The right questions to ask your wealth manager

Investment Advisors and wealth managers play a critical role in the investment ecosystem. Apart from experience and knowledge, they also go through qualification tests to become one. They are continuously trained by product providers, always interact with experts in their industries, and are in constant touch with the developments in financial markets.

Average investors, who do not have attitude, aptitude, or time for managing their investment, will be better off taking investment advisors’ help to achieve their financial goals.

Once you have decided to engage with an investment advisor, what are the critical discussions and questions one should ask?

Discuss asset allocation: Asset Allocation means allocating your investible amount among different investment categories like equity, fixed income, gold, cash, real estate or any other asset class.

Most investment experts have concluded that asset allocation explains most of the returns. Asset Allocation is also a very critical aspect from even a risk management perspective. It is generally observed that specific funds or products end up taking the lion’s share of discussion time while discussing asset allocation is done in a very abrupt or cursory manner.

An investor should ensure that an investment advisor’s expertise is used maximum for asset allocation based on your personal goals instead of the performance of specific funds/stocks in the portfolio.

Discuss diversification: Investors generally understand that more number of mutual funds means more diversification. This understanding is far from the truth.

Generally, many equity funds are not good as they provide little diversification during periods of stress. Diversification happens when investors hold multiple asset classes in the portfolios. Investors must ask advisors the right questions on diversification and correlation.

What about global diversification? Most of the investors have traditionally invested in Indian equity market only. Even though people know about the companies like Google (Alphabet), Facebook, Microsoft, Amazon, or Apple, They have never considered exposure in international equity due to lack of simple funds available which can give such exposure. Now there are many funds available through which one can invest in global markets to get true diversification.

Are costs of the investment portfolio reasonable? Investors should ask questions on expenses (direct and indirect) of holding stocks and mutual funds over long periods. Generally - there is nothing wrong with holding high costs funds. Knowing why they are being held is necessary for the investor. Investors holding funds for 10-20 years+ should account for the compounding impact of costs.

What is the rebalancing criteria? Portfolio rebalancing ensures effective risk management for the investor. It also ensures investors are buying low and selling high. There seems to be no consensus on the best rebalancing method in the industry. However - it’s important for the investor to understand the advisor’s rebalancing process and ensure that the advisor follows this with discipline. Disciplined rebalancing is key for a stable and successful investment portfolio.

Are you owning too many funds? Investors should not hold too many stocks and mutual funds in the portfolio and therefore discuss and question their advisor if he/she is recommending too many funds. Too many funds lead to over-exposure on a small number of stocks, leading to considerable overlap in funds. At times - too many funds lead to the portfolio mirroring an index.

Discuss the compensation for investment advisor upfront: It is generally believed that investors who pay a fee and get good advice tend to fare better than investors who invest directly. It’s important to know that the most successful investors are not ones who invest well but can manage their behavior well. Good quality advisors ensure investors stay invested and prevent poor quality decision-making (which generally leads to long-term wealth destruction).

In conclusion, most wealth manager relationships tend to be focused on products and returns. However, focus on asset allocation, risk and behavior are equally important (if not more) for long-time investors.