By Amit Kumar, Financial Advisor
RIO DE JANEIRO, BRAZIL – Since the start of the global financial crisis in 2008 and the ongoing ‘doom and gloom’ in the financial media, many investors have become skeptical about using financial advisers to generate added value. Howard Borsden, Managing Direector of Looking for Dylan, discusses the provision of financial advice with Amit Kumar, who advises expats and Mercosul nationals.
Howard: What brought you to the Cidade Maravilhosa and are you enjoying life in the world of financial consultancy? You landed just before the start of the financial crisis, great timing!
Amit: I worked in commercial banking many years ago in London. Moving to Lat-Am was a lifestyle decision and I am enjoying the experience. Over the last five years, I have built up a sizable client base of expats and Mercosul nationals, most of these during and after 2008 therefore I believe that a crisis is a real opportunity to help clients when they most need it.
Regardless of temporary economic situations, people will always need to plan for long-term goals such as retirement and providing for their children’s education.
Howard: Indeed an optimist! How do you make investment choices when designing the portfolio of a new client? We use a risk questionnaire with every client – how important is this?
Amit: Firstly, it depends on the profile and age of the client. It is important to understand their investment horizon and attitude to risk and return. After completing a fact-find on their financial situation and objectives, we would complete a risk questionnaire, the results of which often surprise clients themselves, as many believe they have a higher appetite for risk before confronting likely scenarios in the questionnaire.
We would then prepare a draft asset allocation table for the client and discuss the balance in each category: Equities, Commodities, Fixed Income, Alternatives, and Cash. Within Equities, for example, we would have subcategories i.e. Regional funds (e.g. Southeast Asia, India) and Sector funds (e.g. Renewable energy, Natural resources) and lists of recommended, top-quartile funds in these spaces.
We would discuss the likely return and volatility from each subcategory. This is an ongoing process, which is revisited periodically.
Howard: How would you handle a higher risk asset allocation during a period of slower growth, knowing that investors have to be more patient for real returns compared to the previous decade?
Amit: This is precisely the time to accumulate higher growth assets, in particular, equities. In five to ten years, many people will be looking back wishing they had been more aggressive instead of waiting on the sidelines watching their cash being eroded by inflation.
Consider both developed and emerging markets and be careful not to ignore U.S. and European equities based merely on recent performance. Ask yourself – Is this recession going to last forever? – Where will India and China be in ten years? – Will EU politicians finally show some direction (!) with banks eventually increasing liquidity in the Eurozone?
Howard: Studies on investor psychology suggest that the pain derived from say, a ten percent loss is greater than the pleasure derived from a ten percent gain. Some clients tend to have shorter-term memories and blame their advisors for temporary losses. Since the crisis began, more disgruntled investors are voicing their concerns given the duration of this downturn and ongoing bad news about the world economy.
Amit: A high-quality adviser should maintain conviction and educate their clients about the most suitable strategies instead of pandering to a sensitive risk profile, which may not be sufficient to achieve their objectives over the required horizon. I have seen many advisers offering conservative asset allocations to appease their clients – only to forgo profitable opportunities in the market.
Would a doctor prescribe a pill to appease a patient whilst knowing that only surgery would resolve the medical condition? This also works the other way round when financially self-sufficient retirees hold excessive risk in their portfolio; we should be talking to them about target income-generation and capital preservation.
It is only natural for individuals to worry about their savings in this world of sensationalized media and the liberal sprinkling of words such as ‘crisis’ and ‘crash’. Some of my more financially-aware clients proactively contact me during a temporary downturn to ask about possible opportunities.
Asset prices tend to undershoot their real value during such times due to panic-selling, presenting immediate value opportunities to more astute investors. Examples of this were the first quarter of 2009, post-Lehmans, and the third quarter of 2011, following the U.S.-debt ceiling increase and EU/Greece crisis. Surprise, surprise… the world did not end on either occasion!
Howard: Since 2008, the application of hedge funds and alternative investments by financial advisers has changed. In some cases, these are being abandoned altogether due to fear. Are you bullish on the use of such investments?
Amit: This would require a whole new article! ‘Alternatives’ do have a significant role to play in the risk management of a portfolio. I would only select large and liquid funds in which the fund directors are investing their own money to ensure their incentives are aligned with the investor.
A relatively transparent strategy is preferable with performance-related fees instead of hidden management fees. Our role is to study the options this space and have a more detailed discussion with our clients regarding the potential risks and returns.
Please email [email protected] if you would like to discuss your attitude to risk and return or any other aspect of financial planning.
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