August 22, 2014

What is the role of a financial advisor?

It’s a question a number of investors have asked, and continue to ask.  It’s a question which not many advisors answer well.  But it is an important question, especially in today’s scenario where investors have enough information and ease of execution to consider bypassing an advisor and investing directly. 

I believe that doing so may not be in the best interest of most investors, and that most of us would benefit from having a good advisor.  As a first step towards evaluating the appropriateness of an advisor, I think it is important to know what to expect of an advisor.  In this post, I propose to offer some thoughts on this.

While individual opinions across advisors and investors may not be exactly the same, in the context of mutual funds, I doubt if there will be any significant disagreement over the following expectations:

  • Identifying suitable funds
  • Determining the share of each fund in one’s portfolio
  • Determining when to buy or sell a fund
  • Facilitating buying and selling of funds
  • Providing after-sales and ongoing service
  • Performance analysis and reporting
  • Tax planning

One could apply most of these expectations to any other investment product. 

As I see it, this is one way of looking at an advisor’s role.  Depending on how an advisor positions himself/ herself or depending on how an investor perceives the role of an advisor, there can be many more expectations added to this.  For instance, some advisors position themselves as capable of helping their clients define their life goals and drawing a roadmap towards achieving those goals.  There are some who position themselves, more ambitiously, as solution providers for all money matters.  In the words of one such advisor, “I am a banker, broker, lawyer, chartered accountant, and investment specialist, rolled into one.”

A few years ago, I came across an article titled, Role of an Investment Advisor, on the website of a US-based financial advisory firm, Black Walnut Advisors, LLC.  Here is an excerpt worth talking about in the context of this post:

The Role of Your Advisor

So with access to all of these specialists, some investors are unclear about the role their advisor plays. Some come right out and ask, “What does my advisor do for me?” Here’s the answer. Your investment advisor:

  • Works with you to discover your personal financial objectives
  • Assesses your entire financial situation (all major holdings including home equity, art, stock options, etc.)
  • Designs a customized investment plan that offers a realistic opportunity to achieve your goals
  • Screens the industry’s best service providers to identify those that offer services that complement your goals
  • Works with those providers to implement your customized investment plan
  • Monitors the providers and replaces them if they fail to meet your objectives
  • Tracks the providers to be sure they don’t stray from the investment style they were hired to implement
  • Monitors your portfolio and recommends adjustments to your strategy based on conditions in the capital markets, changes in your life and progress toward your goals
  • Provides education and guidance to help you understand your investments and to keep your goals in sight and portfolio on track regardless of current market conditions
  • Celebrates with you when things go well
  • Feels your pain directly on the bottom line when times are tough

No discussion on the role of an advisor can be complete without a mention of noted industry observer, Meir Statman.  I find his writings on this subject extremely illuminating.  For this post, I would like to present an extract from his article, Financial Physicians, which was published in AIMR’s Investment Counseling for Private Clients IV, in August, 2002.

Financial advisors who act as financial physicians combine the science of finance and securities with the ability to empathize with and guide clients- thinking not about risk and return but about investors' fears, aspirations, and the errors they are likely to make. Financial advisors promote wealth and well-being just as physicians promote health and well-being.

As I suggested above, and as illustrated by these examples, there is no single way in which to look at the role of an advisor. Individual expectations can, and do vary.  For a meaningful advisor-client relationship (as for any relationship), it is important that there is a matching of expectations on all sides.

I would like to close this post with something I overheard from a passionate conversation between an investment advisor and his client: “My job is to protect you from yourself!”

Personally, I agree with that observation but I’ll leave any elaboration on this for a future post.

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