What Advisory Conversations Should Be About

Conversations between clients and advisors are at the heart of any advisory engagement. The quality of these conversations goes a long way to defining the quality of the engagement and the investment experience of the client. Almost every conversation between clients and advisors today tends to revolve around the aspects of picking investment products, evaluating investment performance and comparison with other investors or benchmarks. But clients must not judge the importance of an advisory engagement in such a restricted sense. Nor should it be pitched or sold as such by advisors.

Product selection and periodic performance evaluation by both parties are undoubtedly important components of any advisory engagement. But, there are a lot more aspects that conversations between clients and advisors need to revolve around to allow both parties to derive the greatest degree of value from their engagement. Because these are aspects that give a true and fair view of the advisor's competence and help clients achieve their financial goals and other objectives from the engagement. So today I will be throwing light on these usually overlooked aspects that advisory conversations do not focus enough on.

Any healthy advisory engagement would involve a significant number of conversations where risk is the subject matter of discussion. Along with a general understanding of investment risk, it is also important for advisors to make clients cognisant of the specific risks associated with a given investment opportunity that a client wishes to participate in. This would help clients better guage whether a particular investment opportunity is well suited to them. And where it is found that the opportunity is well suited to the client's needs, the client must participate in a way that is aligned to their risk profile.

And any advisory engagement must involve conversations centred around developing strategies to do so. Take the case of cryptocurrencies in India for example. Almost all types of cryptocurrencies are now considered a popular investment option by most investors, especially the younger ones. But, the risks associated with them are quite significant. In the most recent budget proposed in early 2022, the government proposed to tax cryptocurrencies and other digital assets quite significantly. A summary of the tax proposals made with regard to cryptocurrencies are given in the graphic that follows.

Moreover, cryptocurrencies are not currently confirmed to be legal in India. As recently as July 2022 Union Finance Minister Ms Nirmala Sitharaman confirmed that the Reserve Bank of India is in favour of a total ban on cryptocurrencies in India. More on this can be found in the article linked here (Cryptocurrency: RBI seeks ban, but India needs global support to regulate it, says FM Nirmala Sitharaman). Finally, as per a regulatory notification issued by SEBI in 2021, all SEBI Registered Investment Advisors are prohibited from offering advice to their clients on cryptocurrencies.

Given such a context, cryptocurrencies would not represent a viable investment option for most who wish to invest in them. Investments in products that are this risky would only be suited to a select few whose current net worth is at least a certain multiple of the net worth required to cover their basic needs and goals. Even for such individuals, it would be advisable to only put a limited portion of their net worth into such products. And it is upto advisors to talk about such risks and nuances in their conversations with clients.

Today income profiles of individuals are highly diverse, owing to the wide variety of employment options available. The various groups that advisors interact with and their income profiles are set out in the graphic below.

But regardless of the income profile of an individual, they would have their own set of financial aspirations, needs and goals. Naturally, the need to save and invest for each of them would persist. Therefore a lot of the early conversations in an engagement with a client need to revolve around the advisor trying to gain a clear understanding of the client’s income profile and designing a robust savings plan around it. This is especially true in case of clients who have sporadic incomes. A few broad contours around which a savings plan can be constructed for such individuals are set out in the graphic that follows.

Quite clearly, a robust savings plan creates a stable platform for clients, which can then serve as a base on which they can build a bespoke investment portfolio. The importance of having conversations with clients around their savings habits and plans cannot therefore be emphasised enough.

Financial planning should develop into a habit for clients. And this would be possible only when they understand and appreciate the need for financial planning. The need for financial planning does not stem solely from clients' needs to achieve their financial goals. It stems from the need to instill a sense of financial discipline within clients. The essence of financial discipline is laid out in the graphic that follows.

Practicing financial discipline is a lifelong exercise. So it would help clients achieve a sense of security and peace with their finances, which is the ultimate objective of sound financial planning. And it is upto advisors to make clients aware of this fact during conversations between both parties. This would help clients open up a lot more with regard to what it is that they really want from their money, automatically improving the quality of the engagement.
In the constant quest for better investment returns, it is often forgotten that adherence to the right investment behaviour over long periods of time serves as a much better catalyst compared to product choices and market timing. Following the right behaviour optimises returns for clients without them having to take on more risk than they can tolerate. But adherence to the right investment behaviour is never easy, and especially so over long periods of time. The onus is therefore on advisors to constantly communicate the importance of following the right financial habits and investment behaviour until such habits and behaviour come naturally to clients. It is also important for advisors to guide clients through adverse phases especially when they are prolonged. This is again possible only through effective and timely communication with clients.

Viewing an advisory engagement from the standpoint of helping clients achieve better returns is ultimately a highly one dimensional perspective. An advisory engagement must address the client’s needs at a much deeper and more holistic level. It must set clients up for financial peace and success all through their lives and not just until they achieve their stated financial goals. Every conversation between clients and advisors as part of the engagement must therefore be oriented towards achieving this single, overarching objective.

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Akshay Nayak

SEBI Registered Investment Advisor and Fee Only Financial Planner based in Bangalore, India. My stories ≠ advice. Email ID : akshayadv93@gmail.com