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Is Your Financial Advisor A Guardian? - Outside View by PersonalFN

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Is Your Financial Advisor A Guardian?
Dec 28, 2015

"Invest in ABC Ltd", said Mr Stockbroker, who runs a financial services boutique firm at Nariman Point, a financial services hub in Mumbai. "Mujhe news mila hain ki ABC Ltd. ke share prices badhne wale hain. Abhi time hain market mein invest karne keliye, teji chalu hain" pitched Mr Stockbroker (The share prices of ABC Ltd are going to rise and this is the right time to invest in the amid the Bull market phase)

How many times have we heard these words, where a stockbroker has lured you, an investor, to invest in the stock markets with a promise of stupendous gains? And, if the stockbroker is a close friend, relative, accountant etc. such tips are trusted even more and often perceived to be reliable.

Much to our misfortune, most of us follow through on these statements; we view the stock markets as a place that can give us quick returns. We believe that the only way we can make a "killing" in the stock market is by "timing the market correctly". Succeeding leads us to crave for more; and if we fail, then we invest more to make good the loss.

Have you considered the harm you may be causing your long-term financial wellbeing by indulging in trading of this sorts or gambling? The similarities are appalling-both are speculative in nature, and gullible investors fall for the thrill of it, believing they can get rich quick. The fact is you cannot create wealth by doing either, although there are many out there who attempt to. Remember, a trader or a gambler is only good until his last trade/bet.

Today, our brain is programmed to consider trading in the stock markets as an acceptable norm amid the exuberance of an urban life vis-a-vis gambling, which is still considered a taboo. The information overload has left many investors mystified, bamboozled, and directionless, perhaps even forgotten the basic tenets of investing.

Proponents of Behavioural Finance (the study of the influence of psychology on the financial decisions we take in life and the subsequent effects on our financial wellbeing) mention that, four important emotional areas are triggered when it comes to stock market trading:

  • Greed: Greed is one of the strongest emotional desires. It drives an individual to acquire as much wealth as possible in the shortest possible time from every channel available.
  • Herd Mentality: Individuals find solace in a group. We tend to follow what is the common, socially-acceptable outlook towards money and seldom question its prudence on account of the fear of being ostracised.
  • Faith: Have you ever wondered why professionals suit-up for a meeting or an interview? Well, it's being said that many investors evince faith in well-dressed professional as against those who approach with modesty. ("Clothes make the man"-Erasmus) But as they say, "looks are deceptive" so, use sound discernment before you hire a financial advisor.
  • Emotions: Emotions play an important role in influencing our financial decisions, causing us to behave in an unpredictable or irrational way. Even at the stock markets, we tend to invest more and more when the markets are on a high and hold on to our investments when the markets are falling (as we believe they will rebound). Quoting Mr Warren Buffett, you should "be fearful when others are greedy and greedy when others are fearful".

Behavioural Finance studies suggest that the important traits of successful individuals are self-discipline, will power, strength of character, and delayed gratification.

The purpose of seeking advice from an experienced financial advisor is to receive intelligent, prudent advice that can help achieve their investment objectives / financial goals by clocking an optimal rate of return. Every investor would weigh the cost-to-benefit ratio of having a financial advisor. In the financial advisory space, we call this the value of advice', and it need not always be monetary.

Amid the mis-selling practice in the financial services industry, what investors are looking for is an advisor who can serve as a 'Financial Guardian'. One who can understand their clients' outlook towards money, and guide them in a manner that helps them achieve their financial goals, keeping their best interest in mind.

If financial advisors act as 'Financial Guardians', with ethics as their compass and handle the hard-earned money of investors with enough care, prudence, sense of responsibility, and intelligence, they can earn the trust, respect, and loyalty of several investors.

Do you believe that your financial advisor adopts high fiduciary standards and keeps your goals in mind? Do share any experiences (positive or negative) you have had with us, as it could benefit fellow readers. It would fuel our editorial team to bring you other in-depth, relevant perspectives. As they say: "each one help one".

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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