3 questions to ensure that your adviser has your back

By Morningstar |  27-12-16 | 

Whether you already have a financial adviser or are looking to hire one, you want to be confident of his or her ability to handle your money.

Make no mistake, financial planning is a comprehensive process requiring hands-on experience and a strong understanding of tax planning, insurance, investments and retirement planning. In a portfolio, all of the above are linked and decisions need to be made in conjunction with an individual’s income flows, liabilities, assets and goals.

Bearing this in mind, it makes sense for individuals to take the advice of a financial adviser. That does not mean they should blindly believe what is told to them.

Below are guidelines to understand the thought process of your adviser and know whether he has your best interests in mind.

Don’t shirk from asking tough questions. After all it is your money at stake.

1)   What is the basis for your recommendation?

Ask your adviser how many funds he actively tracks and the asset management companies, or AMCs, preferred. Don’t just obtain his white list, dig deeper.

Ask for the reasoning behind the ones selected and the ones avoided. If your financial adviser employs a bevy of terms to describe the recommendations, don’t get intimidated. Ask for clarity. As an investor, you need to be able to comprehend how your adviser arrives at recommendations and the research process employed.

The importance of seeking detailed information about the recommended funds cannot be overstated. Get a grasp as to how the fund has performed over various time frames. Does it collapse in a bear market and soar during a bull run? How has it fared vis-à-vis comparable peers and its benchmark index?

If you come across any funds that capture your attention, ask why they are not recommended. It will help you get an insight into the thought process of the adviser.

It does not stop there. If he recommends a dividend option against a growth option, do not blindly go for it.

In equity funds, a growth option is definitely a smarter choice. As the value of your investment grows, so does the net asset value, or NAV. If the NAV is Rs 20 per unit and the fund declares a dividend of Rs 2 per unit, after the dividend payout the NAV falls to Rs 18. Your own money is given back to you. Dividends from a mutual fund is just the return of investors’ money disguised as dividends- very different from the dividends you get from stocks.

There are exceptions. If you need need some cash inflows periodically, your adviser may suggest a dividend option.

2)  How often is the fund reviewed?

The next step would logically be to understand how often the recommended funds are reviewed. Just because a recommendation is made, it need not be forever. The fund manager could change. The fund’s mandate could change. The AMC may get taken over. Alternatively, the market may run up substantially throwing your desired asset allocation out of gear. In that case, the adviser needs to be able to suggest which fund’s units to offload or which one’s SIP need to be terminated.

In other words, you need to understand why your adviser picked that fund in the first place and under what conditions he deems it necessary to sell or halt further investments into it.

3)  How does the fund fit into my portfolio?

Every single investment must have a distinct role to play in your portfolio. In other words, investments should not be made on a stand-alone basis but a holistic approach must be taken. The fund’s investment mandate should determine the role it plays.

To elucidate, a large-cap oriented diversified equity fund could be a core holding and lend stability to the portfolio. Conversely, a thematic fund could be an apt ancillary holding. A mid-cap fund could be selected if you have 20 years to retirement and are willing to take a more risky approach. On the other hand, it could be that you need to invest in an equity linked savings scheme, or ELSS, since you have to meet your requirements under Section 80C of the Income Tax Act and your equity exposure needs to be upped.

You need to ask your adviser what role each and every fund in your portfolio is intended to play.

On the flip side, don’t hesitate to come up with your own suggestions and take his view on the same. For instance, you may want to invest in an international fund. For instance, since India is classified as an emerging market, you may want to have some exposure to the U.S. stock market. Alternatively, you may want to take the road less travelled and look at a global thematic exposure - such as a global agri or a gold fund (one that buys gold mining stocks). Don’t make any such move till you get the opinion of your adviser. But don’t take just “yes” or “no” for an answer. Ask him to explain his rationale specific to your situation.

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Dec 27 2016 03:52 PM
An advisor can elobrate only on the fund performances of the AMCs in which he registered himself. He can't compare with all the AMCs funds altogether. A good advisor is normally registered his name with the few famous AMCs which have good record of performances in the field. However the investor have every right to ask questions to an advisor about the fund in which he is interested.
Ganesan T
Dec 27 2016 01:18 PM
Yes, Investors can ask these questions to get a great clarity in their investments
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