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Wealthbeats The toughest 3 questions client ask and how I deal with them

The toughest 3 questions client ask and how I deal with them

Tough questions are not to be avoided. In fact, when dealt well with, tough questions deepen the relationship advisors have with clients.
Ravi Samalad Dec 26, 2016

Where are markets headed? What returns can I get from my MF investments in 1 year? Why have you recommended me Scheme A when Scheme B has offered much higher returns?  You may have faced such questions from clients and prospects often. Thus, you need be prepared for answering such questions which can make or break your deal. Here are a few questions client ask their advisors:

 

  1. Can the AMC go bust?

 

In the wake of rising defaults by corporates, some investors may worry that they will not get their money back. Their fear stems from witnessing media reports of business owners defaulting on their debt obligations. Goa based advisor Vijay Hede, Co-Founder of Shivranjani Securities often gets such questions from his investors. To address their concerns, Vijay gives a detailed explanation of how mutual fund companies are different from corporates. For instance, he tells them how a mutual fund is set up as a trust and its beneficiaries are investors. Moreover, the investors’ money is held by custodians. Since custodians are independent of the sponsor and the AMC, this structure protects the scheme assets for the benefit of investors. According to SEBI rules, accounts of the schemes need to be maintained independent of the accounts of the AMC. Further, the auditor appointed to audit the scheme accounts needs to be different from the auditor of the AMC.

 

Investors may want to know what will happen to their investments if an AMC sells its business to another entity. In such cases, Vijay informs his clients that even if a sponsor wishes to move out of the business, they have to bring in a new SEBI approved sponsor before they can exit. The new sponsor would need to put in place the entire framework of trustees, AMC etc. Therefore, unlike the occasional experience of ‘vanishing companies’ in shares and fixed deposits, mutual funds cannot disappear. Vijay says that he has explained this structure to many of his investors.

 

  1. Can I lose money in mutual funds?

 

Given the low financial awareness, some investors equate the term ‘mutual fund’ with equities. Due to their past experience of losing money either in direct equity or in equity funds, investors can be averse to invest in any scheme because of the fear of losing money. Vijay Hede says that his prospects have often asked him whether they will lose money in mutual funds. Since mutual funds cannot assure returns, this question seems to be fair. “The first thing they say when they hear mutual fund is that they have lost money in equity. So I explain to them the different levels of risk associated with various categories of mutual funds. To clear their misconception about losing money in equity funds, I explain to them how they can mitigate risk by holding long term and diversifying. I show them the rolling returns of Sensex since 1979 to convince them that equities pay off in the long run,” he say. 

 

Gujarat Based IFA Narendra Zinzuvadia is often asked by his clients whether mutual funds offer guaranteed returns. “People who have been investing in fixed return kind of products usually ask if MFs also offer guaranteed returns. I have to educate them that while MFs don’t assure returns it is the only asset class which can beat inflation and generate wealth over the long run,” says Narendra. 

 

Here’s how Kirit Shah of Kinjal Investment Consultancy deals with this question. To set the expectations right, he works with only those clients who have a five-year time horizon. “First time MF investors need to educated about the volatility in markets. I explain to them how remaining invested for long term yields the best results. Also, I make them understand that negative return is merely a notional loss. Since equity funds are long term products, I work with only those clients who have a five-year time horizon,” says Kirit.

 

  1. Why should I pay you a fee?

 

Indian investors are not used to paying a fee to their advisors. Thus, many advisors may not ask for a fee due to the fear of losing the client in spite of adding a lot of value to their clients. “It will take some time for Indian investors to start paying fee to their advisors because the market is not matured. Many investors are new to mutual funds and asking them to cough up a fee would be a deterrent.  Besides, it is difficult to adopt a fee structure which best suits your practice. For instance, we need to decide which type of fee structure to adopt – fixed, profit sharing, transaction based, etc. Each of these methods have their pros and cons,” says Dhruv Rajani of Imperial Wealth. Besides, Dhruv says that advisors who wish to charge fee need to demonstrate their value add.

 

While majority of IFAs do not charge fees, those who wish to make the shift will have to have this difficult conversation with clients. To a large extent, justifying why investors should pay a fee to you when thousands of other advisors are willing to offer their services for free may deter you from charging fee. But if you are able to articulate your value proposition well, they may be willing to compensate you.  Here’s one way to handle this situation. Advisors can cite a famous line said by the legendary investor Warren Buffet – ‘It only takes two things to succeed as an investor. First, having a reasonable plan, and second, sticking to it.’ This is where you as an advisor would help them stick to their investment goals.

 

Another way to justify your fee is by demonstrating how your advice has helped limit losses during a crash or helped them reduce their tax liability. Thus, presenting concrete results of your advice would help them understand what you bring to the table.

 

Here are some tips to prepare your responses to handle difficult questions:

 

  • It is okay to say that you don’t know the answer especially if the question is related to the direction of markets.
  • Try to steer the conversation towards an action step so that you have a chance to convert the prospect into your client.
  • Educate your clients about investments. Today, many advisors are organising investor awareness programs to help people make better investment choices. Well-informed clients will have clear expectations from you and ask the right questions.
  • If your advice has helped your client, document it. For instance, you can calculate how much your client has saved in taxes by switching from bank FD to debt fund and earned a better post-tax return. This will help you present the data and justify your fee.

 

What are some tough questions clients have asked you? Do write in and let us know.

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