Serious Advice Isn't Sensationalist

Most of us may have or may have had the habit of following business news channels on television at some point. We would have seen a variety of so called market experts appearing on these channels at regular intervals. In most of their appearances, these parties can be seen making polarised forecasts about the subject they are talking about. They also do not hesitate to promote investment products and strategies that they favour. This is no different for finfluencers.

This makes us think that the job of an expert or even a financial planner for involves giving glamorous advice based on highly polarised views. But there are certain fundamental differences between the way in which experts who appear on public fora and planners deliver their opinions. We must understand these differences and modify our expectations accordingly. So today, I'm going to dissect the dynamics of each of these roles and show why serious financial advice cannot be as sensationalist as the stuff we hear in the media.

The views of an expert appearing on a public forum usually go out to many people simultaneously. This usually means that their views are likely to be highly generalised. So there would be no consideration given to the relevance of their views to our individual needs. This is because they would not be held liable for their views. Also, such parties are well compensated for each appearance on a media platform. And their compensation is invariably agreed before each appearance.

Therefore they would be paid regardless of the views they express during their appearances. Those who host such conversations may even have a prior agreement as to the questions that are asked, and the kind of answers that sell better. In fact, this is a major reason why we see the same experts appear on the same platforms repeatedly. So views expressed in such conversations lack independence and accountability.

This is in stark contrast to the work done by financial planners. To begin with financial advisors and planners work with their clients on a one on one basis. So their advice is addressed to the client alone. Planners serve clients in a fiduciary capacity. This implies that that the client’s best interests are placed at the forefront when advising them.

Therefore the advisor is accountable for the advice they impart to clients. Also, the advice imparted to clients would is highly personalised.

This means that the planner would always impart advice that is the right fit for the client's needs. So a planner is unlikely to impart polarised or sensationalist advice. Let me explain this by picking up a couple of situations and showing how differently it would be communicated by a market expert and a planner.

Periods Of Heightened Inflation

In such a scenario, an expert is likely to say

"Inflation is significantly high at the present moment. It is likely to remain high over the next few years. This could most likely lead to a significant crash in the equity markets at any time now. And markets could take a few years to recover. Therefore investors must look to reduce their equity exposure and shift to cash. They must consider coming back into the equity markets only when things begin to get better." Such views are likely to unnecessarily heighten fear among those who listen to it.

Within a similar premise, a planner may communicate this by saying "Yes, inflation is currently high and likely to stay there. But a rise in inflation is not a sudden event. It happens over a period of time. Markets are likely to factor this into stock prices to a certain extent. Therefore, we may see a prolonged correction but not a sudden crash. But there is no need for you to worry. We are investing in accordance with a financial plan and asset allocation strategy. So your exposure to equity is optimally limited.

High inflation is a negative for us as consumers. But stocks may actually benefit from heightened inflation. Some of the underlying companies can raise selling prices. This could potentially lead to higher profits and dividend payouts in the future. And the fact that a recovery could take time means that we can gradually increase equity exposure if required.

A complete exit from equity would reduce growth in your portfolio. This would hamper your chances of achieving your long term goals". This is clearly a lot more well rounded view of the situation. It would reduce fear in the mind of the client. A clear action plan can then be put in place to deal with the situation. This way the client is much more likely to embrace the advice and act on it.

Insurance Products

Term insurance is the only product that optimally meets life insurance needs. But, what gets propogated in the media is every other life insurance product apart from term insurance. This is especially true for ULIPs (Unit Linked Insurance Plans).

The manager of an insurance company appearing in the media may make a case for ULIPs by saying "ULIPs are investment cum insurance products. They give individuals both insurance coverage along with investments in market linked products. It also allows the insured individual to choose the asset allocation for the investment component under the policy. Average costs associated with such policies are also low. ULIPs therefore represent an ideal option to meet the life insurance needs of individuals".

A financial planner is likely to explain this to their clients by saying "ULIPs do offer the dual benefit of an investment component along with life insurance coverage. But it must be remembered that life insurance is meant only to cover the risk of death. The two pronged nature of a ULIP would mean that the quantum of insurance coverage offered by such policies would be lower. While average costs associated with ULIPs are low, they are extremely front ended. This means that costs are extremely high in the initial years of the policy. A significant portion of the annual premiums paid during those years going towards covering costs.

This would ultimately eat into the returns earned on the investment component of the policy. It would therefore be better to purchase a pure term insurance policy to meet life insurance needs. Investments must be kept independent of insurance coverage."

The Last Word

There is definitely a grain of truth and logic to every view in the world of investing and personal finance. Highly polarised views may make the advice given sound good. But such views distort the truth. Financial planners on the other hand understand that there is a difference between good sound financial advice and financial advice that sounds good. They also appreciate the fact that their ultimate objective is to undertake actions to drive the right results for their clients. Therefore their views would be a lot more pragmatic. They must sometimes be based on what the client needs to hear and not what they want to. This ultimately shows that there is good reason why serious financial advice cannot be sensationalist.