Investment Blog

How to differentiate if you are getting genuine investment advice or being sold products that benefit the advisor more than you?

Many of our clients come to us after dealing with traditional wealth management setups. At the time of taking over their portfolios under our advisory, we do a portfolio audit to understand their current portfolio structure and what changes need to be done to align the investments with their risk profile and market conditions.

What we observed was not very surprising to us but clients weren’t much aware of the mismanagement in their portfolios.

Here are the common patterns we observed that are not in the interest of the clients: 

1. Too many products: If your portfolio has more than 20 products in varied proportions, then there is a high likelihood that your advisor is selling you new and new products that pay higher commissions than the existing ones. Too many products create clutter in the portfolio and distract from efficient management of your portfolio. 

2. Underperforming Products: Many underperforming products (in their respective categories) continue to stay in the portfolio even when the underperformance has been observed for multiple years. This usually happens because either the ongoing commission is high or there is no regular reviewing and monitoring of your investments. 

3. Complex Structures: Many PMSs and AIFs underperform MFs (in respective categories) after costs and taxes but many still exist in the portfolios. This happens because many such fancy products offer higher payouts to distributors. Of course, there are a few AIFs and PMSs that make sense but selecting those needs thorough due diligence and should have a track record of clear outperformance than mutual funds in the same category. Some specialized AIFs can be considered after deep research, due diligence, and investment suitability. 

4. Equity Heavy Portfolio: Higher allocation to equity (>80%) at all market levels and low to no allocation to Debt and Gold asset class indicates that your portfolio lacks diversification. A balanced portfolio must have representation from at least the three major asset classes for weathering volatility. Usually, equity products offer higher commissions than debt which offer higher commissions than Gold. That’s why most of the portfolios we have audited are equity-heavy despite the conservative risk profile of the investor.

If you find any of the above-mentioned observations in your portfolio, you must speak to your advisor and understand the rationale for such.

If you do not get a convincing response, then it’s clear, that you are being sold products to maximize commissions and not what is best for you.

The best way to avoid such a situation is to deal with fee-only SEBI Registered Investment Advisors who cannot earn commissions by regulation.

Originally posted on LinkedIn: www.linkedin.com/sumitduseja