Is your financial advisor misleading you?
Financial advisors have a critical role to play in times of volatility in the financial markets. However, is your financial advisor guiding you correctly on where and how to invest in the choppy stock market or behaving like a salesperson?
The equity markets have displayed acute volatility in the past two years, forcing many investors to reconsider their decision. You can’t blame them for feeling nervous. After several years of good returns, they have suddenly seen the gains of the past 2-3 years wiped out. It takes months of persuasion to get an investor to enter equity markets. One week of turbulence can trigger panic attacks and send him scurrying for safety.
Financial advisors have a critical role to play at times like these. Distributors are riding the current wave of uncertainty and diverting investors from pure equity schemes to debt-oriented hybrid funds. The idea is not to lose business by keeping investors within the MF fold.
This is a myopic view. While debt-oriented conservative hybrid funds may outshine regular equity fund returns in the short term, they are likely to yield lower returns in the medium and long-term. Such schemes are not useful for young investors who are saving for long-term goals. In their quest for safety, they would be missing out on a great opportunity to create wealth.
It is difficult to convince investors to remain steadfast in a turbulent market. But this is where the real mettle of the financial adviser is put to test. Instead of behaving like a salesperson, he needs to act like a sherpa and guide clients to goals. A good sherpa neither lets a climber take undue risks, nor frightens him with disaster stories. He guides him to the right path and helps him reach his destination.
A good sherpa makes sure the climber has been acclimatised for the arduous journey ahead. For financial advisers, this means educating clients about the inherent volatility of the equity markets. They need to prepare individuals for downturns and corrections before they happen, not afterwards. Even if their funds are doing well, they should not be led to believe that the good times will continue. If investors are explained upfront the trajectory of equity investments will not be a straight line like that of a fixed income instrument, they are less likely to panic when markets correct. An adviser who doesn’t explain the risks of equity is not a sherpa but a travel agent out to make a quick buck.
It is true the Indian economy is facing a slowdown in demand and some macro-economic numbers are not encouraging. But the economy is not on its deathbed. Why, it is not even bedridden. We continue to grow, albeit at a slower pace. The economy is only going through a seasonal flu. This is not the first time, not the last time the markets have corrected. It happened last year and this year. It could happen again in 2020 as also in the following years. Investors who let such short-term blips shape their investment decisions will never make serious money from equity investments.
(The writer is associate partner at Alpha Capital.)