Lessons From The Journey So Far

It has been a little over six months since I qualified as a SEBI Registered Investment Advisor. The journey thus far has been exciting and enlightening in equal measure. Playing the role of an investment advisor involves as much constant learning as it does sharing that knowledge with others to help pave their way to achieving their financial goals and independence. And this is no different in my case as I have learnt a lot on my own journey so far. So in today’s blog post I’m going to throw light on some of the essential lessons I have learnt on my journey thus far. The views that follow contain both insights as well as my personal views on the subjects of financial planning and imparting financial advice, based on what I have learnt on my journey so far .

The first lesson I have learnt on my journey is that when offering financial advice, it is not for advisors to make all of the decisions for their clients. Clients would be better served when they sometimes make financial decisions for themselves after being given a complete picture of their financial situation by their advisors along with potential choices open to clients and the consequences that come with each choice. Also, I am of the view that while regular reviews of how clients are following up on their financial plans is important it is equally important to give them enough time and space to act on the advice and plans given to them. Ideally, clients should ideally not be micromanaged by their advisors through overly frequent meetings, unless there is a serious deviation that warrants attention. Once the broad contours of a client’s financial plan have been laid out, it is more than enough to have follow up meetings once a month, so that clients can bring any new developments to the advisor's attention at the earliest. Progress made on financial plans can be reviewed once a quarter so that damage control and course correction become easier.

Next, I would like to share my views on what it takes for financial advice to be relevant and effective in today's times. Today, financial advice must go beyond the mundane activities of constructing portfolios and giving recommendations with regard to the most profitable investments. It must be delivered based on an understanding of the personality a particular client, their financial situations, risk profile, aspirations, needs and goals. It must be timely, context specific and incisive. Effective financial advice must also be reasonable in light of a client's financial situation rather than rational. For example, rationality would dictate that we need to be regular with our investments regardless of the circumstances. But, when working with a client who is facing a liquidity crisis, it would not be reasonable to expect them to continue with their investments. In such a situation, the focus of any financial advice given to them must be focused on fixing the liquidity crunch they are facing rather than planning further investments.

As far as constructing portfolios and financial plans is concerned, I am of the view that when preparing financial plans for clients, it is important to sit together with them and map out a reasonable range of future outcomes. It is important to ensure that the plans which are prepared, are aligned to keep clients well prepared for as many of those outcomes as possible. And most importantly, financial plans constructed for clients must be aligned to meet possible worst case scenarios, given the realities of a particular client’s financial situation. For example when working with a client who does not have a secure job and an adequate emergency fund amount in place, a possible worst case scenario would be a job loss. Therefore, any financial plan prepared for such a client must prioritise the creation or augmentation of an emergency fund, so that the client would not get caught off guard even if they were to lose their job.

Also, I personally feel that constructing portfolios and financial plans must always be driven by purpose. Each asset in portfolios prepared for clients and each component of their financial plans must have a clear reason for being there. Each component must play a clear role in helping them achieve their financial goals. Therefore, suitability should be the basis for including a particular asset or component in a client’s financial plan rather than profitability. Also, when helping clients prioritise their financial goals, aspirational goals such as buying a new car, new house or planning a vacation must never be given priority over essential goals such as planning for retirement, children's education or marriage. This is because aspirational goals usually involve significant cost outlays which need to be incurred in short periods of time. On the other hand, essential goals require a lot more discipline to be displayed over long periods of time in order for them to be achieved. Prioritising aspirational over essential goals may cause clients to deviate from their plans to achieve their essential goals. And any such deviation could seriously hurt clients' chances of achieving their essential goals, which would be a major setback for them.

Finally, I come to talking about my views on helping clients follow the financial plans suggested to them. When clients are faced with a choice between caution and aggression while following a financial plan, it is always better to advise them to err on the side of caution. At the same time, it is important to realise that an approach that gives too much attention to being cautious may mean that clients might not be able to achieve their financial goals on time. Therefore, it is essential to make sure that the course of action chosen for clients is reasonably conservative and not overly conservative. Also, a client’s financial situation is highly dynamic. Therefore, there needs to be a considerable degree of flexibility in financial plans created for clients in terms of contingency plans for possible changes in clients' financial situations. Doing this would ensure that there would be enough room for them to adjust and continue to follow their financial plans even in the event of a significant change in their financial situations.

To put all of my views and the insights I have gained together, clients would be best served by their advisors when they are sometimes given the freedom to make their own financial decisions after being given a holistic view of their financial situations, without micromanaging them. Financial advice has to go beyond pure numbers and recommendations to be effective. It should rather be tailor made for each individual client based on an all round understanding of the client, whilst being reasonable in light of the financial realities of the client. Portfolios and financial plans should be construed for clients based on clear purpose. They must also leave the client well prepared to face as wide a range of possible future outcomes as possible. It is always better to urge clients to adopt a cautious approach to following their financial plans, while ensuring that the suggested plan of action is not overly conservative. Lastly, a considerable degree of flexibility must be built into financial plans developed for clients. Contingency plans must be put in place for probable changes in the financial situations of clients. This would allow clients to follow the plans set for them more diligently without being too affected by a change in their financial realities. Hope these insights would be of use to all those who read this post.