6 key discussion topics with your financial advisor in 2014

The last 5 years have been difficult for retail investors. Many investors saw significant value erosion in their equity assets and now that the Indian market has crossed the historical highs again, retail investors have by and large, missed out on the recent rally. Equity markets, especially in India, are difficult, complex and unpredictable. As such, investors need stronger engagement with their financial advisors, to maximize the performance of their investments. Here are a few key topics, we suggest, investors should discuss with their financial advisors.

• Discuss your personal financial situation:

  How has the current market condition, affected your financial plan. We are conditioned by the media, both print and electronic, to pay attention to the most sensational story. Media is guided by commercial interests, to grab the maximum eyeballs. Discuss with your financial advisors, which market developments have a potential impact on your financial plan and which ones are just distractions, as far your financial plan is concerned. In general, if you have a solid financial plan, then you can ignore the “breaking news” on the TV
  



• Discuss equity markets:

  Our equity markets are complicated, volatile and difficult to predict. “Experts” who claim to forecast share prices or have “sure shot” strategies, are probably trying to sell you something. Good advisors, on the other hand, can provide you guidance on market trend and relative performance between sectors and asset classes. You can work with your financial advisors to setup or re-balance your portfolio based on such guidance, to meet your investment objectives. Retail investors often underestimate their own investment intelligence and like to “outsource” their investment decisioning to “knowledgeable” colleagues, friends and relatives. While it is strongly recommended that we take professional advice, we should be equally informed about the investment selection process
  



• Discuss your investing personality (and your advisor's):

  We are who we are, and it is important that both the investor and the advisor know each other’s investment personality. Investment objective is one thing and our personality is another. You may be the buy and hold type, or profit booking type or both at the same time. Whether your investment personality is aligned with your investment objective and your current financial situation, is something your financial advisor should be aware of. Investment is a dynamic process, and need to be tuned to our investment objectives, current financial situation and market conditions. Unless your short term cash flow situation has changed significantly, nothing probably needs to be done to your financial plan. To quote a famous line from the Hollywood movie Wall Street, “Don’t get emotional about stocks”, it is often detrimental to the interest of your financial plan
  


• Discuss the actual probability of achieving the goals in your financial plan: If only there was a sure thing in equity markets. Most of us are aware that, unfortunately there is no such thing. When your advisor sells you a product to meet your goal, it does not guarantee success of your plan, especially if the product relates to equity investments. However, investors do not need to resign themselves to bothersome uncertainty. While risk and return is implicit in equity investments, smart investors have a better handle on risks by working with probabilities associated with projected returns on their investments. You should have a discussion with your advisor on probabilities of success of different milestones your financial plan given inflows and outflows of cash over a period of time
  



• Discuss costs associated with investment:

  Apart from explicit costs like asset management fees (for mutual funds), brokerage (for equities), there are additional costs like service tax and securities transaction taxes. Depending on your asset class, your investment returns may be subject to capital gains tax. Discuss with your financial advisors, to avoid unpleasant surprises
  



• Discuss costs associated with financial advice:

  A variety of options of financial advisory are available globally and are gaining popularity in India. While the traditional model of financial advisory is based on commissions earned from the product manufacturers, some advisors now charge a fee from their clients to take care of their entire portfolio for the long term. These advisors do not restrict their advice only to products where he earns commissions, but advise a wider spectrum of products. Fees charged by these advisors could either be in the form fixed fee or a percentage of assets under management. If your advisor offers such services, have a detailed discussion to understand cost and benefits