Fire your Financial Advisor?
In today’s Mint, Monika Halan has a post titled “When to fire your financial adviser“. While I am sure she knows way better than me when it comes to advisers, I felt that she had used a large brush without providing contexts when its right and when its wrong. So, here I go as usual with my thoughts;
MH: An adviser who gives you the average without separating out the asset classes when disclosing returns needs to be questioned.
Me: Assuming your have your entire networth here, its actually how much your networth is growing. Now, if we start splitting, why stop with Debt vs Equity since not all Debt or all Equity are the same. The difference in returns between investing in a large cap equity fund vs a Thematic equtiy fund can be huge. But that difference arises due to one being of a much lower risk than another. If Equity returns are bumped up due to a couple of them, is your advisor a Genius or one who is taking bigger risks?
Coming to Debt, are all Debt funds the same? Of course, not but will you understand what risk he is taking or what time frame he is looking at just by concentrating on the returns he has generated?
MH: If you have more than a total of 10 funds—across all categories—you need to question your adviser.
Me: To me, this answer once again misses the context. Its not about how many funds you are having that is the problem. The problem will be in terms of how correlated they are and how much portfolio overlap you are seeing. A large number of CTA’s trade as many as 100+ non correlated assets at any point of time. If you are having multiple funds but very little correlation between them, you are actually pretty well diversified. Of course, this could also mean lower returns, but volatility will be lower too.
MH: The guy is churning you; maybe to win a junket his fund house is offering.
Me: This is the risk of going to some one who you think offers his services for Free but makes money in the back-end. Fee based advisors have on the other hand no such conflict – they receive a fixed amount and hence are less susceptible to making you churn your investments.
So, how do we know whether my advisor is doing the job or is it time to fire him?
The biggest issue that is not addressed in the article is what benchmark is the one you should aim for. In my opinion, if you are a risk averse person but one who wants a bit of higher returns for his investments, you should ideally got for a split of 40 : 60 in favor of Debt to a max of 60 : 40 in favor of Equities.
It would have been lovely if we had a ETF similar to Vanguard Total Stock Market ETF, but given that we don’t have that, our best bet will be to use the GS Nifty Bees as the Equity component benchmark and something similar to the LIC MF G-Sec Long Term Exchange Traded Fund as our Debt fund benchmark.
Now, lets get back to our starting point. Assume you invested a year ago. Download data for the ETF’s you have selected – the debt fund ETF above may not have that much data in which case you will have to use the Index it tracks.
Once done, assume your investment was made in the ratio you are comfortable with or are invested in. Based on present value, does you returns match or is higher than this? If Yes, your advisor has generated better returns which is good.
But Rewards are one side of the coin – on the other side you have Risk. So, using the same data you now need to calculate the volatility of your investment and compare (not sure you can easily get such data from your advisor, but you pay him and he needs to provide you with it at the minimum). Here, our aim is to see if we are having a lower volatility. A high volatility means that you are taking a much higher risk to generate the said returns – seems acceptable in good times, its only in bad times that we wonder what hit us. Yes, doing such Analysis is tough, but hey, its your money and the least you can do is try and understand how its doing once in a while.
Either way, understanding what your financial advisor is bringing to the table is the key in deciding whether to continue with him or fire him. Nothing comes for free but not all costs are acceptable.
This is the kind of debate that never runs cold.
What does “what your financial advisor brings to the table” even mean? It is a tacit acceptance that of some kind of informational leverage that investor does not have. The real question is not that this leverage is actually genuine or a deception, the question is whether investor can realise the the “value” of what “financial advisor brings to table” before a long wait or even an account-bust.
All said and done, covering all perspectives, investors expect some one else to do the dirty work for them. The dirty work of reading, researching, late-nights, skipped weekends, high-BP, anxiety attacks, and a good ear to listen to all tantrums when things go wrong. The fact simply is that the dirty-work costs money. Sometimes the money is in the form of lower profits, no-profits or even losses. The point is, investor gets what they ‘seek’ for and ‘advisor’ gives them their inclination.
The only point this debate will grow cold is when investors make effort to do their own investments (at the least, try and gain enough knowledge to critically analyse the advisor) – which isn’t ever going to happen. If they can’t do this, they can never realize the glib-talking to sincere-advisor. After all, markets are not every one’s cup of tea. And I sincerely and greatly respect the people who truly and ethically work their way through this maze.