‘Positive brainwashing works’

The typical retail investor rushes into equity funds in bull markets and abandons them when the tide turns. This is the main reason for the poor return experience that many investors have with equity investing. But how can an advisor change this behaviour and ensure that clients make money? D Muthukrishnan of Wise Wealth Advisors swears by what he calls ‘positive brainwashing’ to help his clients avoid bad decisions. Managing portfolios on behalf of 174 families who have over 1,100 individual systematic investment plans (SIPs) running, Muthu says that the key tool which he uses is frequent communication.

“Conviction is contagious. When you recommend to your clients what you yourself do, it works. I use every possible medium of communication to positively reinforce the need to be long-term,” says Muthu. That means emailing daily quotes from investment greats, such as Peter Lynch and Warren Buffet, writing a weekly blog and reaching out to reassure investors during every market blip. Muthu and his colleague Parthasarathy also meticulously track the 1,100-odd SIP accounts every month, to ensure that the cheques are going out like clockwork. Clients who miss payments are immediately chided to stick with their plan. “You won’t believe how well a simple call works. We have managed to keep the lapse rate on our clients’ SIPs at less than 1 per cent, while a third of the SIPs in the industry stop within a year,” says Muthu. “If you don’t churn portfolios, you have a lot of time to devote attention to clients.”

He is particular about the kind of clients he takes on. He only accepts those with a minimum 10-year horizon. This meant quite a struggle initially. During his first three years as a financial advisor (Muthu quit a BPO job at 34 to take up a full-time career in financial advice), the raging bull market of 2006-07 was on. He remembers one high net worth investor, who invested ₹Rs 30 lakh in an Energy Fund in 2006-07. “I tried to dissuade him but he wouldn’t listen. He made the investment. Two years later, the NAV fell to ₹6. He sent me a cheque, admitting that I had given him good advice.”

Nor does he take on clients who lack discipline. “If someone has a lot of EMIs or revolving credit, I ask them to go back and get their finances in order first,” he says. The investors who signed up for SIPs in 2006-07 have managed a 17-20 per cent CAGR and are now votaries of long-term investing.

To create wealth, selecting the ‘best funds’ and frequently changing the portfolio are unimportant, says Muthu. “Generally, advisors tell investors that they can create alpha by selecting the best funds for them. But fund selection is not as important as it is made out to be.” Given that his advice is simple, will he lose out to direct plans? Muthu is quite sure that Direct Plans will disrupt traditional distribution models, and is prepared to take a cut in fees.

He thinks AMCs need to reduce the cost differential between Direct Plans and regular ones. “I think a differential of 0.50 per cent or so between the two will be accepted by investors, but not 0.75 or 1 per cent.”

Only allocation matters

Getting a client’s asset allocation right is the key to investing success, believes Rajaraman K of RRK Advisory. In contrast to many advisors in the market, Rajaraman focuses more on asset allocation than on product advice.

Ninety nine per cent of Rajaraman’s clients, mostly NRIs, give him their entire financial profile to work with — their financial goals, cash flows, spending habits. Based on these, he builds an asset allocation plan. He handles the finances of about 300 families with ₹150 crore in AUM.

How does he approach asset allocation? Does he use the 100-minus-age rule? Not at all, says Rajaraman.

“I look at financial goals and risk tolerance rather than age.” With new investors he has this handy thumb rule.

“Usually, I allocate two-thirds of the investor’s portfolio to the home country and one-third to India. Within that, again I allocate two-third to equities and the rest to debt. Within the two-third equity, I may allocate two-third to large-caps and the rest to mid-caps,” he explains.

This mantra has worked out really well, because upheavals in one country or one asset don’t really hurt the clients’ portfolio.

Besides this, the goal matters too. If a goal is coming up within the next five years, he keeps off equities. He has his own test to assess risk tolerance and keeps a hawk-like watch on new clients. “I actively make note of how many times a client calls me in bear markets. That tells me a lot about his risk tolerance,” he says.

What if clients act against his advice? He says. “It is the clients’ money and I have to respect that. Let’s say, a client is trying to sell his equity funds at the wrong time. I usually convince them to sell half the intended amount. But I don’t argue if a client feels very strongly about a decision. Once you have the allocation right, there’s not much that a single decision can impact a portfolio.”

With a lean operation, Rajaraman swears he cannot survive without technology. He thinks the advent of direct-only platforms and robo advisories will cause disruptions.

“Ten years ago, we all paid big commissions to book train or airline tickets. But those businesses have gone out entirely. It is time for IFAs to go through a similar disruption.”

One area where he scores is on providing qualitative advice and not selecting funds.

“No one can predict fund performance. To look at the past record and predict that this will continue, is like looking at a car racing on the road and saying you can predict where it is going!”

And then, some clients don’t just ask for portfolio advice but for life advice too. “They consult me on sensitive matters like having a second child, or quitting a career for studies” That’s surely something no robo advisor would be able to do!

The return isn’t that important, time is

A very successful advisor in North India, Ashish Modani of Jaipur believes that it is just two tenets that have helped his clients create wealth — simplicity and discipline.

“I have found that you can have short-term success at investing, but to really create wealth, you need only one thing — discipline. Today, with all the Flipkarts and Jabongs, Young India is all about spending money. If you don’t automate their savings, investing becomes impossible. SIPs ensure this,” he asserts.

Ashish started out as a financial distributor in 2004 and now has over 3,500 families doing over 6,000 SIPs through his firm. He doesn’t offer SIPs as ‘one of the options’ to his clients; it is the only option.

He believes that to call SIPs a retail product is a misnomer — wealthy clients need discipline in SIPs too. “If a patient comes to a doctor, whether it is Ambani or the man on the street, his diagnosis has to be the same. It’s the same with financial advice. I have clients with SIPs from a few hundred rupees to a few lakh a month,” he says.

How does he convince clients to stay on in falling markets? “Bear markets do create panic. But we need to remind investors of the purpose of their savings. Financial success is a roller-coaster ride and not a linear path.”

Ashish has a team of 14 people with him to help keep in touch with clients. Does he also advice his clients to change their portfolios based on fund performance? Not often, says Ashish.

“There are three factors in wealth creation — the principal, time and rate of return. Investors give too much importance to the R factor. But in my experience, it is N that is the most important — the time over which you invested. The moment you begin the search for the best funds, that’s when you invite sleepless nights,” he says.

What was his most memorable success? He remembers an investor called Kesarlal. Ashish once did a corporate training session; Kesarlal was a peon at that firm. He came forward and said – “ Sir, main bhi SIP karna chahta hoon.” But he could only spare ₹250 a month, while AMCs would only accept ₹500.  Ashish helped him get together with a friend, open a joint account and invest ₹500 through SIPs. He eventually made a lot of money. 

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