Oct 14, 2014

Of late, with the Regulator pushing hard on Investor Awareness, AMCs, Insurance companies and Banks have been trying to invest in on-ground seminars, publications and advertising. However, how much should Investors learn about the working of financial services products and how much of the decisions on investment should they make on their own is something that needs to be analysed before jumping headlong into aggressively communicating about the features of products. This article proposes that Investors should understand well the basics of Asset Allocation and the principles of Financial Planning, and should leave the specific Products selection to their Advisors or Distributors (I am using the terms Advisor, Distributor, Wealth Manager inter-changeably in this piece).

The rationale behind suggesting the above approach :

• The financial circumstances of each customer is unique and first, they need to understand inside-out their own Life Goals, and then plan for each of them; similarly, for wealth-building HNI clients, the risk profile and composure of each client is different, and hence they need to understand merits of asset allocation and plan as to what is the most suitable ideal long-term asset allocation for their family wealth.
• Studies in the US markets showed that as high as 75% to 94% of portfolio performance was determined simply by which Asset Classes were chosen to invest in and in what ratio.
• It is physically not possible for >90% of people to understand the nuances of even an elegantly packaged product like a Mutual Fund – why debt MF, short-term vs long-term, merits of accrual, large cap or mid-cap or small-cap. When is the time to sell and re-allocate? Leave alone the merits and demerits of Traditional Insurance vs ULIPs vs Term Plan. Or a Structured product with mezzanine properties of debt and equity.

Thus, what we are suggesting through the above approach is that each Investor should understand and be responsible for knowing the amounts of money required for each of the Goals – first home, marriage, education of children, marriage of children, retirement and when will each Goal occur. He should then ask his Financial Advisor / Wealth Manager to help him construct separate portfolios for each Goal. The portfolio should be a mix of instruments of different asset classes, and the allocation should vary depending on the nature of the goal and the time for the goal. He should keep a tab on the time-for-goal and push the Wealth Manager to suggest changes as Goals get nearer or market conditions change radically.

On similar lines, HNI clients should plot their existing Asset Allocation, and ask their Wealth Manager to advise them on their overall ideal portfolio – how conservative or aggressive should they be, depending on their own Investment Objectives and their ability to withstand volatility. Then they should get product buy/sell recommendations from the Wealth Manager to reach their ideal allocation.

Which exact stocks to buy or MF scheme to invest in should be left to the Advisor, since there is very little chance for Investors to understand 100% of the working of any of the above, unless your main day-work is researching on products. Hence, there should be a clear divide of “Knowledge Responsibility” between Investors and Advisors. Investors should themselves be ultimately responsible for knowing about their own Asset Allocation and Financial Planning. Advisors in turn need to ensure that the products advice given by them meets the requirements of the Financial Plan or the Ideal Asset Allocation of their Investor Clients. This will be true Investor Awareness – after all, Awareness of what you don’t know or can’t know is also one form of Awareness !!