She knows how much money you make, your expenses and even your bank balance. She is your financial advisor. And since both of you must walk together for wealth creation, it’s crucial that you pick and choose your financial advisor carefully. Once you make up your mind on whether you want a mutual fund distributor or a registered investment advisor, start asking questions to the people you shortlist. The more you know your advisor, the better it is for you.
How many market cycles have you seen?
The longer your advisor’s experience in tracking markets and investments, the better. Check how long your advisor has been in the markets. How she behaves in rising as well falling markets is crucial to how she handles people’s money.
“If your advisor has not seen a bear market, you wouldn’t know how she would react in a falling market,” says Pallav Bagaria, director, Sapient Wealth Advisors and Brokers. Different market cycles teach advisors and fund managers different lessons. While the market crash in the year 2000 was all about the fall in information technology stocks, the 2008 market crash sensitized us about the pitfalls in chasing momentum shares and highly leveraged companies. If your financial advisor has been through such times, she would know better how to interpret the market cycles, handle situations and clients maturely.
What is your investment philosophy?
Like fund managers, different advisors have different management styles. When equity markets get over-valued and a fall looks imminent, some advisors tend to take profits and switch completely to fixed income instruments and liquid funds. Others prefer to buy stocks and mutual funds that appear to be out of favour in the hope of making good returns when the tide turns. This is called a contrarian approach.
A few prefer not to do much, buy a few funds and then hold them to them for years. Others track markets like hawks and are aggressive in their stocks and fund picking. “Spend some time in getting to your advisor’s philosophy and see if it gels with what you are looking for. There are some investors, for instance, who like switching between equity and debt aggressively. But not all investors may be comfortable with such an approach,” says Pallav.
How do you select your mutual funds?
The easiest way to select a mutual fund is to look at its star-ratings. Is investing in a 5-star or a 4-star rated fund your fist recourse? But this is not the right approach. A scheme’s star-rating is merely a report card. It shows how a fund has performed in the past. It does not tell you how it is likely to perform in the future. To map the scheme’s future, your advisor has to do her own research, study portfolios, get to know the fund manager and her style of functioning, the scheme’s strategy and so on. “Investors can check various websites themselves these days and get to know which funds are doing well. Information is widely available. The advisor must list out the process she has put in place to identify future winners rather than just recommending past winners,” says a Mumbai-based financial advisor who requested anonymity.
Go a step further. After knowing how your advisor selects schemes, ask how she aims to make a financial plan for you. Does she make a comprehensive financial plan or would she identify schemes that help you reach a particular goal? Or is the aim to earn returns? “This helps investors understand the method behind an investment solution. It just comforts investors about the sort of process followed,” says Tivesh Shah, Chief Executive Officer, Tru-Worth Finsultants. Tivesh helps investment advisors and distributors to set up their back-end processes.
Do you eat what you yourself cook?
It’s a comfort if your advisor invests in the same set of funds that she advises her clients to take exposure to. Some advisors are happy to show you their own portfolios to demonstrate that their skin is in the game. “If your advisor says yes, then subtly ask her to prove it. There’s no harm in asking; you need proof,” says the advisor quoted above who did not want to be named.
How do you change funds?
Ask your advisor what her role would be once you invest initially through her. If your distributor is going to earn a trail commission for as long as you stay invested in a mutual fund scheme, then do you really need her services? Here’s where a thorough review process helps. “Are we on the path to achieving our financial goal or have we deviated? Has the portfolio manager changed? Or is the market fall temporary?” asks Tivesh, adding that the portfolio review should ideally be done once in six to 12 months. Sometimes fund managers change.
On rare occasions, your mutual fund scheme may change its own investment objective. “The advisor needs to work in a fiduciary capacity, keeping your interests ahead of his own interest. Trust, performance and professionalism are the basis of a fiduciary relationship,” says Anup Bansal, managing director, Mitraz Financial Services.