Three Qualities of a Successful Investment Adviser

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Investment management is never a part-time activity but a full-time job. Quality investment management is much more than selecting schemes from star-rating websites or buying a stock based on little insights. It requires not just sophisticated skill-set for asset allocation calls (across asset classes, sub-categories, and schemes), the temperament to keep emotions under check but also an ability to quickly understand the impact of the latest market developments (global and domestic) on various asset classes in a rapidly-changing world.

Given these requirements, hiring an investment manager can make a significant difference in your financial wellbeing and peace of mind. Either it compounds to result in wealth creation or wealth destruction or just average market returns.

To generate above-average risk-adjusted returns and to meet your investment objective successfully, you must look for these three non-negotiable qualities in an investment adviser which are extremely important for value addition to your investment portfolio:

1. Aligned Interest: The most important and unavoidable trait should be the complete absence of conflict of interest. Unchecked conflict of interest can ruin your investment returns. Click here to read more about how investment advisors’ conflict of interest is dangerous for you.

Aligned Interest

Fiduciary duty should be on the top of the mind of any genuine adviser. To ensure that the interest of your adviser is totally aligned to yours, an adviser should manage the entire investment in zero-commission products like direct plans of mutual funds and earn only from transparent fee received from you. Commissions earned from product manufacturers have significant potential to affect investment recommendations. Absence of commissions eliminates any conflict of interest regarding investment decision making to meet your investment objectives.

Ensure your adviser is a SEBI Registered Investment Adviser (RIA) (SEBI cautions the public against unregistered investment advisers – https://www.thehindubusinessline.com/markets/sebi-cautions-public-against-unregistered-investment-advisers/article25622843.ece). An RIA is allowed by SEBI to earn fees for investment advisory from clients, and barred from earning commissions from product manufacturers. An RIA is also allowed to access the transaction details of investments in direct plans of mutual funds (after receiving the client’s consent).

2. Experience & Expertise: An adviser who is responsible to manage your investments and provide advisory should have a relevant work experience and good academic credentials related to investment management field (like CFA/CFP/NISM Adviser).

Asset allocation is responsible for 80% of the portfolio returns and scheme selection only 20%. Therefore, your adviser should have developed a deeper understanding of asset-class cycles and asset (equity/debt/gold) valuations which are extremely important to stay ahead of the curve by aligning your portfolio for future opportunities and risks.

Asset Allocation

Your adviser should be able to provide you additional insights and perspectives about the investment scenario backed by independent and critical thinking. These insights should be additional to what a majority of people are already aware of through the mainstream media. He should be well versed with latest market developments and should quickly understand their impact on your investment portfolio.

3. Regular Review & Rebalancing: Today’s fast-changing, complex and competitive world requires that portfolios should be closely reviewed and rebalanced with a change in market dynamics based on consistent investment philosophy. 

Portfolio Rebalancing

If an adviser doesn’t have an investment philosophy she will drive your portfolio to losses by being forced to fall in line by psychological pressures resulting in buying at the top and selling at the bottom. Therefore, you must enquire and understand the investment philosophy and framework followed by your investment adviser.

You should also, without fail, check the track record of your investment adviser to understand successful asset allocation calls over the last few years, as guided by her investment philosophy, which resulted in higher risk-adjusted returns.

Don’t forget to judge and evaluate your investment adviser based on above mentioned three parameters before hiring her or continue to have her services. Your job is to find the right adviser and let her manage your portfolio based on the stated investment objective while you tend to your professional and personal duties & interests.

Disclaimer: Truemind Capital Services is a SEBI Registered Investment Adviser (RIA)

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