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  • Writer's pictureAkshay Nayak

What Advisors Have To Deal With

Most of us are aware of what working with financial advisors involves in a broad sense. It involves working with professionals who serve us as mentors and financial coaches, helping us realise what exactly we wish to achieve with our money and work towards achieving those things thereafter. But it may not always be possible to gain a more granular understanding of the advisory process, since that usually requires us to actually participate in an advisory engagement. A closer look at any advisory engagement would reveal that the work done over the course of the engagement is segregated into various phases. And the advisor would have a clear role to play and a set of clear responsibilities to carry out during each of these phases. But advisors rarely get the recognition they deserve for discharging those responsibilities. So in today's post, I will be talking about each individual phase of the advisory process and the roles and responsibilities of the advisor during each phase. This would help those of us looking to work with professional advisors gain a detailed understanding of what the advisory process entails and appreciate the importance of the work that advisors do before actually entering into an advisory engagement.


The first phase of the advisory engagement would involve creating an asset inventory and helping clients define their major financial goals. Creating an asset inventory is the most basic process in the advisory engagement where the advisor simply takes stock of the various investment products a client holds in their portfolio when entering the engagement. This would entail gathering details from the client with regard to various fixed deposits, stocks, mutual funds, gold, real estate property and any other assets that they may hold. Once the list of assets is ready, the advisor may suggest changes in terms of cutting out products which the advisor may feel are not suitable for the client’s needs, while also suggesting alternatives for the outgoing products.


Once the asset inventory process is completed, it would be time to move on to helping the client define their major financial goals. This is, to my common sense, the most important phase of the entire advisory engagement. Therefore, the advisor should ideally spend several hours with the client and their family exclusively for this exercise. Involving the family during the goal setting process is vital because the advisor would clearly understand what the goals of each member of the family are. It would then become a lot easier for the advisor to understand how realistic and reasonable each of the client’s financial goals are. The advisor must then help the client and their family prioritise between competing financial goals. For instance, let us say that the client wishes to prioritise planning for retirement (both for themselves and their spouse) while the spouse wishes to prioritise buying a new home. In such a case, the advisor has a clear responsibility to let the client and their family know that since retirement planning is an essential and unavoidable financial goal it should be given greater priority over the purchase of the home, which is a goal that is purely aspirational and therefore can be put off until some point in the future. Approaching the exercise of setting financial goals this way would mean that the client and all members of their family would be on the same page with regard to what their financial goals are at all times.


Once the client’s financial goals have been set, the advisor must help clients formulate their financial plans and implement them. This would involve recommending an asset allocation strategy and investment products that are optimally suited to clients in light of their risk profiles and financial goals. The major challenge for advisors during this phase would be to convince the client of the relevance of the financial plan and investment products being recommended to them. This is even more true if the plan being recommended by the advisor is radically different to the way in which the client had been investing before entering the engagement. For instance, let us say that the advisor is of the opinion that the client’s financial goals require an asset allocation of 50% equity and 50% debt. But the client has been investing 70% in equity and 30% in debt until now. In such a case, the suggestion from the advisor to increase exposure to equity and reduce exposure to debt is likely to be met with a significant degree of resistance from the client. This is because the client may feel that they have been doing reasonably well with the old asset allocation strategy. Also they may not want to expose themselves to greater risk inherent to an increased exposure to equity. Therefore the client may feel that the need for change is not warranted. This is a classic case of the Prospect Theory which dictates that we tend to feel the pinch of losing money more strongly than the satisfaction of gaining money.

The onus then falls on the advisor to make the client aware that they are falling prey to the prospect theory. The advisor must then furnish enough logical evidence to the client as to why the old asset allocation strategy is irrelevant in light of their needs and how the new strategy improves on the old one. They must also be able to clearly communicate how the client would benefit from following the new strategy.


Once the plan is put in place and implemented, it would have to be monitored and reviewed regularly. Reviews must ideally happen with the client and their entire family at preset intervals. A review of the client’s financial plan would also be mandated in case of extraordinary circumstances such as a change in the client’s household income, change in the client’s financial goals, milestone events (marriage, divorce, childbirth etc), being affected by major lifestyle conditions and so on. Managing the client’s investment behaviour on the way to their financial goals becomes the advisor's most important responsibility during this phase. There may be times during the engagement when the client may wish to allocate too much or too little to a particular asset class based simply on the performance of the asset class in the recent past. For instance, if equity as an asset class has consistently returned 20% over the preceeding 3 years, the client may wish to allocate 70% of their portfolio for a 5 year goal to equity, even though their goals and risk profile mandate an equity allocation of 50%. This is known as recency bias.

Once again the onus falls on the advisor to remind the client that being able to achieve their financial goals carries more relevance than the kind of returns they generate. Therefore as long as the returns their portfolios generate are enough to enable the client to achieve their financial goals, they must not look to chase returns at the cost of disturbing the optimal asset allocation strategy that has been agreed upon.


And all the while, the advisor has to be at peace with the fact that the uncertain nature of events in the real world means that even the most logical and well intentioned advice can be rendered completely wrong. For example, let us say that the advisor suggests that the client may be better off redeeming a portion of their equity allocation after a sustained upward run for stocks. But, the stock markets return another 20% after the advice is given. The advisor in this case is well within their right to ask the client to book out of equity. But this would not stop the client from questioning and critiquing the advisor’s judgement. Therefore the advisor must always be mentally prepared to deal with such situations. As must be clear by now, advisors play multi dimensional roles within an advisory engagement. And doing so requires advisors to display a substantial degree of technical and emotional acumen to be able to deal with clients through a variety of situations. Therefore we must realise that even though advisors possess considerable expertise within their domains, there are a number of aspects that are out of their control. And therefore, their performance must always be judged keeping these facts in mind.




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