We usually read articles in the newspapers that indicate how an investor should select his or her financial adviser. The usual tips given are the adviser should be qualified, should be from a trustworthy reference, should sell solutions and not products, should diversify their investments, etc. These are without doubt essential qualities of an adviser and investors should be careful on whose advise they take to invest their money prudently and wisely.
Good financial advisers with all the qualities mentioned above start talking of high return when they talk to their customers. When an adviser points out that in a particular investment the returns will be high, innocent lay persons fall for the bait and put their money in risky investments even though they themselves do not have a risk appetite for high risk investments. The question is, is this good financial advising?
A Good Financial Adviser
In the newspaper Mint dated 22 August 2019, in the Personal Finance section, Jitendra Chawal in an article explores this question and he has a rather interesting point of view. He says that a good adviser is one who does the following:
- Offer simple, easy to understand solutions
- Is reasonable about the return expectation in the future period of time
- Is cautious and prudent on future return expectations
- Talks of risks in investing and not only returns
Mr. Chawal makes the point that good advisers are like teachers and coaches to their clients. They should educate their clients about risks in investments, in a manner that clients relate to it.
This is exactly the message in this Blog. Happy that there are sensible financial advisers, making sensible statements for the layman. Investments with high risks are too complicated for the layperson. The layperson does not understand the implications of risk on his or her investments. The layperson also does not have the time to study investments and markets on a regular daily basis.
It is our job as life insurance sales persons to explain risks in investments to our customers. Financial advisors who sell on the basis of return and do not adequately discuss risks with their customers are committing a fraud on unsuspecting individuals. In the field of risky investments discussing risks is more important than discussing returns. Because risks are certain, returns are uncertain.