Those of us who have the habit of following business news channels on television would have seen a variety of so called market experts appearing on these channels at regular intervals. These experts include mutual fund managers, independent market commentators, investment bankers and even investment advisors. In most of their appearances, these parties can be seen making overly optimistic or pessimistic forecasts about the future of the markets and economy. They also do not hesitate to promote investment products and strategies that they favour.
All of this makes us think that the job of a market or investment expert or even an advisor for that matter involves giving glamorous advice on the back of highly polarised views. So we automatically tend to expect this from our advisors when working with them. But there are certain fundamental differences between the way in which experts who appear on television (or any other form of media) and advisors who work with us 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 imparted by our advisors cannot be as sensationalist as the stuff we hear from experts in the media.
In case of those who appear on any given media platform, their ideas are usually shared on a one to many basis. That means, the views that they propogate on any media platform go out to a large number of people simultaneously. This usually means that their views are likely to be highly generalised, regardless of the truth and/or accuracy of those views. So there would be no consideration given to whether or not the views they propogate are a good fit for our specific needs as individuals, because they are aware of the fact that 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 it would be paid to them regardless of the views they express during their appearances. Those who host the conversations with market experts on a given media platform would often have a prior agreement with the expert behind the scenes with regard to the questions that are asked as part of the conversation, and the kind of answers that would sell better. In fact, this is a major reason why we tend to see the same experts appear on the same platforms repeatedly. The end result of all of this would be that the views expressed as part of such conversations are highly likely to lack independence and accountability.
This is exactly opposite to the work done by professional financial advisors and planers with their clients. To begin with financial advisors and planners work with their clients on a one on one basis. That means all the views and advice they impart are directly addressed to the client and the client alone. Advisors are also expected to serve clients in a fiduciary capacity, meaning that they must always put the client’s best interests first when advising them.
Therefore the advisor is accountable for the advice they impart to clients. Also, the advice imparted to clients would need to be highly personalised.
This means that the advisor would always need to suggest strategies and impart advice that is the right fit for the client in light of their financial situation. And as a result, advice imparted by an advisor to their clients is unlikely to be sensationalist in nature. Let me explain this by picking up a couple of situations and showing how differently it would be communicated by a market expert in the media, as against a professional advisor. Take the case of a situation wg there is significant inflation in the economy. A market expert is likely to say something like this in one of their public appearances in the media.
"Inflation is significantly high at the present moment, and 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 and similar safe assets as soon as possible. They must consider coming back into the equity markets only when things begin to get better." This is clearly a highly biased and overly negative view of the situation. And such views are likely to unnecessarily heighten fear among those who listen to it.
Within a similar premise, a professional advisor may communicate these facts to their clients by saying something along the lines of "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 and 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 since we are investing in accordance with a financial plan and asset allocation strategy, which means your exposure to equity is optimally limited.
Also, while inflation is a negative for us as consumers, well established companies are likely to benefit from heightened inflation. It means that they can raise selling prices on their offerings. This could potentially lead to higher profits and dividend payouts in the future. So we can treat this as an opportunity to trim exposure to lower quality components of your equity portfolio so that the quality of your equity portfolio improves. And the fact that a recovery could take time means that we can gradually increase exposure to the higher quality products in your equity portfolio.
A complete exit from equity would reduce growth in your portfolio, hampering your chances of being able to achieve your long term goals such as retirement, your children’s education and so on. So we may treat this period of high inflation as an opportunity to trim your equity exposure and change the composition of your equity portfolio, without bringing your exposure to zero". This is clearly a lot more balanced and well rounded view of the situation designed to reduce fear in the mind of the client by putting forth a clear action plan to deal with the prevailing situation.
Let us now understand the divergence in the views of both camps with regard to the broader areas of personal finance and financial planning. One product category that is most frequently missold to individuals everywhere is life insurance. Term insurance is the only product that is optimally structured to meet the life insurance needs of individuals. But, what gets propogated in the media is every other life insurance product category apart from term insurance, especially ULIPs (Unit Linked Insurance Plans).
The manager of an insurance company appearing in the media is likely to make a case for ULIPs by saying "ULIPs are investment cum insurance products. They therefore give individuals the best of both worlds in terms of 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 product option to meet the life insurance needs of individuals".
A financial planner is likely to explain this to their clients by saying "While ULIPs do offer the dual benefits of an investment component along with life insurance coverage, it must be remembered that life insurance is a product that is meant to exclusively provide protection against risk. Therefore the two pronged nature of a ULIP would mean that the quantum of insurance coverage offered by such policies would be lower. Also, 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, with 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 and keep investments independent of insurance coverage."
There is definitely a grain of truth and logic to every theory and view in the world of investing and personal finance. Those who wish to portray their smartness and intelligence in public, distort this grain of truth in a way that suits their motives. This makes the advice they give sound good. Financial planners on the other hand understand that there is a difference between sound financial advice and financial advice that sounds good. They also appreciate the fact that their ultimate objective is to undertake actions that lead to the right kind of results for their clients. Therefore their views would be a lot more pragmatic and must sometimes be based on what the client needs to hear, not what they want to hear. This ultimately shows that there is good reason why serious financial advice cannot be sensationalist.