Penny wise pound foolish
The third client story is of a client who left us 4 years ago - before direct plans came in. He is a well-travelled professional, and moved his portfolio to a bank that offered him a host of freebies like airport lounge passes, invitations to golf tournaments and so on - lifestyle perquisites that had nothing to do with investments, but which nevertheless mattered to him.
In the next two years, he was sold a series of high commission endowment policies, on which he paid an annual premium collectively of Rs. 30 lakhs. He has seen a fair share of RM rotation, he has seen a senior manager step in when he expressed dissatisfaction, but no one who really put the client's interests first.
He came back to us a few months ago, and admitted that not only has he wasted the last 4 years, but also that his portfolio has been set back by several years. He readily acknowledges that the freebies that lured him cost him nothing if he were to purchase them on his own, as compared to the destruction in his portfolio as a consequence of bad advice that came along with the freebies. He has moved his portfolio back to us, and is now investing with us in a very significant way. He has decided to work only with us, and seeks our inputs on all financial matters.
He fully acknowledges that the lure of small benefits which is why he went to the bank, was indeed a case of penny wise pound foolish. This is not a story about direct plans as such, but is very relevant in the context of direct plans, because clients who move to direct are lured primarily by a small benefit of lower cost, but what they don't appreciate at that time is the value of good advice which they lose as a consequence. It is only when we narrate such real life stories that it brings home the message of staying away from this penny wise pound foolish syndrome.
Direct means Do-It-Yourself. Will you actually DIY?
This story is not of a client. It's the story of a golfing friend. His wife was a functional head in a large corporation, and had plans to quit and start her own enterprise. They were aware of direct plans and invested through direct plans, and hence never really called us in a professional capacity to discuss their portfolio.
When she set up her own business some 18 months ago, she moved her entire portfolio which was in equity funds, to liquid funds. She was starting out a new business, she needed capital, and she felt more comfortable with the knowledge that it is available at short notice in liquid funds. She shifted about Rs. 1 crore into liquid funds. Her business plan envisaged capital requirement of around Rs. 20 lakhs. As it turned out, she drew down around Rs. 25 lakhs for her business, and then got so busy with her business that she spent no time on her portfolio, and the balance Rs. 75 lakhs has remained in liquid funds over the last 18 months.
We came to know all of this when they called us one day to discuss a problem they were facing with an insurance policy, on which they needed help. During the conversation, they acknowledged that while the lure of lower cost in direct plans had tempted them, they had underestimated the time and effort they would have to put into managing their portfolio. Since they put in no effort due to lack of time, money was just lying idle in liquid funds. They understood clearly that going direct means making a commitment to take out time to manage their portfolio. Since they couldn't take out the time, their portfolio suffered. They have now decided to use our services, after agreeing on a plan of action.
You lose a lot when you start shopping for a discount
This is a story of an old school friend who has now become a successful tech person. He travels the world, setting up tech projects - he's doing very well for himself. We started a professional advisory relationship with him in 2006, when his mother - who was also a teacher in our school - asked us to come and talk to him about saving. He has quite an extravagant lifestyle and his weakness was buying the latest gadgets. He earned well, but also spent very well. From there, we got him to gradually understand the value of savings, got him to start with a Rs.5000 SIP, which we then gradually increased to Rs.50,000 as he started focusing a little more on regular savings. We also built a healthy portfolio beyond the SIPs, as he started diverting his growing income to the portfolio.
When entry load was abolished on direct investments in 2008, he decided that he wanted that cost saving to accrue to him. But he also wanted our advice. He asked us for a rebate. We thought that apart from the fact that regulations don't allow, in any case it was unreasonable for him to expect a rebate considering the value we had brought into streamlining his finances. We declined to find a solution that he was looking for, so he moved half his portfolio and half his SIPs to direct investments, and retained the other half with us, so that he continued getting our advice. This was his way of getting his rebate!
What happened over the years to this direct portfolio is really an eye-opener for anyone who is looking to go direct. Now, we thought that his direct portfolio will be a mirror image of his advised portfolio.But it wasn't so. There was a long period of time when equity markets were going nowhere - 2008 to 2013. Towards the end of 2013, he came to us and asked us to shift his equity SIPs to debt SIPs and move the accumulated equity portfolio also to debt. We persuaded him not to do this, and after much persuasion, he agreed to leave the accumulated portfolio in equity, but switched anyway from equity SIPs to debt SIPs. Its only a few months ago we came to know that when he was nervous about equity markets in 2013, and when we didn't allow him to switch to debt on "our" part of his portfolio, he anyway went ahead and liquidated the direct part of his portfolio, and worse still, never invested it elsewhere. He was confused, and perhaps didn't know what to do, so he did nothing. The portfolio with us rebounded when markets turned up in 2014, and he now realises the mistake of trying to ride two horses at the same time. We've had detailed conversations with him now and have redrawn his goals, increased his SIPs to make up for lost time and have done STPs to get him back in a staggered manner into equity markets as per the agreed asset allocation. He also understands that stopping his SIPs has set him back on his goal plans that we had originally worked out for him. He is now so committed to catching up on his goal plans that he has agreed to sell a property in Faridabad which he is taking possession in a month's time, and will invest the proceeds in mutual funds to catch up and get back on track on his goal plans.
We have shared some of our own real life experiences which underline the value of good advice. We are sure each one of you also have similar experiences to narrate where clients got lured by lower cost, but later realised that the benefit is not in lower costs, the real benefit is in the value of good advice. The more we share among each other, the more we enable ourselves to collectively reach out to investors and help them to truly understand the value of good advice.
On a lighter note...
From WF's office, some more posters depicting the price vs value equation:
Share this article