Who Is To Blame? Investor Or Financial Advisor?

by David Opoku
 

When financial plans fail to achieve the financial objectives aimed at, there is normally a lot of blame-laying. Indeed some advisors even get fired along the way. But let us be brutally honest with each other. Who is to blame? The investor or the financial advisor?
 
It is very difficult to answer this question due to the complexity of the financial planning process. I feel strongly that a general answer will be invalid, and that it is sensible to take each individual case in isolation, as a result of disparity in circumstances.
 
Let us have a close look at the question by considering the financial planning process in detail. Perhaps it will shed some light on who might go wayward in role play. It is usual for the financial planning process to start with a lot of questions pounded by the advisor to try to get to know his/her client. The idea is a step in the right direction, but can there be anything wrong with the process itself? I believe you got this answer right; it is a ‘yes’. A number of things can go wrong during this 'interviewing' stage.
 
Done professionally, the financial advisor is to do only about 20% of the talking, and permit the client to use the remaining 80% to hopefully, pour his heart out. The figures are based on what is known as the ‘Pareto Rule’ in sales; I wouldn’t want to digress into that now, though. What I am saying, in effect, is that the advisor should listen attentively most of the time, and allow the client to do most of the talking. It is entirely the wrong time to be thinking about what types of services or products will be suitable for the investor. Rather, a close attention should be paid to the subtext as well as the body language of the investor, and endeavour to take note of any salient clues. It must be remembered that only about 7% of communication occurs in speech! Success at this stage also depends very much on the range of questions that are asked and how relevant they are.
 
The investor has a major part to play here. He/She must embrace the fact that financial planning is a two way process and does fail when the effort gets one-sided. The respective roles are not any different from those of a doctor and a patient, with the investor taking the latter role. The investor is supposed to be as open and frank as possible when answering questions. If done properly, some of the questions will come off as prying into one’s private life, but the hard truth is that they must be correctly and joyously answered, if one is striving for success in investment. Remember the doctor can only be chanced to issue a sterling prescription, with the full support of the patient during the ‘diagnosis’ stage. The advisor cannot work the magic if he does not get to know his client very well.
 
A lot of issues, including age, risk tolerance, family matters, purpose for money, financial objectives, income, amounts owed, existing assets, life expectancy, retirement age, and so on have to be touched on in the ‘interview’. The element that takes most time and skill to ascertain is the ‘risk tolerance level’. It is also normally quite difficult for investors to tell the difference between 'purposes' for their money, and their financial goals.
 
The ‘purpose’ for money is the broad context into which the goals fit. An example might help to clarify this. Somebody might have a purpose of achieving a very comfortable retirement period. Into this general idea one can have financial objectives (normally quantified) of having say access to £5 million to provide an income of say £50,000 a year, to help maintain the lifestyle he/she is living now.
 
All things being equal, a financial plan is drawn, and then put into action. At this stage both parties have a role to play. It is important that the investor trusts and maintain enough faith in the advisor and the plan, so as to stick to the latter, irrespective of fluctuations in stock market. The role of the advisor here will be to stay as close as possible throughout the period of implementation, carrying out relevant reviews and adjustments in the plan when changes in the stock market warrant. It also beneficial if the advisor is there to calm the fears of the client especially during ‘bears’ (when prices fall) and avoid greed, on the part of the investor during ‘bulls’ (when prices rise). This will be a step in the right direction to encourage the client to stick to the financial plan, and hence assuming it is a powerful one, raise the likelihood of achieving the financial objectives.
 
I hope you have decided by now that it is perhaps not easy or right to point fingers when a financial plan does not achieve its purpose. There are so many factors to consider, and at each stage in the process of planning and execution, either parties can excel or under-perform. My advice is: keep your hands in your pockets, and you will be saved the trouble of pointing your finger at the wrong person.
 

About the Author

BA Hons. in Accounting and Finance. I am currently specialising in Financial Advising/Stockbroking in Edward Jones Ltd.
E-mail: davido312@aol.com
Web address: http://www.investmentyouneed.com
 

Related Articles

• Don't Be A Stock Scam Victim