Investment Advisor Need Of The Hour!

Market volatility is not new to investors and even bear markets are not unknown for those who have spent considerable amount of time in the markets. However, there are many investors who are not ready, prepared or well-equipped to deal with both bear market conditions and market volatility. How does one deal with such tough market conditions and continue to make money? Can investment advisors really help investors in such turbulent times? Yogesh Supekar candidly discusses the issue of hiring an investment advisor so as to maximise gains and avoid the market pitfalls 

Rohit Mantri, a first-time equity investor who opened a dematerialisation account with a leading discount broker in India, started pouring money into equities in 2020 when the pandemic hit us all in the most unexpected manner. Within a matter of months, owing to the sharp rebound in the equity prices, the portfolio size of Rohit swelled into lakhs. The confidence was sky-high and stock prices jumped rapidly, allowing Rohit to turn all his dreams into reality. It was irresistible for Rohit to not invest more into equities. The good momentum continued in 2021 as well, leading to ten times’ gains in just 18 months in his portfolio. 

Such stupendous gains in such a short time managed to make Rohit a rich person by his own admission. However, come 2022 and Rohit is perplexed and unclear as to what needs to be done to keep the portfolio performance intact. Today, he reads more articles related to the stock market and has also got several books on this subject to understand how stock prices function and what leads to wealth creation in the long run. He has also attended several seminars, webinars and stock market training sessions in 2022, all with an aim to sharpen his market timing skills. 

While the attempt is to improve stock market skills, the portfolio continues to underperform in 2022. With patience is running out, Rohit is now contemplating to hire an investment advisor. The reason to look at an investment advisor is to get a fresh perspective on the markets and to protect the capitals gains accumulated over the past 18 odd months. After all it is painful to watch a portfolio bleed, especially when its size has expanded into several lakhs. It is not very difficult to trace investors with similar experiences in the world of the equity market. 

The year 2022 has made every investor realise that skill-sets in the investing game are a must in order to consistently make money in this arena. Without adequate skills the probability of winning in the equity market is reduced significantly. When we talk about skill-sets what are we discussing here? A basic set of skills required to be a good stock market investor can be: 

• Ability to read the financials of a company and conclude on the financial strength of the company
• Ability to forecast the performance of the company in the coming quarters
• Understand the basics of price volume action known as technical analysis
• Ability to understand the business of the company and judge whether better days lie ahead for the company
• Ability to understand ‘value’ in any stock
• Ability to buy at a ‘discount’
• Ability to build a strong portfolio of stocks and manage it actively. 

The list can go on depending on the level of expertise one wants to develop. Such minimum skills are required in order to generate positive returns in the markets. Most investors end up generating 8-10 per cent on an annualised basis in the long term while a few unlucky ones get stuck in the middle of a crash and end up losing a sizeable amount of money in the process. On the positive side of the story is the possibility of generating closer to 18-20 per cent annualised returns. What if it is possible to generate returns in excess of 18 per cent on an annualised basis and doing so whilst taking half the risk compared to the overall market? 

That is the goal of portfolio management – to be able to maximise returns while minimising risks. While maximising returns and minimising risks is the ultimate mantra for investors, what we see is that most investors end up taking unwarranted risks i.e. maximum risk and generating minimum returns i.e. negative returns. Here is where an investment advisor can come into the picture. He can be the one who has acquired adequate skill-sets and is experienced enough to generate the best risk-adjusted returns for you. 

Says Hitesh Bhandari, a budding investor who like Rohit Mantri started his investing journey in 2020 during the pandemic: “I started investing in 2020 and was lucky enough to buy stocks at beaten down valuations. However, after a successful 20 months in the market I soon realised I lack the required skill-sets to decipher market trends and understand the difference between quality stocks and those stocks whose prices were getting inflated without being backed by fundamentals. There are thousands of shares listed on the BSE and the NSE and how do I find the best investing opportunities? I simply hired an investment advisor and since that day my investing life has been easy.” 

“Not do I only get the best stock ideas from time to time but I also get access to portfolio management strategies that will help me with portfolio allocation and weightages. I have learned over a period that portfolio management skill is the determining factor in generating higher risk-adjusted returns. My investment advisor helps me with stock ideas and portfolio management which has helped me tackle the market downturn in 2022. My portfolio is outperforming the markets and there is no doubt it is thanks to my investment advisor. The additional benefit is that I do not take impromptu decisions based on some news reports and therefore avoid investing in poor stocks.” 

Importance of Investment Advisor

Practically it is not possible to track markets on a daily basis for majority of the investors even if they are skilled enough. Market knowledge is not enough unless and until an investor spends some quality time doing market research and equity research to build conviction in the stocks to be included in the portfolio. Apart from the inability to undertake equity research due to lack of time, one of the biggest concerns for participating investors is the lack of financial literacy. Unfortunately, financial literacy is low in India, and this is one of the biggest reasons why most investors fall prey to financial scams. 

One of the best ways to overcome both these problems i.e. lack of time and lack of knowledge is to hire an experienced investment advisor who engages in focused research and has spent substantial amount of time in the markets to understand their nuances. It is a misnomer that an investment advisor is required only to generate quality stock ideas. In fact, the best of the investment advisors is the one who help investors to build the portfolio from scratch and stays with the investors from the beginning of their investment journey and stays put till the financial goals and objectives are met. 

Investors at large underestimate the importance of the skill-sets that are introduced by investment advisors in terms of investment planning, asset allocation and portfolio management. An investment advisor with his or her experience and market timing skills can design the most suitable riskadjusted investment plan for any investor. A seasoned investment advisor will also be able to lay emphasis on the importance of asset allocation and demonstrate the pros and cons of asset allocation. Last but not the least, any investment advisor can add tremendous value by providing inputs on portfolio management strategies, both strategic and tactical. 

Portfolio management skills go beyond stock-picking and include allocating weightages to each constituent. Churning is required in active portfolio management. The trick is to identify the winners and get rid of the losers. An investment advisor can help with portfolio management techniques. Such invaluable rules for investing need to be pre-defined with the help of an experienced advisor. At times investors need help on a particular aspect of investment process be it stocks selection, portfolio management, tax planning, mutual fund planning, estate planning or real estate planning. Some investment advisors leave portfolio management to investors themselves while helping investors with genuine stock ideas while the others provide a complete solution i.e. stock ideas and allocation to each of the stock ideas. 

Selecting a Good Investment Advisor

It is not enough to hire an investment advisor. A good investment advisor is a totally different experience than hiring an average investment advisor. A good investment advisor usually involves investors in the decision-making process. After a thorough risk profiling a tailor-made portfolio can be created to meet the financial objectives of the investors. It is important that the investment advisor does not skip the investment process that starts with setting financial objectives and can end with portfolio performance evaluation matrix. Every step of the investment process needs to be discussed and explained to the investor. 

While hiring an investment advisor, the investor needs to evaluate the background of the investor, study the track record and the performance of the investment advisor in the down market versus the up market. In an up market it is easy to deliver positive returns. One of the most important checks that investors must do is understand the incentives earned by the investment advisor if the advisor is also selling you any financial products. There are some advisors who work on ‘fee-based only’ structure, immaterial of your asset size. Then there are investment advisors who will charge fees based on the asset size and usually tend to charge a portion of the profits booked. Investors also ought to understand the difference between an investment advisor and a portfolio manager. 

Investment advisors can help with investment management, retirement planning, estate management, tax management, budgeting, debt management, etc. It is a much broader term than compared to a portfolio manager. Portfolio managers are typically more focused on helping you invest and managing your investment portfolio. It is important that an investor decides what exactly is needed from the advisor and accordingly can hire the advisory services. One of the important qualities one should look for in an investment advisor is his or her ability to guide investors in turbulent times. 

"Investor needs to nail down objectives and bake them into a financial plan. The exercise helps match the investor’s financial goals with the kind of risk that needs to be taken in the portfolio" ― Expert Financial Advisor 

Feroze Azeez, Deputy CEO, Anand Rathi Wealth Management 

"Wealth Should be Managed to Minimise Leakage" 

What is the role of an investment advisor?

Financial planning is crucial to every individual irrespective of the size of his wealth and age. In fact, the earlier one starts planning the better his or her wealth creation potential becomes. Wealth refers to both financial and non-financial assets of an individual. A part of the wealth is used for daily life like the house in which we stay, or the monthly expenditure towards your necessities and lifestyle expenses. This part of the wealth is termed as consumption wealth. The other part which is not used for daily consumption needs to be managed so that they can generate sustainable returns.

Non-consumption assets on the other hand serve two purposes: they help in generating wealth for the investor or for passing wealth to the next generation. This is the part of wealth which needs to be managed through a strategy. The strategy will vary as per the objectives and the needs of the end users. The four steps of management are:

• Defining an objective
• Creating a strategy to meet the objective
• Implementing the strategy
• Constantly monitoring it and taking corrective measures. 

Apart from this, advisors also play a crucial role in identifying the relevant 3-4 product categories from 20+ products that best suit your individual return and risk profile. In this journey of wealth management, an investment advisor can help you build a strategy to meet the risk and return objectives and identify the right asset mix which can help you navigate through difficult times with ease. This will lead to lesser disappointment and secured future financially. 

Why is an investment advisor helpful?

An investment advisor should help you holistically manage your wealth and ensure a strategy for maximum wealth generation. These encompass the points mentioned below:

• Setting a Target Rate of Return: Defining financial goal or expected rate of return can help you decide the asset mix which will help in moving towards the same.
• Risk Objective: You should try to mitigate risk from your portfolio and calculated risk is encouraged as too much risk may deplete the stability of the portfolio and too less risk will not generate enough returns.
• Increase Tax Efficiency: The objective is always to maximise the returns and sometimes the right tax planning through choosing the right assets can save up to 1-2 per cent of the return. For example, debt mutual funds are more tax-efficient for individuals in the highest tax bracket.



• Smooth Transition of Money: Wealth should be managed to minimise the leakage while passing on wealth from one generation to the other.

Can an investment advisor help investors create consistent wealth for investors? 

Yes, an investment advisor can help in creating consistent wealth for an investor. An advisor can help you reach your target goal through choosing an asset mix with products that helps you meet the objective at calculated risk levels. 

Probability of Alpha generation over their respective Benchmark 

Apart from this, an advisor can help you diversify your portfolio in a manner to generate maximum alpha i.e. return over benchmark. For example, many investors prefer investing in index -based mutual funds. However, this may not be apt as they fail to generate alpha. An advisor can help you diversify and create a portfolio based your horizon of investment, expected return and risk appetite. 

Qualities of a Good Investment Advisor

Here are some pointers about what qualities you should look for in an investment advisor:

• Good reputation is a must
• Proactive rather than reactive n Stable mindset and should not panic in turbulent times
• Experienced finance professional with industryrecognised certifications
• Should have a clear market-beating strategy and should be insightful
• Should keep investors’ interest in mind
• Should be willing to work with you. 

Robo Advisors and their Role

A robo advisor is a digital financial platform that furnishes automated, mathematical algorithm-driven financial advice along with investment management services that include minimal human intervention. Initially, this technological innovation was applied to automate and optimise passive index strategies based on the modern portfolio theory. Robo advisors have evolved from then. Today, a typical robo advisor asks questions about an investor’s financial situation, risk appetite and future financial goals via an online survey and then uses the data to offer advice and automatically invest on behalf of the investor.

The software uses complex algorithms to manage and allocate client assets in the most efficient way possible. Robo advisors provide a wide array of bias-free traditional investment management services at relatively lower fees than human financial advisors. They require low amounts of minimum opening balances, making them economically viable for retail investors. Robo advisors also add value by allowing users to easily invest in a diverse range of asset classes conveniently through web or mobile applications. Additionally, they offer full access to portfolio management tools, which leads to more flexibility as well as higher security. However, they lack the subjectivity required to offer fully personalised services and are not suitable for complex issues such as estate planning. 

In recent years, the robo advisory segment of the industry has experienced phenomenal growth. Client assets managed by robo advisors reached nearly USD 1 trillion in 2020. As per statistics, assets under management (AUM) in the robo advisors segment are projected to reach USD 1.66 trillion in 2022. AUM is expected to show an annual growth rate (CAGR 2022-2026) of 15.20 per cent, resulting in a projected amount of USD 2.92 trillion by 2026. In 2021, the largest robo advisor in terms of assets was Vanguard Personal Advisor Services with USD 231 billion in AUM. Some believe that robo advisors are the inevitable next step in the evolution of financial planning and investing. 

Conclusion

The Indian equity market has shown remarkable resilience amidst all the volatility caused due to the geopolitical situation, global supply chain issues, inflation and rising interest rates across large economies. The fear of recession has pushed several developed markets into the bear market territory. The recent recovery in the markets from the low level of about 15,000 in Nifty is dubbed by many as a technical bounce or a counter rally within a bear market. Whether it is a technical bounce or have we bottomed out is difficult to say at this point of time. As an active investor the key task is to choose the highest quality stocks and manage the portfolio efficiently, taking into consideration all the variables that impact the market. 

If at any point of time it gets unmanageable for an individual investor both in terms of identifying quality stocks and managing the portfolio, external help should be sought. An investment advisor is a must not only in times of turbulence but also during a bull market scenario. Maximum equity portfolio management mistakes are made during bull markets as most investor end up lapping up poor quality stocks. Market exuberance leads to leverage buying and at times leverage trading as well. This activity has the potential to erode capital at a rapid pace. All such basic mistakes can be avoided simply by hiring a seasoned investment advisor. The difference in performance over the long term can be significant with the help of an experienced investment advisor. 

It is not about stock ideas alone when it comes to taking support from an investment advisor. It is the package of complete investment planning and the whole investment process which can be designed and implemented to improve portfolio performance. These days, with advancement in technology, investment advisory service providers can deliver their recommendations in timely fashion and in the most cost-effective manner. All investors must do is to identify the top investment advisor who has a proven track record of market outperformance and focuses on research methodology which can lead to market-beating performance consistently. Studies have shown that professional investment advice can help navigate market volatility, minimise taxes, create a retirement plan and do much more. Hence, investment advisory is the need of the hour!