Better to be disappointed now rather than sorry later on. While this applies to all of us, it is especially relevant for financial advisers. In the current market, advisers face a lot of competition and always try their best to provide clients with what they need. But is that enough? Sometimes, it is important to say no to customers. And it is mostly for their own benefit. Let me explain with a couple of examples.
One of my clients had been contemplating moving out of mutual funds, into certain regular return investments, due to a change in his tax status. Under the new tax status, unrealized gains on investments in a calendar year would be taxed. It’s been 6 months since we started discussing this issue, during which the client also sought the advice of various institutions on where to invest. Given the higher quantum of funds involved, most institutions suggested products like alternative investment funds (AIFs), structures, preference shares, perpetual bonds and company fixed deposits. However, due to liquidity and concentration risk in all the above instruments, my advice was to stick to mutual funds and choose the dividend option to help minimize tax on the NAV change.
During the 6-month period, we had many heated discussions and finally I was able to make him realize that having liquidity and diversification is more important than getting into instruments which would help with his tax objective, but would put his investment itself at risk. Imagine his plight if he couldn’t remove his money or if the company issuing the structure got downgraded and wasn’t able to repay the principal. Would saving of tax be more important then?
However, in such situations, my experience has been that clients tend to veer towards the advice given by institutions and question the independent advisers’ views much more. But what they forget to ask is: why are institutions suggesting products with liquidity and concentration risk. Just because the client has a particular requirement, shouldn’t the bankers have suggested instruments that were in line with the customer’s risk profile? And shouldn’t the investor choose to follow the adviser who is not just sending options but actually giving the reasoning behind it and is sticking to her viewpoint. In such cases, clients must value the advice of an adviser who says no because the aim is to prevent them from pursuing bad investments.
Another example is of clients who use independent advisers as sounding boards but use institutions to invest, due to other facilities provided by the institution. Recently, a friend referred me to an individual who had sold a strategic stake in his company and had received a large sum. Being a high-profile stake sale, many private banks were in touch with him for his investments. After 2 hours of discussion, it was clear that he wasn’t sure of the recommendations given by the banks and since his friend had referred me, he was relying on my confirmation to take a decision on his portfolio. Had I agreed to manage his portfolio, he would have probably ended up giving me a small part of his portfolio to have me on board but would have continued to invest through his bankers. In such cases, advisers are better off saying no to clients who are not willing to appreciate the value of right advice.
Sometimes, there is a disconnect between what the investor wants out of the financial adviser and the service the adviser provides. I met another individual who had sold his company and was not working. He had a large amount to be deployed but wanted a part to be used for trading in stocks (which he would decide on). He was keen to set up an office and hire people to do this. From what I gathered, the balance investments were invested into fixed return instruments (the majority into commercial property) for regular income. The overriding factor for trading in stocks was really to keep himself busy. In such a case, the adviser should certainly say no as their role would be limited to that of an administrator.
It is a well known fact that Indians do not like to pay for financial advice and many advisers have existing customers who take their advice on schemes but choose the direct plans. I seriously don’t know of any professional, in any other sector, who you could call regularly and take free advice. For that matter, how many investors would be willing to give free advice to anybody in their own area of specialization?
Even if clients are willing to pay for advice, often it is not commensurate with the experience and pedigree of the adviser. Recently, an adviser was mentioning about a prospect who had all the trappings of an expensive lifestyle but expected the adviser to work for a very low amount. An adviser helps grow the client’s money for their needs. If the fee for the service is not commensurate, advisers must say no.
Clients, too, must learn to value advisers who have the ability to say no irrespective of the amount of money involved. They would be the ones who clients can trust and fall back on since such advisers are driven more by their principles in the long term rather than short-term business targets.
Mrin Agarwal is financial educator; founder director, Finsafe India Pvt. Ltd; and co-founder, Womantra