In the numerous case studies that we have dealt with so far, investors were often 'guilty' of making inappropriate investment decisions. For example, they failed to hold well-diversified investment portfolios or were invested in unsuitable investment avenues. Given that retail investors are not investment experts, such scenarios aren't entirely unexpected.

This time around, we deal with a case wherein an investor chose to trust an 'investment expert'. And to put it mildly, the expert erred, leaving the investor in dire straits. The investor is a 60-year old lady, while the investment expert is a PMS (portfolio management service) offering from one of the country's leading brokerage houses.

The facts of the case:

• The investor is a 60-year-old lady who has recently retired
• She received a retirement package of Rs 10 lakhs (Rs 1 million)
• Her husband is a yoga consultant
• The couple largely depends on their savings to meet their day-to-day needs

In early 2006, at the height of the rally in mid cap stocks, the investor (the 60-year old lady) was advised by the brokerage house to invest in a mid cap PMS. The brokerage house assured her (verbally of course!) that her investments would yield a return of at least 15 per cent per annum.

The sales pitch included glossy brochures proclaiming that the brokerage house was the recipient of the "best brokerage house of the year" award. This in turn meant that they were experts in managing money and knew what they were doing.

And here's what really happened. While few would dispute that a mid cap PMS was the wrong product for the client in question, the timing couldn't have been worse. Mid caps turned for the worse and the investment portfolio presently languishes in negative terrain. Needless to say, the promise to deliver at least 15 per cent per annum stands thoroughly exposed now.

Our advice to the individual - cut the losses and exit the mid cap PMS. Instead, invest predominantly in assured return schemes like fixed deposits and the Senior Citizens Savings Scheme. A smaller portion of the corpus can be held in the low-risk monthly income plans, whose equity component is capped at 15 per cent. Our advice stems from the client's needs i.e. safety of capital and regular income.

Of course, the PMS providers' views were to the contrary. Their view - mid caps are now looking attractive and therefore from now on, the performance will be very good. The PMS providers continued to err in advising the client. They refused to understand that a category like a mid cap stocks did not suit the retired lady, whose sole source of income were her savings.

The individual, thankfully, decided to redeem the PMS and opt for conventional assured return schemes.

This case raises some pertinent questions for investors. Is the investor absolved of all his responsibilities once an investment advisor is engaged? Does winning awards or flashing fancy presentations on a laptop amount to becoming experts in the investment sphere? A closer scrutiny of the case can provide us the answers.

The client in question would scarcely classify as a risk-taking investor. Her investment objective was to generate an income for meeting day-to-day expenses. These facts were unambiguously disclosed to the brokerage house. Yet the advice offered was to subscribe to a mid cap PMS.

How a mid cap portfolio can aid a retired risk-averse investor earn a regular income is beyond us. This certainly doesn't speak very highly of the quality of investment advice offered.

At Personalfn, we are not big supporters of rankings, awards and star-ratings. The parameters utilised to determine the winners and the utility such rankings/awards can offer, are both often questionable. To read our detailed view on rankings/awards, please read "Do the stars really foretell?".

What could have forced the brokerage house to offer the client a service that was grossly unsuitable for the latter? Was it the pressing need to meet its revenue targets (putting self-interest before the client's) or was it poor understanding of the client's needs (gross incompetence)? In either case, it was an unpleasant situation for the client.

This brings us to the bigger issue. Are investors justified in blindly trusting investment advisors? We think not. We have always maintained that investors would do well to engage the services of a qualified and competent investment advisor/financial planner. Also, investors should rely on the expert's advice; but that isn't the same as having blind faith.

On the contrary, investors need to question their advisors and ask relevant questions. For example, investors should thoroughly examine the credentials of the investment advisor. Also, investors need to be explicitly aware of the investments they are making, the possible downsides and the scenarios when their investments are unlikely to deliver in an expected manner.

Similarly, information about alternative investment avenues and their comparison vis-a-vis the advisor's recommended investment vehicles should be solicited.

Put simply, there is a need for investors to actively participate in the investment process and make informed investment decisions. And given that it's their money at stake, should certainly be motivation enough!

By Personalfn.com, a financial planning initiative
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