Our clients: Our biggest challenge as well as our biggest strength.

The most prominent challenge faced by investment advisors in their practice is handling clients' emotions and their behavioral patterns. Advisors dilemma is, at times the clients' actions are regulated by their fear and impulse rather than your advice.

One major challenge faced by financial advisors is high customer expectations, especially in Returns context. Investors cannot imagine of a situation of loss on their investment, and when it happens they are devastated, and generally the fault is put on your shoulders.

When you recite Equity's potential to the client, supported by literature, graphs and tables; the client is actually seeing the bright side only and tends to visualize a replica of the successful examples in his/her case too. And when the flip side comes to play, it comes as a huge setback, and the client feels cheated.

Therefore, it is very important that the investor should be familiarized with the other side of the coin too, it is essential to attach disclaimers before he/she invests. The client, prior to investing, must know of the following:

• Not all funds are the same, the investor can get above average, average or even below average returns. There are no guarantees.
• Equity investments can be very risky if the investment horizon is short.

Once the investor is acquainted with the inherent nature of the investment, understands the risk attached, he/she will be more reasonable in their expectations from the advisor and the investment.

Another roadblock on the advisor's path is clients' lack of trust. The principles of sound advising lays delivering investment advice in alignment with the investors unique needs, goals, financial position, and risk profile. However, based on the above standard, the advisor quite often is unable to deliver quality advice, owing to the fact that this advice is based on half baked ingredients. Most times the picture we have in mind of the client's profile is distinct from reality. This happens because investors generally do not reveal complete data to their advisors for lack of faith. There are instances when investors ask advisors to devise a financial plan for them, without revealing an expected inflow of money from inheritance, or without mentioning about a second source of income, like a rental income, so in these cases the advisor underestimates the financial position of the client, and hence would advise accordingly.

Most advisors have to go through the trust trial, and the solution to this challenge lies in:

Realization: The investor must be made aware of the criticality of his personal and financial data in his financial plan and the repercussions that evasion of facts may have on his financial health. And, Confidence: The investor must be confident that his info will not be divulged. The advisor must practice and assure of utmost secrecy to the clients.

Gaining the trust of clients isn't a piece of pie, you need to put in efforts, you need to give some time and space to the client, and your words and actions must coincide.

And lastly, Response to Volatility, Investors' intense attachment to their money, pose a challenge for their financial advisors. Investors are scared of volatility, their hearts can skip a beat when markets are giddy. They at times commit investment sins in a state of panic, by basing their buy and sell decisions on market movements, and bothering their entire financial plan. And all we advisors can do is clinch our teeth, looking at the state of dismay.

The answer to the dilemma is the Equity story presented to the investor must include the volatile nature of the asset class and the ripples that the volatility can create on the investment in the short run. The idea is to keep the investor mentally prepared for any bumps that may come on the way, and refrain him from taking impulsive decisions. Also, the investor looks up to his advisor for support during turbulent markets, it's a crucial part of the advisory practice to handhold the investor, to prevent him from fumbling.

The bottomline is, client handling pose as the biggest challenge for most advisors. Clients become difficult because of their perceptions and behavioural patterns. However, Customer education, Awareness of Risk associated, and Confidence in their investment can turn your biggest challenge into your biggest strength.

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Often we come across articles and blogs talking about tips and strategies on how to become a successful financial advisor. Generally such literature touches upon subjects like personality traits, improvement of communication skills, sales skills, client management, time management, expansion of product basket, getting certifications, etc. All of these, undoubtedly are at the core of financial advisory practice, however, there's one factor which remains at the center of all of the above, which largely directs the growth of the advisor, and that is, his/her clients' well being. There is a direct correlation between the Investor's prosperity and the success of the financial advisor.

So, this article concentrates on the crucial aspect of “Keeping your client at the center”. So how do you go about working in the best interest of your client to grow your business? The answer to this is simple, “It's not about your business”, This can be construed as the sole Golden Rule of Advising. Although, it is not at all wrong to think about your profits and growth, after all you are doing a business, putting in immense efforts for your advancement. However, when your business is financial advisory, your growth is a bi-product of your client's prosperity. When you are suggesting an investment to an investor, always apply the doctrine of substitution, think of it as your own investment, if you would have been in a similar situation as your client, had a similar investment horizon and goal for investing, Would you invest in the product? If yes, then only go ahead with suggesting the same to your client.

| Concentrate on what the

| client needs and not

| what you think they want

Concentrate on what the client needs and not what you think they want: Many times there is a disconnect between clients' wants and our perception of what they want. We tend to anchor on our time tested methodologies and advise our clients accordingly, but what we do not realize at times is there are no uniform investment rules, because investors prioritize their wealth creation and risk minimization needs differently. We may be fabricating our advise trying to get optimum returns for the client while keeping the risk low, considering the client's age and income demographics, however for the client wealth creation may be paramount, he may be comfortable with a certain degree of extra risk for some extra wealth. Hence, we must deal with each client with an open mind, understand his specific needs, as there is no “general” in financial advising. However, we must call for his attention if he is going either overboard or is being over conservative in assuming risk.

| Regaining the

| trust of people

| at large

Regaining the trust of people at large: Many people are possessed by a negative notion about financial planners and advisors, because of the large number of mis-selling instances happening in the country. For this reason, you may encounter people who are unable to trust you, at least initially. Breaking the notion and regaining the trust of people is a challenging task, which can only be achieved by working in the best interests of clients, and creating wealth for them. So every new client is a new opportunity to regain that trust, and strengthen the image of the overall advisor fraternity.

When the client creates wealth, and that's because of you, your business gets a chance to grow since firstly, your trail income is based on the investment value of the client; as the client's investment increases in value, your income increases. Secondly, when the client recognizes your genuineness, when they see the efforts you put for their benefit, you have won their trust, and a client for a lifetime. And lastly, the happy clients are likely refer you to their friends and acquaintances, and the best part is you do not have to work all the way from the beginning, regaining the lost trust in advisors, you have a base built, a reference attached.

At the end, working for clients' well being may not reap immediate benefits, you may have to forego your gains at times in quest to get the best for your clients. And although it may be tempting to sell, especially when you are new in the business, yet working in the best interest of the client is surely the right thing to do, and will pay off eventually.

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Since the announcement of LTCG tax on Equity, the markets have not quite settled, and so the investors. You must have been pestered with questions by now, “Do I have to pay a tax on my Investment now?” “You said I'll get tax free Returns?” “Should I sell my investment, so that I don't have to pay any tax?”, and the like. The minds are blocked by perceptions because every newspaper and TV channel has a different story to narrate, which is also the primary factor behind the hype.

How do you answer the questions, and explain the impact of the announcement on the investor's investment is the major challenge at this point of time. It is crucial to give a satisfactory response and demystify the investor' apprehensions,

What's the New Law

Long Term Capital Gains (Investment period > 1 year) of above Rs 1 Lakh from Equity stocks and Equity Mutual Funds, will now be taxed at 10%, which was fully exempt earlier. However, the gains made until 31^st Jan 2018 will be grandfathered, meaning the capital gains made on the investment until 31^st Jan 2018 will be exempt.

Tax Calculation: Amongst the most asked questions by clients at this point, is the tax calculation part. How will the grandfathering work? How much tax will be due on existing equity investments? How about new investments?, etc.

We have the following illustration, which shows the LTCG tax impact on an investment made in an Equity Mutual Fund on different dates, this will help you in solving a lot of queries:

Assumptions:

Investment Value on 31^st Jan 2018 (Grandfathering Date): Rs 5 Lakhs

Redemption Date: 1^st May 2019; Value on Redemption Date: Rs 620,000

So, the above table shows that investors do not have to worry about the gains they have made historically, since all gains made prior to 31^st Jan 2018 are tax free. As we see in the table above, in the first case, on a total gain of Rs 210,000 made over 2 years, the tax liability comes to just Rs 2,000. Also, long term capital gains made after the grandfathering date, upto Rs. 1 lakh, will be exempt.

Focus should be on the Goal: Further, it's not just about tax, the investors must realize that they invested in Equity Mutual Funds with a goal in mind. If they are being skeptical about their investment, ask them if they have fulfilled the goal, if not, how do they plan to provide for the goal? Urge your investors to not go astray. If their goals are still far way, they don't need to worry about tax, rather they should stick to their investments.

Another stance of volatility: You might have nervous investors, especially the ones who may have lately started an SIP, they might not be able to digest the falling NAV's for they aren't yet accustomed to the ups and downs of the market. These investors must be reminded of the inherent volatile nature of Equity markets, you have more than a three decade history packed with instances where markets have dwindled to some news or the other, like this time it's LTCG tax, but it was only a temporary phase, because in all the cases, the markets regained, without fail.

Handholding: The investors need your support at this point of time, if their doubts remain unresolved, they might end up exiting equity and succumb to products which may not conform to their risk profile and investment needs. You lose a client and they might lose a good investment.

To conclude, the cause of the confusion and panic can be largely attributed to lack of clarity. The investors are not likely to go anywhere just for a 10% tax on returns, because there is no other asset class or investment product which can still match Equity, in terms of returns. However, it's important that the investors should not be left to themselves wondering about the connotations of the new tax, they should be explained the impact of the tax with concrete examples, plus they should be reminded of the rudiments, the reason behind investing is not tax saving, but creating wealth and fulfilling goals.

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One of the most vital roles played by financial advisors is managing behavioural biases of their clients, who are stuck between timing the market, following the herd, chasing returns, among others; thus creating substantial value over time. There is a plethora of literature available on behavioural bias affecting investment decisions and how to overcome the bias, but most of this information caters to one side of the story only, the Investor side. Apparently financial advisors too are victims of the paradigm, but seldom would they realize that the advice they deliver may also be clouted by their emotions or behavioural bias. The investors are better off as you are there to help them overcome their bias, but in case of advisors, the challenge is, it's only you who can help yourself. Hence, for an advisor keeping a check on your own emotions along with the clients', becomes paramount.

And a super way of overcoming such biases is to be aware of them, as the first step to solving a problem is understanding it. So, here are some emotional prejudices which may be dominating your judgment and decisions, needed to be taken care of.

Heuristics: Heuristics typically means applying mental shortcuts, that is processing only a part of the information received or processing the information incorrectly, when there is inflow of a large amount of data. Financial advisors too at times apply heuristics by processing partial or incorrect information while advising clients. Say for instance, the client under consideration is a young unmarried person, we may assume he has a high risk appetite, which may not be the case, and base our advice on the basis of our subjectivity. An advisor must never have a presumed background, each investor is different, we should always draw the sketch on a plain white canvas.

Industry Trend Bias: Another phenomenon that impacts advisors' judgment and the advice they deliver is market trends. Like other individuals, advisors too tend to believe that the market trend will continue. For Example, when markets are on the bull run, advisors believe that the upsurge will continue for a while and base their advice on this belief. The irony is they understand the fact that the direction of the markets cannot be predicted, yet they get influenced by trends. Even if it is highly likely that the bull trend will continue, yet it's wrong to base your decision on the likeliness. You never know the markets might start correcting from the next day. Take the example of the recent bit-coin rally and the subsequent downturn, when the coin was taking giant leaps and surged to US$15,000 levels, people started believing the trend will continue for at least some time, until the coin's pace was thwarted and it changed course.

Familiarity Bias: Another cognitive bias often seen in advisors is tendency to prefer familiar, tried and tested products. Real Estate or Gold can be a good example of the Familiarity Bias. Because people were familiar with these asset classes, they did not look beyond them, and both sectors witnessed sluggish growth over the last decade.

Familiarity Bias in advisors has two drawbacks:

1. Lack of proper diversification in the client's Portfolio. Your preference for let's say equity, will result in over concentration of Equity in the client's Portfolio.

2. Unable to meet specific needs. The investor who is looking to invest in a product, which isn't your forte, may not get the solution from your end.

Anchoring: Anchoring is one of the most common behavioral bias, witnessed in both, advisors as well as investors. Anchoring means when we consider our past experience as a foundation to base our future decisions on. And it is very difficult to modify our perceptions of products based on our first experience. We may have had a pleasant experience with a particular sector in the past, and there are chances we may have anchored the episode to the extent that all our clients have that particular sector in their Portfolios, irrespective of it's relevance in the Portfolio.

So these were some of the most common behavioural biases, among others, witnessed in financial advisors. The crux is it's not just our investors who are not letting go their emotions and biases while investment decision making, quite often we advisors might also be influencing our clients' portfolios with our emotional biases. It is extremely important for advisors to understand these biases and get over them, and deliver fair advice, which is unaffected by judgments or prejudices. It is a continuous task to guard yourself and them against bias.

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