“Your recommendations have underperformed the index”.
“I would have been better off investing in fixed deposit, but you insisted that I invest in equity.”
Different times, different arguments, same emotions!
Over the years, investment advisors have heard these lines very often – in both bear markets and bull markets. These statements cause a lot of stress for the advisors. But, can something be done about this? What is the reason behind such frequent encounters? What makes investors ask such questions and what can you do to nip the problem in its bud?
These issues need to be resolved, or else, they can result into loss of business for the advisor. And that is definitely not a pleasant situation.
In order to get the answers, let us first understand the psychology behind the questions. What does the investor expect from the advisor?
My extensive interaction with investors and investment advisors indicates that the investor expects the advisor to generate highest return on the investments irrespective of what happens in the various investment markets. This is where the questions originate – in rising markets, the investor expects the portfolio to generate higher return than the market average, and in falling markets, they expect the portfolio to at least generate higher than fixed deposit returns.
The fact is, such results are impossible to get. I have, so far, not come across anyone who has exhibited the ability to build such portfolios or the ability to shift from one investment avenue to another at the most appropriate moment.
The advisors know that.
If that is so, this looks like a communication problem. There is a gap between what the investment advisor can do and what the investor expects from the advisor. The only way this gap can be removed is that the advisor communicates this very clearly to the investor.
While it is impossible to every time get highest positive returns on the portfolio, it is easy to get average and reasonable returns. This can be easily achieved through a balanced portfolio – investing across various investment avenues. Such an approach is also known as asset allocation.
As Nick Murray, veteran US advisor and the author of several books on personal finance puts it, “Through asset allocation, one will not make a killng, but one will not get killed, either.”
A properly balanced portfolio will ensure that in rising equity markets, the portfolio can generate higher than fixed income returns and in falling equity markets, it will protect the value through investment in other than equity avenues.
A good advisor is then one, who
- Understands the benefits of asset allocation, and
- Communicates these benefits properly to an investor.
With this approach it might take a little longer to acquire clients; but once acquired, it will result into long-term relationship.
Amit runs Karmayog Knowledge Academy. The views expressed here are his personal views. He can be reached at amit@karmayog-knowledge.com
