An advisor with a bias towards long term financial planning would be better as he/she would work with you on your financial goals.
Yet another friend called seeking the reference of an advisor. She has tried various financial advisors but found it difficult to work with them for various reasons. Her biggest grouse was that they treated her like a “dumb woman” with no investment knowledge. She was turned off with the constant use of jargon and advisors being full of themselves and boasting about the type of clients they handled.
A lot is spoken about investor biases. However, personal biases of advisors, both conscious and unconscious, affect investors’ investments in a big way.
We face personal biases everywhere. How often have you gone to a doctor and felt you need to change because this doctor doesn’t seem to understand you or prescribes too many medicines, which you may not be inclined to take. While it is easier to evaluate a doctor’s services, doing so for an advisor is not easy. Here are some biases that can significantly impact your investments.
Personal biases of the advisor
Does the advisor want to deal with the “man of the house” only? Do you find the advisor avoiding questions from women or not answering them properly? It’s strange to get to hear these kinds of attitudes still prevalent, but I do hear occasional complaints from people who claim to have come across this bias among a few advisors. Does the advisor patiently educate you on products being recommended? Such advisors are certainly not right for your portfolio.
Bias towards investment planning
Does the advisor talk about running a financial plan or is he/she only suggesting investments as and when you have investible funds? An advisor with a bias towards long term financial planning would be better as he/she would work with you on your financial goals.
Does the advisor suggest only one type of investment for example endowment policies or equity investments? This could be because they have experience with these investments and feel safer suggesting such investments only. Or they had a bad experience in certain investments, which colors their views. Certainly, no investor can have a portfolio with only insurance policies or only stocks or equity mutual funds and investors need to diversify among various asset classes. In which case, is the advisor equipped to handle other investment options? A case in point is debt funds, which are not understood properly by retail advisors and are suggested on the basis of yield/expected return over risks taken.
Does the advisor suggest the flavor of the season investments? I have seen this in equity investing wherein stocks/ funds are suggested based on short-term returns and a positive view of markets going forward. You need an advisor who recommends instruments based on your financial goals and not because they are in vogue now so that your portfolio is not too affected by market risk.
Short term bias
Is the advisor biased towards short term investments over long term investments? If your advisor is an equity trader who is constantly shorting stocks or is someone who doesn’t believe in long term instruments like PPF due to long lock-in periods, he/she is unlikely to advise otherwise. You may want to casually check with your advisor on his/her best investments and how he/she is investing for retirement to see if the advisor can make recommendations in sync with what you are more comfortable at investing into.
An advisor who works on commission over advisory fees could be aligned to suggesting high-cost products which may not be suitable to the investor. Equity-linked debentures or investment-linked insurance policies are the best examples of products sold for high commissions. Not all commission-based advisors recommend high-cost products keeping their own interests in mind- I’ve known many who do good work in this space- but in my opinion, in a fee-based advisory atmosphere, yours and your advisors’ interests are always aligned.
Exotic products bias
Does the advisor always try to get you something new and exotic, which is available to only a few investors? This could be observed over a period of time if your advisor consistently recommends such products. Sometimes advisors tend to get awed by exotic products like private equity investments and recommend them to all their clients. However, the needs and risk-taking ability of other clients would be very different from yours. Dealing with an advisor who is biased towards exotic products would mean investing in instruments which you may not fully understand or want to risk investing in.
You will need to work for a couple of months with an advisor to figure out if he/she is the one for you. Be sure to check for the above biases along the way.(The writer is Financial Educator, Money Mentor and Founder of Finsafe India).