Financial coaching

Advisors, not the agents matter in investment matters

Even as Covid-19 pandemic has put the economy in bad shape, it’s the financial system which continues to remain illuminated on the back of relief and stimulus packages rolled out by the government from time to time.

This is a continuous effort on part of the government to keep the businesses and household budgets afloat as there is no sight of an end to the Covid-19 crisis, at least, in the near future.

Pertinently, the virus-induced crisis among other things has exposed all of us to some important money lessons to mitigate the risk of any future financial crisis like the one triggered by the ongoing pandemic.

Within this situation, we have been observing a lot of genuine innovations in financial products and alongside, a chain of financial products have hit markets, promising magical returns. However, such products luring investors with quick and high returns are always loaded with high risk.

Let us deliberate on the investment in high risk products. We have seen that these schemes are pushed in the market in such a way that most of the time it becomes difficult for gullible investors to avoid falling victim to the greed of making quick bucks. In other words, the greed to make easy money has now become so intense that most of the time it overpowers their financial wisdom. Precisely, the ‘hefty’ returns on investment are magically highlighted to lure a common man to catch hold of the schemes by hook or crook.

Falling victim to this greed of making quick and easy money, a huge chain of small investors has already lost thousands of crores in ‘fraudulent’ schemes in which investors are paid from money collected from new investors instead of the scheme generating earnings. Such schemes run as long as new investors keep investing in the scheme.

We frequently come across investment and savings schemes promising abnormal rates of interest. The high rate of return promised is not at all matching the market environment. Investing in such schemes is always a very risky proposition. And the chances are that it is a trap to rob investors of their hard earned money.

However, it’s not only a matter of ‘dubious’ financial schemes, even a lot of small investors lack guidance to explore appropriate investment options. They are even clueless about the deposit as well as loan schemes to bank upon for their economic prosperity.

It is notable, the onset of two-year old ongoing Covid-19 pandemic has made the financial matters more complex as job losses and drastic fall in household incomes became rampant.

Now, what should gullible (retail) investors do to insulate themselves from the risk of losing their money?

In the given circumstances, it makes sense to route through your investment in the market through professional financial advisors. It has assumed significance and you have to think about the importance of a financial advisor as you think about a doctor who prescribes medicines for treatment of your illness. Precisely, a financial advisor is like a medical doctor for an investor.

Before making any investment, it would never be a bad idea to have an expert opinion of a professional financial advisor. For example, you should not go into the stock market without a professional stock market consultant. This way you can lay your hands on profitable investment tools and a worry-free future with respect to your financial strength. You may think about yourself as a knowledgeable investor for having access to financial information on the internet, but the fact is that advice from a financial advisor in the matters of the stock market definitely makes a difference.

Today the market is flooded with varied financial instruments and it is impossible for an individual to understand everything that is available for them. In this crowd of financial instruments, individuals cannot pick what is best for them and it’s only a good financial advisor who can help an investor to put the right investments in place.

Since financial markets are unpredictable, we cannot say financial advisors will give foolproof advice. However, his advice based on your particular situation and goals can help you to minimize the financial risks. To get maximum out of your financial advisor, you have to at least let him know about your level of conservativeness and your appetite for risk.

Don’t forget to make your financial advisor understand you better so that his financial plan for you includes a diversified portfolio of various instruments to meet your goals. It’s the financial advisor who will help you to strike a balance by making you aware of various options.

Let me also have a word about market analysts. Of course, analysts in today’s markets are key to important sources of information. But investors should understand the potential conflicts of interest they might face. Some analysts work for firms that underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover—either directly or indirectly.

So what matters is the investor's own application of mind while playing in the markets. You as an investor should not exclusively rely on an analyst's recommendation when deciding whether to buy, hold, or sell a stock. Instead, you should also do your own research about the company whose stocks you are going to purchase. Don’t overstep your financial circumstances while making a decision to invest in the financial market.

However, an analyst may have a conflict of interest, but it does not mean that his recommendation is always faulty. It's up to you as an investor to assess whether the recommendation is wise for you. You should educate yourself to make sure that any investment you choose matches your goals and risk bearing capacity.

However, I would reiterate engaging a professional financial advisor before taking any investment decision.

However, engaging a financial advisor doesn’t exonerate you to remain aloof from your investment portfolio. Once you are on board with a financial advisor and your portfolio is put together, you need to monitor that portfolio. You should have a regular performance review of your investment portfolio with your financial advisor. Don’t forget to update your advisor about any life situation change which you may undergo at any point of time.

So the bottom line is that the basic aim of every investor is to see their assets grow over time. As far as managing money is concerned, you can certainly go for it all alone. Doing it yourself is, of course, a brilliant idea, but mastering money management skills especially vis-à-vis stock market requires intensive research and learning. Day by day as you get busier, your financial goals get more complicated. It’s here a financial consultant’s role emerges and he can help you to remain disciplined about your financial strategies. However, asking him questions and following his advice will surely not only lead to growth in your investment but also help to minimize your risk in the event of any stormy situation.

Lastly, there is a breed of self-styled ‘financial advisors’, who are actually agents. Here you need to understand the difference between a financial advisor and an agent. A financial advisor has a fiduciary responsibility which means his advice must be suitable to you. If a 75 year old person goes to buy a high risk fund, the advisor will say no. He will not recommend a high risk investment product to an old person. On the other hand, the agent will offer the product as soon as the old person demands it. The agent simply vends products and his income is dependent more on sales. The advisor will charge you a fee for his services.

(The views are of the author & not the institution he works for)

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