What's the role of advisor in financial planning?

Investing requires not just analysis but stable approach and unwavering mind. One may be able achieve success but if one were to accomplish consistency one needs more than luck. Also, to remain unaffected by the emotions, a good advisor could play an important role in an individual's investment journey. Not always that the advisor knows all the things that are unfolding or would unfold but he/she would provide a third-person's view to your perspective which reduces the emotional reactions to the market gyrations.

While the markets continue to behave in their own ways, the journey of the participants is not always aligned to the market conditions. It could be because the investors' exposure to the market might be different from that of the growth areas of the market and the timeline considered for the comparison might not be appropriate. Overall, each investor has and will have a journey most unique to them in the ways they approach the risk, expose the risk and tolerate the risk.

It's thus imperative to conclude that the investment returns depend upon the investor and just the markets as such. So, the biggest contributor of returns on the investment is not how the markets behaved but how the investors responded to the market's behaviour. One has to look at two simple questions: Can one control what is happening in the market and can one control how to react to what is happening in the market? The answer to the first question is a 'No' and for the latter is a 'Yes'.

An advisor could play a critical role in normalising the emotions exhibited by the investors. In simple terms an advisor would act as a speed bump in the train of thoughts experienced by the investors. Every investor undergoes capricious moments or emotions due to the market volatility; an advisor would help pause the train of thoughts even for a few seconds, which allows the investor to regain rationality. It's thus helpful to have a good advisor for every investor.

Another important role an advisor would bring on to the investor's table is to give a bird's eye-view on the plan. Each time either due to the reaction towards markets or trying to grab an opportunity, investors could make decisions from their standpoint. An advisor would place the move or decision in the entirety of the plan or goals so that the decisions taken are in-line with the risk appetite and timelines.

Of course, on the advisor front credibility is a key to establish and build the relationship. Without trust it's difficult to gain credence to the advice or execute the recommendations. While industry complaint certifications and qualifications might help establish the initial understanding, the openness and transparency between the investor and advisor only would help build the relation in the long run.

The role of advisor is enhanced with the financial or goal planning. This helps for the investor to list out their aspirations and for the advisor to derive the big picture. The experience of the advisor also helps in tinkering with the goal setting or making it more realistic while also assess the accurate risk tolerance.

The culmination of the above two steps is in the construction of the portfolio. A portfolio should reflect the goals, timelines and most importantly risk appetite of the individual. This allows not only in achieving the set goals but create a pleasant investing experience which is even more important.

As a reactive measure, an advisor at times would resort to portfolio rebalancing. This could be reflective of the changing market dynamics or even of the changing needs of the individuals. Some of these are planned as some of the goals are neared or achieved. This also brings varied performance at various times within different parts of the portfolio. Mostly this is done to ensure the portfolio stays within the risk profile of the investors.

As Jason Zweig said, 'investing isn't about beating others at their game, it's about controlling yourself at your own game'. It's, hence, ideal to have an advisor or mentor to guide/counsel you in investing as a qualified person could evaluate the decisions at these times from a rational view than an emotional perspective. Also, he/she could form a speed-bump in your train of thoughts at these volatile times to make more judicious decisions.

(The author is a co-founder of Wealocty, a wealth management firm and could be reached at [email protected])