the highest returns, choose the best product, or make unrealistic promises. They will always be direct and tell you that Investing is a Marathon and it is all about managing Risks.

Managing Risk is not just about getting a client go through a Risk Profile questionnaire and then telling him these products are suitable. What I mean is that Managing Risk is not just about asking a set of questions in terms of how you are feeling about the market or what you will do when this happens or how much pain you can tolerate. These are some basic things to understand Client Behaviour towards Risk.

Here is how a sound and wise advisor will protect you and manage risks:

  1. Figuring out how much you need. What’s your Number?
  2. How much return do you need to achieve your number? If you need 6% return only, then invest to achieve a 7-8% return only.
  3. Time Diversification: For example, Money that is required in the next 3 years will never be in Equity as an Asset Class. Money that is required in the next 3 months will always be in Liquid funds.
  4. Diversification in an Asset Class: (50 stocks instead of 5). Yes, I know diversification value reduces beyond 30 stocks but there is still value in going beyond that number and best done through a mutual fund)
  5. Asset Allocation: Diversification across Asset Classes (depending on financial goals). What should your asset allocation be based on your financial goals? Each goal depending on the time horizon will have an asset allocation of Liquid, Debt, Equity, Gold and International Equity.
  6. Diversification across Investment Styles and Fund Managers: I won’t get into the technical details of this, but the key point is whether Large Cap or Growth or Value, no one strategy works all the time. Additionally, no single scheme is a top performer every quarter and there are periods of underperformance for every scheme.

The creation of a financial portfolio is not just Science but also the Art of managing Human Behaviour. The advisor is not just creating logical and rational portfolios, but a Portfolio that allows you to stick with your investments over the next 30-40 years (and let compounding work for you). This will come at the cost of lower returns but solid risk management. This is not to say you will be out of the market during sharp declines. The key is to say that you will always have money when you need it for every financial goal and you will never lose your shirt and pants ensuring you have enough money even if you make a century (I was referring to your age 100).

Mark Zuckerberg said, “The biggest risk is not taking any risk”. However, my line is “The biggest risk is in taking a risk but believing you haven’t taken any”.

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