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Wednesday, June 11, 2008

The Role of a Financial Adviser on Your Investment Portfolio

What should be the role of a Financial Advisier on your investment portfolio? The below is extracted from an article from the Business Times titled "Portfolio strategy and your adviser".

A good adviser strikes a balance between making tactical changes and cautioning clients about acting on emotions


A REFERRED client recently consulted me regarding his investment portfolio. After the introductions, he quickly settled down and poured out his woes to me. Listening to him, I began to understand his anxiety and why he urgently needed help.

His story goes like this. In late 2007, he was concerned that there were many signs that pointed to a slowdown in the world economy in 2008. He told his financial adviser he wanted to restructure his investment portfolio into a more conservative one but the adviser resisted his suggestions. By not doing anything, his portfolio has suffered losses. He wondered if he should stick with an adviser who seemed only to adopt a buy-and-hold formula. This client felt that his portfolio should be actively managed and advice given regularly to help him navigate dynamic market conditions.

But this thought went through my mind: If the client had the expertise to predict future market performance, why did he need an adviser in the first place? I told him that looking at the facts, I didn't think the adviser had done anything wrong.

He was stunned by my reply. In fact, I added, I would be more suspicious of advisers eager to sell or switch investments. After all, making more buy and sell recommendations could generate additional commissions, or at least make it appear that the adviser is on top of the situation.

Was the adviser wrong in doing nothing? In my opinion, the fact that your adviser doesn't agree with your suggestion to move into more conservative investments does not mean that he is lazy or incompetent. In fact, quite the opposite. If you were going into 2008 with a diversified portfolio that is in line with your risk appetite then it seems reasonable that an adviser would caution you against making any big changes.

That's not to say that an adviser should not re-evaluate a strategy in light of market conditions, or even make changes. But I believe a good adviser must strike a balance between making tactical changes to the client's portfolio and cautioning clients about acting on their emotions.

I reminded my client that we can only accurately assess a situation with the benefit of hindsight. Hardly anyone could have predicted that the stockmarket would crash in 1987 or that dotcom stocks would melt down in 2000 or that a financial crisis was looming in 1997 or that property would peak in 2007.

I do not believe that restructuring a portfolio just because the client feels that next year is going to be bad is the right course of action because it is almost impossible to identify accurately which part of the portfolio will be adversely affected.

It is unrealistic to expect the financial adviser to predict the market. Even if he was right one time, he would not be able to do it consistently. Think what a client would feel if an adviser did warn of an impending downturn and moved him into more conservative investments only to be wrong.

Since it is unrealistic to always invest at the right moment, what should investors do? You should ask yourself these questions. Why are you investing? Is it for income, growth or for speculative reasons? In order to structure an appropriate investment portfolio and expect a reasonable return, you need to have a clear set of investment objectives.

As such, your adviser should be exploring your goals with you. He should also understand how much risk you're willing to accept in order to reach your goals. He must also explain how you should react to market downturns along the way. If you haven't had such a conversation with your adviser and if he does not contact you periodically to evaluate your situation, then I don't see how he can give you reasonable advice.

Once your adviser understands your goals and risk tolerance, he can put in place an investment strategy. The common foundation for such a strategy should be a diversified investment portfolio that includes a variety of different stocks, bonds or unit trusts.

While the adviser cannot guarantee performance, he should be able to advise you on how that portfolio might perform over the long run. At the very least, he should tell you how the portfolio has performed in good and bad markets in the past by explaining to you the range of returns given the level of risk you are exposed to.

In real life, no strategy is going to go exactly according to plan. Hence, your adviser should be providing periodic reports, perhaps every quarter or even every six months. He should also show you how you're doing in relation to an appropriate benchmark. If your portfolio's performance is not up to expectation, then your adviser should explain why this has happened and discuss whether any re-balancing is required.

A good adviser knows that markets are volatile and that this will naturally upset many investors. So aside from periodic updates, an adviser should make an extra effort to keep in contact with clients during volatile periods.

At such times, it is not enough for an adviser to say: 'Keep holding on and all will be well.' A good adviser should be willing to go over the investment strategy again to make sure that it is still appropriate for your situation. He must also explain why the strategy still applies even if your portfolio is currently suffering a paper loss.

If the adviser discovers that your financial situation has changed or it turns out you have over-estimated the level of risk you can accept, then it make sense to fine-tune your portfolio. However, if you're constantly making changes to your portfolio, then the adviser probably doesn't have a real strategy for you.

I don't think any client would expect his adviser to have a crystal ball. What clients probably do expect is someone to manage his portfolio and at least call him when the market goes down to either reassure him, or rebalance the portfolio so that the client knows his advisor is alert and responsible.

I have heard the advice that if an individual does nothing else but diversify his portfolio, he will be protected from market downturns. Many were encouraged to invest in late 1995/6 by their advisers, in the name of diversification, and then were told to 'hold for the long term' while they watched the Asian markets turn negative for three years in a row. Remember, a well-diversified portfolio will not earn you superior returns, but that is not what investors should be seeking. Nobody can be sure where the markets will head in the short term. So the whole strategy is to re-assess your portfolio from time to time and keep your investments in check. Otherwise, diversification alone will be a dangerous strategy.

If you want to take big risks and try to time the market (something very few people can do), don't expect your adviser to make those decisions for you; you'll have to decide on your own. The latest Dalbar studies show that over the 20-year period ended December 2007 the S&P 500 has gained 11.8 per cent a year while the average equity investor would have earned an annualised return of just 4.48 per cent. Why is this so? I believe it's because many investors think they can predict the future. If you don't have a crystal ball, that 11.8 per cent doesn't sound too bad, does it? Ultimately, when looking for a good adviser, you need to find someone you can trust, who will educate you, set up a proper asset allocation strategy and invest in assets that make sense to you. Be disciplined and consider adopting a regular contribution investment strategy like dollar cost averaging and evaluate the strategy periodically. Having considered all the points here, decide whether your adviser meets your expectations. But if you want to replace your financial adviser because he cannot predict the future, then I wish you all the best in your search for a replacement.

Ben Fok is chief executive officer, Grandtag Financial Consultancy (Singapore) Pte Ltd. He can be reached at:

Portfolio strategy and your adviser,4582,283111,00.html


  1. With respect I have some concerns with the analysis.
    I'm curious what was eventually done for this person in need of urgent help.
    I too felt the stock market wobbles in late 2007 and as an ex. trader I exited the market because I did not understand what was going on.
    It is not unreasonable for someone to expect his funds to be actively managed to protect his capital. I know several financial planners that do this.
    The client did not state he had the expertise to predict market performance, he only expressed a concern and was looking for reassurance or some action on the part of his financial planner to protect his portfolio.
    I too am stunned by the reply. If his financial planner had taken similar action to what I did he would not have suffered the losses he did, and the cost of the transactions to do it would be far less than the losses.
    The use of stop losses, reverse index funds or puts in times of market volatility might have been used to protect this persons money and satisfy his concerns - and keep him as a client.
    Emotions are what alert us that something might be wrong. We need to accept them as warnings and then take appropriate action.
    It's not a matter of predicting the market so much as a matter of limiting potential losses if something does go wrong.
    May I say that exploring goals when you think a ten ton truck is coming at you just does not work.
    This persons risk tolerance was very low and would fully justify taking his money out of the market or putting in place some of the methods above to help protect the money in the markets.
    Getting a report six months later to tell him he has lost money he might have avoided losing is not what he would want to hear.
    I'm not sure there is anything wrong with an investment strategy that is to be out of the market during high volatility. It is still an investment strategy.
    It doesn't take a crystal ball to put in place defensive strategies to protect someones money.
    It is not a matter of timing the market. If you could have avoided a 40% loss on your nest egg in 2000 and then got into the market even mid to late 2003 when it was obvious to everyone the Bull was back you still would have made a decent return.
    The 20 years 1987 to 2007 was made up of a Bull market up to 1999 when the majority of the 11.8% return was made. From 2000 to 2007 the returns were approx 2.7%. Mutual Funds returned considerably less than the S&P 500 to unit holders too.
    I think I have answered my original question about what happened to the person. I assume he was sent on his way because the planner could not predict the future.
    Again with respect I find this all a little sad because there were many options open to help this person protect his money and make him a client.

    I apologize if I have offended anyone with my Comment, but I felt more could have been done for this person.

  2. Hi,

    Thanks for the reply.

    I think there's really no right or wrong in using a buy and hold strategy. History has shown if one has a long investment time horizon, equities will tend to end higher. It is impossible to go back to the olden days whereby horse carriages or richshaws become the mode of transport again. Human beings tend to want to "live" better.

    Buy and hold strategy is mostly being supported by financial advisers who believe time in the market is the key instead of market timing. As a trader yourself, it is of course also perfectly correct to study trends and exit when you feel something is not right. Of course I am not saying one should hold onto equities forever. Regular rebalancing of portfolio has to be reviewed so that it always matches to one's investment risk appetite.

    In this volatile uncertain market conditions, I think it is best to have a globally well diversified portfolio preferably in low cost Unit Trust funds. There should be a mixture of equities, bonds and commodities (factor in negative correlation). Strategy like dollar cost averaging can be used. I believe investment is now all the more most important in the present low interest rates and high inflation environment. Keep hard cash and it will be eroded further.

    BTW, I just visited your blog and thought it is pretty interesting and I shall visit it more often.



Do provide your constructive comment. I appreciate that.

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