How should advisors relook at client portfolios

So, once you have met a client, created a financial plan and recommended asset classes and investment products commensurate with his/ her goals,  executed the same, is that the end of the story, till his goal has been met? CERTAINLY NOT.

Although, we provide a blue print of clients, finances, assets, liabilities, net worth, cash flows, and life goal needs, these figures are likely to change very often. In fact, every year a financial plan review/goal review should be undertaken to understand the desired recommendations and actual investment performance, and whether both are aligned and need fine tuning.

This is where we have realized, if desired goal return targets are not matching actual growth patterns, a change in client portfolio is needed, irrespective, of the asset allocation recommendation made to our clients. This is because:

1. Like you and me, our clients, would like to see absolute returns on portfolios and profit growth year on year on their portfolio.

2. Desired growth target and actual growth target need to match the assumption of growth rate for goal realization.

3. Broad asset allocation strategies would be maintained, considering long term goal needs.

4. Ensuring a good night`s sleep and a smile on the face of our clients and us!

We design the client portfolio based on tactical asset allocation, where one component is static and the other is dynamic with changing market conditions, so as to provide the extra cushion in terms of performance. Once, short term profits are made and booked, they become part of the static strategic mix component of the portfolio.

This way, clients goal targets are met and absolute return performance is shown to clients and both we and our clients have a good night`s sleep.

With current forward PEs of 12.50/13, weak global environment, depreciating rupee, lack of government stimulus, high fiscal deficit, low manufacturing data, high inflation, we have aligned our portfolios with 30% Equity and 70% debt allocation in the financial assets category.

Assuming current 1 year G Sec yield is at 8.15%, Equity Earning yield is at 6.11%, the excess yield, if invested in equity Is -2.04.

If a client can get risk free return of 8.15%, when compared to -2.04%, why would he invest in equity now?

Actually, this also makes a case for bottom up stock picking, which we have already designed in the portfolio with the dynamic equity component risk exposure the client is taking.

(**Contributed by Dilshad Billimoria, BBM, LUTCF CFPCM, Certified Financial Planner and Investment Advisor)

15 June 2012