Why many professional investors don’t make money

Recently, I attended a five-day workshop on investing where I happened to meet a junior fund manager of an asset management company. In the course of discussion, he shared his portfolio details with me and I went blank with shock when he told me that he has around 12 lakh lying in his savings account for the past one year. Moreover, he had many fixed deposits, traditional life insurance policies, money in Public Provident Fund, and of course an apartment as investment.

When I enquired about his investments in direct equity or through mutual funds (MFs), the answer was, nil. It is very difficult to believe that someone who has worked for more than a decade in the MF industry as a fund manager (incidentally, his fund is one of the superior funds in the industry) has no MF investments. I asked him who his adviser was. He said that his father manages all his investments.

This is just one such instance from many of my casual conversations with different industry colleagues. In my 11 years of experience, I have met many finance professionals, be it bankers, chartered accountants, MF sales executives, fund managers, financial journalists, and even employees from various regulation agencies, and one thing is common. Either their financial literacy level is very low or they are overconfident about how they manage their personal finances.

What gets me thinking is that they advocate investing in MFs or buying term insurance to others, but do not follow the advice themselves. If the participants of the financial services industry are not practising what they preach, then how can you expect a retail investor to put her money into MFs. It’s no wonder that the retail participation in MFs and the capital market is at a paltry 3-4%, despite a proven long-term track record.

What should one make of an investment adviser who is supposedly managing the wealth of high net worth individuals (HNI), but his own financial planning has gone for a toss? I have a friend in New Delhi who has been working as a senior investment counsellor with a foreign bank for the past nine years. A couple of years ago, I found out that he does not have a term insurance policy, and that he has not taken it knowingly citing the logic that if he does not die within the term of the policy, all his premiums will be forfeited. I did not expect this argument coming from a professional at his level. Most of his investments were in real estate. His argument was that the safety and comfort of physical assets are far higher than financial assets. I can’t imagine how he advises clients.

Many theories can be attributed to this kind of behaviour. Firstly, maybe they think that because its their own money, they can manage it at any point in time; but it usually happens at the last minute. If you check the tax planning of most investment professionals, you will see that it happens mainly in the January-March quarter when the employers ask for proof of investments. It is like a chartered accountant filing her own tax returns at the eleventh hour, since all year round she was busy filing clients’ tax returns.

Secondly, they tend to analyse too much, which results in little or no action. I remember a recent case, where a very senior chief financial officer of a company took almost six months to finalize an online term plan after going through 14 different insurance companies. I wonder how he takes financial decisions in his company?

The other rationale is that most of them do not like to hire a financial adviser thinking they know it all. Many do not want to pay fees to the financial planner thinking no further value addition can be done by the planner. The ones who are already investing in MFs prefer to go through the direct plan route as they are able to save 50-75 basis points (one basis point is one-hundredth of a percentage point) in terms of expenses. I know of many cases where doing so has resulted in them being penny wise and pound foolish.

The portfolio construction is tends to be weak and principles of sound asset allocation are violated. I clearly remember an MF sales executive putting some 20 lakh in a liquid fund in January 2014 thinking he will be able to time the market and switch to an equity fund. But in the past year-and-a-half, he has not been able to deploy it simply because he had no time to manage his own portfolio. He missed the big rally that came about after the election outcomes.

Finally, there are hyper aggressive investors who track each and every metric on a daily basis and adjust their portfolios accordingly. They think they can time the markets very well.

One research analyst of a broking firm was putting money in and out of a government securities fund trying to time the interest rate cuts, but at the end of two years, he had made just 4% annualized returns post-taxes. If he would have just stayed in a simple dynamic bond fund, he would have earned 10% returns in the process.

Having said that, there are few professionals who are doing a very good job of managing their own finances. They have the right number of schemes in the portfolio, stick to their asset allocation, have a goal-based approach to planning, and conduct regular reviews.

Finally, a financial adviser needs another adviser to give an independent perspective. How many agree with this can be an another debate.

Gajendra Kothari, managing director and chief executive officer, Ética Wealth Management Pvt. Ltd