Can you afford the cost of no financial advice?
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You would have heard and read about the increasing trend of Indian students going overseas for education. You would also agree that it is not an inexpensive proposition either. Yet, even before students have left Indian shores, parents are keen to get advice from the best education consultants, regardless of the cost. Please note, I said advice.
These consultants neither guarantee admission, nor a visa. They only guide and advise both the child going abroad and the family. Neither do they charge an outcome-based fee; the costs are fixed and payable regardless of the admission or visa outcome.
Yet, education consultants are busier than ever. This trend is visible not only in the large metros, but also in tier 2 and 3 cities. How many students and their parents follow the do-it-yourself (DIY) approach? According to me, the answer is, ‘very few’, even though many parents are themselves well-educated or have studied overseas or even have close family living abroad.
Let me apply this analogy to investments. While making investments and creating your financial plan, you can either plan your investments on your own (DIY) or avail the services of a professional investment adviser who could help you plan for life goals like: buying a house, children’s education and retirement.
Here too, an adviser does not guarantee the outcome but guides you with the right investment choices. Similar to the education example, which approach do you think is the more sensible? In most cases, our life goals are non-negotiable and achieving them is a very important determinant of our physical, mental and financial well-being.
So, it is prudent to avail the services of an experienced investment adviser, as many of us lack the skills needed to draw up and execute a financial plan, which include: risk-profiling, asset allocation or rebalancing and portfolio monitoring.
In fact, many may be well-qualified and experienced in finance and investing, yet we often lack the time to truly devote to financial planning. I know this to be true in my own case.
But let me give you a couple of more reasons why the services of a trusted adviser would serve you well. Contrary to popular belief, the value of an adviser is not only at the time of investing, but also in times of market turbulence. It is at these times that a good adviser will help you stay invested across market cycles and for the long term.
And there is more than enough evidence to show that time in the market, and not timing the market, has proven to be the best way to gather long-term wealth. For example, those who exited after the 2008 market crash are repenting, as the returns have been manifold for those who stayed invested.
Another important value-add that an adviser can bring to the table is maximising the overall returns; called ‘alpha’ in financial parlance. Let me cite an example of the variation in alpha you could expect with and without professional guidance.
Using the Crisil-ranked universe of equity funds as of September 2016, and calculating the returns of funds completing 20 years, we find there are 20 such funds out of a total 147 equity funds tracked by Crisil. These funds provided average annualised returns of close to 19% over this period.
Similarly, using a 10-year filter, there were 105 equity funds meeting this criteria; these returned 12.26% on an average over this period (returns as of 31 October 2016). These returns are much higher than what one could have received from traditional assured returns products over this same time period, with the added advantage that long-term gains from equity funds are tax-free as per current tax laws.
So why not just invest in this universe of funds? Why the need for an adviser? Where is the alpha? So here is the twist. While the average returns for the universe of funds above looks great, the range of returns varies from 6% at the low end to 25.5% at the top end for the 20-year funds and from 4% to 21% for the 10-year funds.
Two funds with a track record of over 20 years and 21 funds with a track record of over 10 years gave single-digit returns.
So, how do we stay invested in the top-performing funds? For that, we need the right fund selection, ongoing monitoring, and corrective action when necessary. This is exactly where a professional financial adviser steps in.
Let me re-iterate the returns differential in rupee terms. Rs1 lakh invested in the best performing fund would have grown to Rs94.40 lakh in 20 years, whereas the same Rs1 lakh invested in the worst performing fund would have grown to a mere Rs3.22 lakh.
Similarly, in the 10-year universe, the best- and worst-performing funds would return Rs6.77 lakh and Rs1.47 lakh, respectively. In both cases, the difference in potential returns between the best- and worst-case scenarios is huge and amply justifies the services of a financial adviser. Thus, the cost of no financial advice (the risk that Rs1 lakh may grow to only Rs3.22 lakh versus a possible Rs94.4 lakh over 20 years) far outweighs any cost we may pay, whether directly or indirectly for good financial advice. In short, a professional adviser could be the difference between meeting or missing your financial goals.
Sanjay Sapre is president, Franklin Templeton Investments–India.