Over involvement can harm your investment portfolios…
This happened over the last few days. While I was discussing investments in one of the WhatsApp groups, I happen to come across a prospect who lives in Australia. He runs his own business there and has been investing for the last 4 years both in India and in Australia. His father is working as a professor in India and has two more years to retire from his job. The prospect mentioned that he intends to get his parents to Australia in the next few years. In order to make sure his parents come and live comfortably; he made his father invest almost 70% or around a lakh of his take-home salary in mutual funds.
Four years of investments were made via SIPs with an advisor based out his father’s place. Further, he also invested a similar amount of money with this advisor. Few profit booking activities conducted over the years, but no solid movements were seen. The prospect was very unhappy with the performance and was looking to change his advisor, hence he started the discussion with me.
In the initial discussions, the prospect was a bit uncomfortable to reveal the details of the investments apart from mentioning that overall investments are tune to a crore. However, after some continued discussions, when I told him that I cannot do justice in advising unless I see the portfolio, he shared the details of his father and his portfolio in scanned pdf copies.
I asked our analyst team to review the holdings. After a deep dive analysis, my team shared the report. The review report was a big surprise. Both his and his father’s money was invested in almost 45 mutual funds with as many as categories that one could find in AMFI classifications; it gave me the straight and immediate answer on why his portfolio is not performing well and also thought the current advisor of his could be just a mutual fund distributor.
I was curious to understand such a laundry list of investments were made. Hence during the subsequent discussion, I sought the details of his current advisor. This also came as a surprise that his investment advisor was a certified financial planner and had a competent experience in advising on investments.
It is not quite possible to have a competent advisor yet no solid and focussed portfolio. If so, it could be the advisor’s incompetency which can one can envisage. However, I felt, it may not be the case post my checks on his current advisor. To my belief, it came right when I started interrogating the prospect with my questions on his and his advisor’s involvement in portfolio creation and management.
Over the last few years, somewhere, the prospect had started feeling that his advisor is not proactive enough and started telling him what to buy and what to sell. The prospect continues to do his research and pick the funds which were at peak performance. He made his advisor many times to do profit booking and switches. Even he exited some funds when markets fell during the March this year at significant losses. His father continues to think that the advisor is just selling the mutual funds and making the money and not making money in his portfolio. It all looked like the prospect was managing than the advisor himself.
This made me realize that the current advisor could not have done the right things given the over-involvement of the prospect. It could also be the case that the current advisor couldn’t assert his role in managing the funds effectively. However, I felt that taking over the prospect’s portfolio may not do any good to the prospect. I felt it would be good to make his advisor work for him on the portfolio.
I suggested the prospect to look for a goal-based approach mentioning what is the corpus required for his parents to live in their wished lifestyle when they move Australia. Secondly, I suggested asking his current advisor to see how we can reduce the no. of investments to make it a solid and focussed set of portfolio of 10-12 funds. I also mentioned that he should stop providing recommendations to his advisor and instead ask the advisor if the portfolio is going in the right direction or not and what changes he is recommending on a periodic basis.
While I continue to await what could be the responses from his current advisor on these questions, I felt to mention few important things that one must remember when he/she engages with a financial advisor to manage his/her personal portfolio.
1. Ensure you have a right advisor, check all credentials, and ensure he/she is the right person for the job
2. Once you have chosen, build trust with the advisor and work with him/her to build a portfolio which suits to your risks and investment profile and not what market reflects
3. Use a goal-based approach for investments and then direct all your investments accordingly
4. Over diversification kills the overall portfolio – be meaningful in the allocation and try to not stretch beyond 10-12 investments
5. Stop overreacting to every market up and downs, and stop over-involvment in the advisor’s work. You will do more harm than any good in your portfolio
Ask the advisor to work for you; seek regular portfolio reviews. Be the manager and don’t be a worker on those which you don’t understand
Dattatreya Krishna
Head – Investment Advisory
Right Horizons, A Sebi registered advisor, Bangalore
9900263874
