Investment advisory, the new paradigm!
Updated: Oct 1
In mid-2012, I started toiling with the idea of investment advisory in India. Investment advisory was still at a nascent stage and a lot of people did not understand the value proposition.
The mindset of investors and market dynamic indicated that Indian investors preferred products over advice.
In 2013, SEBI came up with Investment Advisory license. I was one of the early ones to be granted the license. This regulation was a good start but not good enough to change the mindset of investors and market dynamic.
Media and regulator played a vital role in changing the attitude of investors. In just 7 years, investment advisory is now well-established proposition for a lot of investors especially HNIs.
In a few years only, it is quite heart-warming to see the field of investment advisory blossom. I wrote an article in the Business Standard in 2016, never knew that the gap will bridge so quickly.
The journey and challenges continue but definitely, it has become professionally fulfilling and rewarding.
Investment advisory considers asset allocation on one hand and products on the other (direct stocks, corporate/RBI bonds, preferred shares etc.).
Here are three examples of real clients that will help explain the process and value proposition:
Example 1: 35-year-old product head with an e-commerce company
Income: Rs 1 crore per year
Investable assets: Rs 50 lakhs
Step 1: Risk Assessment
As an investment advisor, I first do the risk assessment to understand the risk tolerance of the investor. Based on the results, I discuss with the investor if there is any gap in the assessment.
Although over some time, personal behavioural understanding improves but initially a risk assessment profile helps to cover the ground.
Step 2: Net-worth & Cash Flows
Then comes asset, liabilities, income and expense assessment. Investors can do this at their end or I can help them do the planning exercise.
Here is a self-help guide to doing financial planning yourself https://www.plutuscapital.co/managingmoneybetter.
If the investor is comfortable with their planning and wants to focus on only the investments, we skip this step.
Step 3: Asset Allocation
Asset allocation is a critical step in the exercise that incorporates risk profile, net-worth and cash flow assessment.
For the client, we came up with the asset allocation as 60% Equity and 40% Debt.
Step 4: Investment Management
Investment management is an ongoing exercise and includes product selection, to begin with. For the client, we came up with the following mix (obviously, this has gone through a change over some time):
We have seen massive turmoil in the debt market with IL&FS, Vodafone, ADAG etc. My clients have not faced any such issue because of the focus on ‘capital protection’ philosophy.
In March 2020, the market tanked by almost 40%, the fall always creates opportunity. I was able to rebalance the portfolio, deploy debt into equity to capitalize on low equity levels.
I am not in the business of forecasting; the prices of high-quality companies were extremely attractive and made sense to tactically increase the equity allocation. In a few months only, equity bounced and we went back to our long-term (strategic) asset allocation. The entire exercise paid off beautifully well.
Example 2: 55-year-old CXO with a large-cap listed company
Income: Rs 2 crore per year + ESOPs
Investable assets: Rs 7 crores
Step 1 and Step 2 are common for all clients. The variation starts from Step 3 i.e. asset allocation. Based on the risk assessment and discussion with the client, we came up with the asset allocation 50% Equity and 50% Debt.
Step 4: product selection
Example 3: 70-year-old retired professional
Investable assets: Rs 10 crores
We followed step 1 and step 2 and then came up with the asset allocation (step 3) as 25% Equity and 75% Debt.
We all come from different backgrounds with varied needs and requirements. No one product can be suitable for all. The need for an investment advisor is not to achieve the highest return but manage the risk and return to meet the client’s investment objective.
In 1963, Warren Buffet wrote to his investors:
“I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership (his client)”