When Investors Are Intolerant Of Their Advisers’ Views

Let me clarify at the outset: I’m neither weighing in on the ‘intolerance debate’, nor do I have an opinion on what to do with awards :) Recently, I ran into an acquaintance who is an investment adviser. Expectedly, the conversation veered towards markets, clients and investment avenues. The gentleman had a rather peculiar complaint. He said “my clients engage me for investment advice, and I am paid a fee for the same; oddly, some of them simply expect me to reinforce their views”. To further complicate matters, his dissenting views were not only met with resistance, they even led to investment decisions being delayed.

This phenomenon is more common than one would imagine. Over the years, I have encountered several investors whose expectations from their investment advisers are no different. At the risk of hazarding a guess, perhaps such investors have an opinion on where to invest, and need advisers for validating their views. Conventional wisdom suggests that the adviser is an expert on investment-related matters; furthermore, he is engaged to help investors achieve their investment goals. Hence, it makes sense to be receptive to his views. 

I’m not suggesting that investors should blindly follow everything their adviser recommends. Not at all. I have always maintained that investors must actively participate in the investment process. An integral aspect of the same is to be informed and to thoroughly discuss the adviser's views and recommendations.  That said, expecting an adviser to simply reinforce the investor’s preconceived notions defeats the purpose of engaging an adviser. Investors and advisers who find themselves in such a scenario have much to mull over.

On their part, investors must evaluate if they are capable of handling investments on their own. If the answer is affirmative, then such investors are better off dissociating from their advisers.

Now for the more tricky one—investors who need investment advice, but are unwilling to accept any from their adviser. There is a need to assess why the relationship isn’t working. It could be a case of losing confidence in the adviser on account of failed recommendations, or perhaps the investor realising (with the benefit of hindsight) that his views on investing are not in sync with those of the adviser. Sadly, this conundrum doesn’t have a one-size-fits-all solution. However, investors owe it to themselves to go to the root of the problem and resolve it. 

The relationship between an investor and his adviser must be symbiotic. While the adviser is expected to pitch in with independent and credible advice that is apt for the investor, the investor must diligently act on the advice, and compensate the adviser as per agreed terms.  An investor-adviser relationship operating on the extremes—either the investor following the adviser blindly, or the investor being cynical of everything the adviser recommends—is bound to fail. The key lies in finding a common ground.

On a parting (and lighter note), apparently my acquaintance has decided to practice intolerance by discontinuing dealings with his unreceptive clients.

Debt Funds: Liquidity Matters, But Managing Liquidity Is The Key

Recently, I read an article written by an individual who is considered an expert on mutual funds. Weighing in on the ongoing debate of debt funds taking credit risk, he came up with an interesting solution--modify the structure of funds investing in illiquid securities, whereby redemption requests don’t have to be met immediately. The rationale being: the combination of investments in illiquid securities and an immediate redemption facility is at the root of the crisis. Hence the solution lies in permitting fund houses to make delayed redemptions. 

On the face of it, the recommendation seems reasonable. But scratch the surface, and the solution will appear simplistic. Here’s why:

To begin with, in a mutual fund, a portfolio manager’s role is not restricted to just identifying lucrative investment opportunities, and making timely investments. His ability to proficiently managing liquidity in the portfolio is no less important. Skilled portfolio construction can enable a manager to navigate unexpected market events (and handle redemption pressure) without unsettling the portfolio, or with minimum disruption to the portfolio. In other words, the presence of illiquid corporate debt in the portfolio need not make the portfolio illiquid. Indeed, liquidity management is one of the parameters on which the manager and his investment process must be evaluated. It is inexcusable for a manager to compromise the portfolio’s liquidity in a bid to clock higher returns. To my mind, such a scenario portrays the manager’s investment skills in poor light.

Furthermore, defining what constitutes a liquid investment is easier said than done. For instance, to suggest that only corporate bonds are illiquid wouldn’t be accurate. A cursory glance at data for trades in the benchmark 10-year GOI bond versus those for other GOI bonds reveals a telling picture. Market conditions and sentiment can significantly impact liquidity. In buoyant markets, the corporate debt segment can be more liquid than in a downturn. A parallel can be drawn for equity markets as well, wherein small/mid-caps typically tend to be more liquid during an upturn. Clearly, defining which funds invest in illiquid instruments (as has been suggested in the article) is more complicated than it has been made out to be.

Finally, there’s a need to discuss where the onus must lie: should investors be asked to tone down their expectations on the liquidity front, or should fund houses be responsible for performing better on the liquidity management front? 

In many ways, the financial crisis of 2008 proved seminal for the Indian mutual fund industry. Several debt funds (including close-ended products such as fixed maturity plans) witnessed extraordinary redemption pressure. Subsequently, SEBI put safeguards in place by prohibiting fund houses from providing premature redemption for close-ended funds and defining the investment profile for liquid funds, among others. Some fund houses and managers went back to the drawing board and re-evaluated their investment philosophy, especially for the debt funds segment. In turn, this equipped them to better manage liquidity in their portfolios. 

Present regulations governing redemptions are not only comprehensive, but reasonably indicative of how investments should be made. Hence, there is no valid reason for creating a third structure (a middle ground between open- and close-ended funds) to make up for a fund house/manager’s incompetence. As for fund houses which can’t make the grade, the ‘perform or perish’ maxim is apt.