4th April 2012

One of the biggest challenges that advisors face today is not about understanding markets and making tactical and strategic asset allocation calls - but it's more to do with getting clients to act on these calls.

Influencing client behaviour is key to becoming a successful advisor

For a good advisor to become successful, he needs to find ways of influencing client behaviour. And, in a market that has remained volatile for a long period of time, it is becoming increasingly challenging for advisors to influence client behaviour when they are caught up in extreme emotions of fear or greed.

Industry data clearly demonstrates the challenges that good advisors face :

Many advisors may have sounded a note of caution by the end of 2007, when markets were above the fair value zone in terms of P/E ratios.

Yet, industry data suggests that investors were the most aggressive in terms of purchasing equity funds, at their richest valuations, based not on valuations but on returns generated in the previous 6 months to 1 year.

Towards the end of 2008 and the first quarter of 2009, many good advisors put out a call to buy into equity funds, citing historically low valuations as shown in this chart.

That was indeed a great time to buy into equities, but how many of these good advisors who put out a buy call, were successful in getting clients to act on the call? How many were successful in influencing client behaviour?

As the above industry data suggests, inflows into equity funds towards the end of 2008 was down to just a trickle - and most investors missed out on the big rally of 2009. On both occasions, investor behaviour was guided more by their emotions of greed and fear than the facts and logic based advice of their advisors.

How can you use volatility to your advantage rather than become its victim ?

Clients often act contrary to your advice - which prevents you from achieving more success : success in managing their portfolios, success in delivering customer satisfaction, success in generating more referrals from more satisfied clients. The question is : how to you break out of this mode? How do you get clients to act more in line with your recommendations?

The answer perhaps lies in imbibing two key insights :

1. Investors are not really looking for chart busting returns when they invest in mutual funds. They are perhaps looking for steady 14-15% kind of returns. Lower volatility and reasonable returns is what they are really looking for. The fact is that very few investors will actually get chart busting returns anyway - due to the herd mentality of entering and exiting markets at inappropriate times.

2. Advisors are familiar with asset classes that include equity, debt, gold and real estate. The future belongs to advisors who embrace a new asset class - called VOLATILITY.

Volatility as an asset class

If we internalise that volatility is here to stay and that it is volatility that is today the biggest roadblock in getting clients to invest, we need to find ways of not just taming this beast but make it work for you.

Instead of trying to allocate assets tactically between the major asset classes - and often failing to get clients to take suitable action on your calls, advisors may be better off looking at a set of products that focus on managing and harnessing volatility - products that use volatility to their advantage and therefore actually deliver the benefits of asset allocation to investors.

ICICI Prudential has been promoting volatility management products as an important asset class, through two key funds : ICICI Prudential Dynamic Fund and ICICI Prudential Volatility Advantage Plan. Advisors must increasingly adopt products that manage volatility and make it work for their clients.

Rather than expecting clients to take prompt action on your tactical asset allocation calls - which they often don't - you are perhaps better off getting your clients to invest in such funds, which allocate assets tactically on a pre-determined basis. If it is the emotions that come in the way of sensible investment decisions, advisors must consider products that replace emotions with discipline and achieve their asset allocation goals through this mechanism.

ICICI Pru's Dynamic Fund has grown from around Rs. 1000 crores at the March 2009 market lows to over Rs. 4000 crores now - through steady inflows even during weak market conditions right through 2011.

A fund that attacks when required and defends when necessary is perhaps better attuned to what investors are really looking for today, as compared to an equity fund that stays invested through all market conditions.

A final word on volatility as an asset class - advisors need to increasingly consider the entire spectrum of asset allocation products as an emerging asset class that can actually help them deliver the benefits of asset allocation to their clients due to the embedded nature of asset allocation in these products.

From a wide range available, advisors must select products that are best suited to their clients risk appetite and circumstances. The key to successful delivery of asset allocation may well be this emerging breed of funds rather than making tactical calls and hoping that clients act on your advice to move a portion of their assets from one asset class to another. If you know that they often don't act promptly on your advice, for you to become successful, you must find an alternate way to deliver the same results in their portfolios. Its time to re-orient your thinking to make sure that your clients actually benefit from your advice.