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Why a fee-based advisor is your best investment coach for all markets

An expert fee-only advisor will always follow a long-term approach to building wealth. Therefore, you end up saving a lot of money

June 18, 2021 / 10:49 AM IST

Have you noticed how most people who invest in the stock market feel they can manage without expert guidance to grow their portfolio and multiply their wealth? And if at all they need guidance, they prefer free advice from friends, relatives or brokers. Now they also have Google and YouTube to count on!

No wonder Sumedha, my cousin's friend, ended up losing a significant portion of her lifelong savings last year when she picked up stocks based on a colleague's recommendation. But there's nothing she could do. So what's the best way to go about it?

There are typically three ways to go about equity investment:

Do it yourself (DIY)

To succeed using this approach, you need to have ample time, put in a lot of effort to read and research, and have thorough knowledge of how the stock market works. After all, equity investing isn't a part-time task!

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Free advice from your brokers, friends and relatives

The drawback of using this approach is that you end up counting on people who aren't necessarily experts in this domain. They may have no idea about the company you may be interested in investing in (or the ones that they recommend), its business, past financial track record, and most of the time even the products, nature of the businesses etc. So, you are likely to end up making wrong investments that can cost you big or make you miss out on some great opportunities to grow your money.

Hire a SEBI registered fee-only equity investment advisor

Some of you will wonder whether it's really worth spending a fee when it comes to equity investment. But remember, the cost of investing in the wrong portfolio far outweighs the fee you pay to an expert.

Above all, unlike financial advisors (distributors, lately) who also sell products and earn commissions from the service providers (such as banks, mutual fund distributors and insurance agents), fee-only advisors offer objective and unbiased advice to clients. The fee has nothing to do with the recommended financial assets, since there is no vested interest involved.

Advantages of hiring a professional equity investment advisor

Here's how hiring a fee-only equity investment advisor can work in your favour:

Fiduciary responsibility means your interest will be at the fore

SEBI-registered advisors are bound by their fiduciary duty to keep your interest at the fore, since they can be held liable in case they render wrong advice or breach your trust. Now that's reason enough to trust their advice!

Moreover, the chances of any conflict of interest are completely ruled out in case of SEBI registered advisors, so you can be assured of getting absolutely objective and unbiased advice. The advice is also strictly monitored at various levels.

Sets the right expectations

The right advisor helps set the right expectations in terms of the kind of returns you can expect over a period of time from your portfolio. That's because, unlike fixed deposits and other investments that yield fixed year-on-year returns, stock markets are volatile. So while the portfolio could grow 40 percent in a year, you could be down 15 percent the following year.  However, a reliable advisor will show you the long-term and realistic picture in terms of the CAGR over a period of 5-10 years, so you know what you're getting into and not get swayed by the short-term ups and downs in the market and get disappointed.

Transparent

They only charge a fee for their advice. It could be a fixed fee or a fixed percentage of Assets under Advisory (AUA) and don't earn commission on the stocks they recommend or charge a performance fee, thus ensuring you get absolutely unbiased and reliable advice. The type of fee will be disclosed even before the engagement starts.

Time-tested investment styles and strategies

A reliable stock investment advisor will use proven and time-tested investment styles and strategies to build the right equity portfolio based on your long-term financial goals such as retirement, wealth creation, or even grandchildren's education.

It involves a step by step, process which normally includes:

-Searching for companies in a universe of 5000-plus listed stocks.

-Selecting companies for the research based on theme, industry, sector, market capitalization etc.

-Analysing the company's financials, management, business etc.

-Choosing the 10-20 stocks that can grow multi-fold over time.

-Constructing a portfolio that has the potential to consistently generate inflation-adjusted, risk-adjusted, and tax-efficient returns over the long term.

-Regularly monitoring the portfolio.

-Reviewing and reallocating the portfolio from time to time.

Following this stringent process holds the key to managing the portfolio risk and growing your wealth through equities over the long term.

Helps to save money

An expert fee-only advisor will always follow a long-term approach to building wealth.  Therefore, you end up saving a lot of money you would otherwise have incurred on brokerage, transaction charges and taxes etc., thus offsetting the cost of the fee paid to the advisor.

Stands with you in good and bad markets

Having a professional advisor who charges a fee for his or her advice means having constant support that will prevent you from making bad decisions should things look bleak in the market. They don't let you get swayed by emotions during good or bad times in the market, but instead are able to show you the long-term picture.

For instance, when the stock markets crashed last year on account of the first wave of COVID-19, many uninformed investors ended up selling their entire stock holdings in a state of panic, thus incurring huge losses. However, an expert advisor would have suggested otherwise and tapped the opportunity to add high-quality stocks to your portfolio, keeping in mind their long-term prospects.

With a professional equity investment advisor working on your behalf, you will be left with free time and wouldn’t have to worry about your portfolio.
Vinayak Savanur is founder & CIO at Sukhanidhi Investment Advisors, a SEBI registered equity investment advisory firm
first published: Jun 18, 2021 10:49 am

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