Why you need a Financial Advisor in India?
Table of Contents
Your relationship with your financial advisor may be one of your best investments.
How can a financial advisor add value to a client?
Undoubtedly, 2020 put us all to the test in several ways. To start with, Sensex touched new highs around the start of the year, then fell sharply in March as the global spread of the COVID-19 forced lockdowns and halted most economic activities. The markets recovered well in the final months on positive vaccine news.
On the other side, our lifestyles changed. A large number of people were forced to transition to a virtual environment almost overnight, which had an impact on a variety of activities, including work, school, shopping, holidays, and festivals.
Many of us could have discovered that our priorities and perspectives have evolved during it all. We believe this is the ideal opportunity for you to consider the benefits of consulting a financial advisor.
Given the volatility in 2020, we think you got more value from your advisor than the cost you paid, even if all they did was help you stick to your investment strategy.
But most advisors do much more—they may actively rebalance your portfolio, provide customised service, ensure your portfolio aligns with your desired goals, and help you maximise your after-tax returns.
All those elements are captured in the that can help you understand the value of working with an advisor.
Active Rebalancing
Why is rebalancing important?
Rebalancing helps to keep the mix of investments in your portfolio in line with your desired risk profile. Rebalancing involves selling investments whose value has increased while adding assets whose value has lagged.
Not only does rebalancing fulfil that basic investing tenet of “buy low and sell high”, it can also smooth out your returns—potentially helping you sleep better at night even when markets are volatile.
We believe many investors do not rebalance on their own, mainly because:
1. It’s easy to forget to do it. Like we know how important it is to visit a dentist twice a year, sometimes what we have to do daily takes priority over the other things we need to do, like rebalancing.
2. It goes against our human nature to buy low and sell high. When it comes to your portfolio, it means buying more of what’s been underperforming and selling what’s been doing well. That goes against our natural tendency to do more of what makes us happy and less of what makes us uncomfortable.
Rebalancing not only takes time and effort to do, but it also takes discipline. Your advisor can help deliver that discipline and help position your portfolio for potential long-term success.
For example, if you had started with a balanced portfolio 50/50 allocation to equity and debt in 2010 and never rebalanced.
That original balanced portfolio with which you started would have become a growth portfolio and drifted to an asset allocation of 70% equity and only 30% debt, leaving it exposed to more significant losses when the COVID-19 crash hit in March ’20.
Active rebalancing can not only ensure you are selling positions that have outperformed (sell high!) and reallocating cash to under performers (buy low!), it can help reduce the volatility in your portfolio. And let’s face it—it’s a lot easier to stick to your financial plan when your investments aren’t fluctuating wildly.
In summary, active rebalancing can help you capture gains, reduce volatility and keep your asset allocation within the initially specified range.
Behavioural Discipline
2020 was indeed a wild ride. In mid-March, when the Nifty had its worst weekly fall, many investors left the market. That is not unexpected. We are only human, after all.
As humans, we often allow our emotions to influence our decision. It may be pretty reasonable in the majority of circumstances. At the same time, giving in to our “fight or flight” reactions in the face of market volatility can hurt our financial health.
When making financial decisions, it’s critical to maintain objectivity and discipline to be successful. This means making decisions that are consistent with your long-term objectives.
This is where working with an advisor can be helpful. Their role is to keep you on track with your chosen plan so that you have the best chance to reach your financial goals.
Investors who stuck to their plans in March 2020 would have likely recovered all the ground lost—and potentially even reported a gain—by the end of the year.
For example, if you had invested ₹10,00,000 on January 1st , 2020, but missed the top 7 trading days, you would have had ₹256,427 less by the end of the year than if you’d stayed invested the whole time.
Missing out on even a few days of good performance can affect your portfolio’s returns. And how do you know which days those will be? That’s the catch—you don’t. Markets can be unpredictable. But their long-term trend has been up.
Without an advisor’s guidance, many investors could have sold low in March and perhaps have had to buy high as the markets steadily recovered throughout the end of the year.
Or they would have been forced to remain in cash until a better entry point appeared, which is risky and quite challenging to do without a crystal ball.
Sticking to the original investment plan can often be the better choice.
Personalised client experience
Automated systems called Robo-advisors offer basic investment management services. They typically don’t provide continuous support, financial planning, or the kind of advice you may get from a trustworthy advisor.
Although their fees are pretty low, in most cases, you only have the option of choosing from a pre-selected list of funds, an annual statement, and a phone number to call in case of questions.
Your advisor, on the other hand, has discussed your goals, circumstances, and preferences with you. They consider those elements when determining your investment plan and can use them as a framework to respond to your specific concerns during volatile markets. We believe there is great value in that.
Multiple global research has shown that investors are more willing to work with advisors who deeply understand their circumstances and financial goals. We believe this is where human advisors have the edge over Robo-advisors.
Like most investors, your life will likely become more complex over time. You may get married, buy a home, raise children, save for your children’s educations, care for elderly parents, and prepare for retirement or manage your finances during retirement.
Families are reassessing priorities now more than ever, prompting daily questions that require a deeper discussion of options, potential outcomes, and financial impact.
• Who would care for and make decisions about my family’s wellbeing if I couldn’t?
• Am I prepared if I find myself unemployed later in life—ahead of when I expected?
• How have my views about my lifestyle changed because of events over the past year?
• What are the most important things to my family and me, and what should I share with my advisor to receive the best advice?
A wise, human advisor who guides you through these life-defining moments can bring tremendous value.
Product selection to match your Goals
Since you have unique goals, circumstances, and preferences, you will require a distinct mix of investment products.
Some investors choose to go alone, and that’s okay, but it takes commitment, a commitment of time and dedication to gain the required knowledge and expertise to select the right investment product for you.
But there are so many choices. With over 2500 open-ended mutual funds, over 2,000 stocks, multiple bond investment options and many other alternate investment choices, it becomes nearly impossible to manage it effectively by yourself.
Understanding what decisions must be made in good and bad markets; managing personal behavioural reactions and biases toward investing. At the same time, creating the correct asset allocation with the right balance of risk for you and your future.
Your advisor helps to distil all that information and narrow it down to the things that work for you. With maturity comes complexity, and having someone to work through the decisions with you along your life’s journey is incredibly valuable.
Tax Efficient planning and Investing
Tax may drastically reduce a portfolio’s return for an investor. An advisor can tax optimize your portfolio by focusing on asset location, tax loss harvesting (TLH), and tax efficiency. Even though the amount may seem small, it can lead to big savings over time.
For example, If you invest 150000 in a regular long-term investment like FD instead of tax-efficient PPF with similar returns as FD. You will end up losing roughly 70,00,000 in 30 years.
After recovering from the pandemic the next challenge we may have as to how we will pay for the record government stimulus programmes that kept the economy afloat in 2020.
In light of this, it appears likely that taxes will continue to rise in the future. Your advisor can help you structure your investments so that you manage your taxes like your household budget, i.e. carefully and smartly.
Your advisor may also use tax loss harvesting if it suits your individual need. It refers to the intentional selling of securities at a loss to turn an unrealised loss into a realised loss. Capital losses can offset capital gains, creating a tax-deferred benefit that can compound over time. The tax loss harvesting approach is tied to each individual’s tax return, and one should only harvest losses when it makes sense.
The Bottom line
It might be a perfect time to consider working with an advisor in the post-pandemic era because that relationship may prove to be your best investment.
If you worked with an advisor who helped keep you invested throughout the market volatility in 2020. Then you already have received great value.
Add to that the value embedded in active rebalancing, a personalised client experience, keeping your portfolio aligned with your specific goals, and the savings from a tax-efficient approach. It seems clear that there is substantial value in working with an advisor.