Three warning signs that indicate that it is time to change your investment advisor

While self-directed investors may not need guidance, first-time MF investors would do well to consult a financial adviser to avoid getting caught in funds which may not suit their risk profile.

Investor appetite for equities is increasing as the markets scales new highs. The exuberance is evident by the massive inflows into equity funds. AMFI data shows that Rs 19,050 crores (YTD) flowed in to equity mutual funds, excluding balanced, ETFs and ELSS as compared to Rs 8,302 crores in the previous year.

There are two reasons for this encouraging trend. Superior fund performance, coupled with increasing awareness is drawing investors towards mutual funds.

However, you need to tread with caution during these times. Thanks to increased awareness of direct plans, this share class is steadily gaining ground due to the return differential vis-à-vis regular plans.

During a bull run, greed takes over rationality and investors rush to funds or asset classes which have done well in the past, entirely ignoring the fact that past performance may not continue going ahead and more importantly the suitability of the fund/asset class in their individual portfolios.

While self-directed investors may not need guidance, first-time MF investors would do well to consult a financial adviser to avoid getting caught in funds which may not suit their risk profile.

Behavioural Guidance

Why should you consult a financial adviser? Advisers play an important role which often goes unnoticed by investors. To achieve your goals, you must spend time in the market. But investors give undue importance to noise which creates fear and they ultimately exit markets through herd mentality.

A recent SEBI survey shows that although most mutual fund investors claim that they will hold on to their investments in times of market volatility, in reality, less than 1 percent investors continue with that particular MF investment beyond a three-year period.

This is where a financial adviser adds value by helping investors control their emotions. Various studies show that advised investors tend to save more than non-advised investors. Investors who chose to get the benefit of lower expenses of direct plans may not have benefitted if the data from Karvy is anything to go by.

This data shows that during April-November 2016 when the markets were volatile, 59 percent of direct investors in equity funds redeemed within three months. This indicates that direct investors get worried due to lack of guidance and take a decision to leave the fund as soon as the markets turn choppy.

On the contrary, only 9 percent of investors who invested through IFAs redeemed during volatile times, finds the report. In fact, the data shows that IFAs have the highest value of investors who have redeemed only after a five-year holding period.

In fact, approximately 40 percent of their investors had a holding period of more than two years. We are not indicating that direct share class is bad in itself. This is just to indicate that naïve investors can burn their fingers if they go by market fad by bypassing an adviser.

What to look for in an adviser?

Before engaging an adviser, investors must do their own due diligence. There are bad apples in all fields and financial advisory is no exception. Thus, before meeting the adviser, investors can do an online search to perform a basic background check.

If the adviser has a website or a LinkedIn profile, it may be a good idea to look at the services she provides, her past experience and qualifications. This will give investors an idea of what they can expect from the adviser.

If you are already seeking advice from a distributor/adviser here are some warning signs which indicate it is time to scout for another adviser:

a) Makes your portfolio churn every year without any valid reason.
b) Does not take care to diversify your portfolio.

c) Does not disclose scheme features like exit load, tax impact, lock-in period and risk factors.

If you are looking to engage an adviser who is registered with SEBI as Registered Investment Adviser (RIA), then you have to pay a fee to avail their services. They will help you prepare a financial plan, implement it and review it till you achieve your goals.

Most RIAs charge an upfront fee to write a financial plan and charge a percentage of assets managed by him for ongoing review. If you choose to execute your plan through the RIA, make sure you are given a direct plan.

If the RIA is charging fee to prepare a financial plan and takes an annual percentage fee based on the size of the portfolio, and on top of that recommends you a regular plan, you would end up paying a higher cost as regular plans carry a higher expense ratio which eat into your returns.

Then there are advisers who are not registered with SEBI. Not having a SEBI registration does not make them bad. Such distributors are also supposed to abide by the AMFI guidelines by following the highest ethical standards.

They are compensated by the mutual fund companies through upfront and trail commissions. Some of them may even charge you a fee. You can choose an adviser who you think best suits your needs.

To sum up, having a financial adviser can help you make your life stress free by bringing your finances on track.

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