In this article, we will dig deep into the real difference between choosing a financial advisor vs DIY investing. DIY investing has become an increasingly popular method of investing, especially amongst young investors who have recently started earning well. Thanks to a proliferation of robo platforms and AI tools, young & inexperienced investors are making a beeline to these for their convenience, sophistication and low cost. But just as easy as it is to do, DIY can be dangerous, especially if you don’t have the right knowledge or experience to make informed decisions.
As a financial planner, I’ve had quite a few young investors come to me after having bitten the dark bullet of DIY investing. I say ‘Dark’ because many have made little or no progress with these tools even after using them for quite a few years. That is not to say that the platforms do not offer good products or services – they do. But what they don’t offer is the personal interaction and guidance which is very essential in money matters.
Below I’ve outlined some of the reasons why many young investors have reached out to me after dabbling with online platforms for a few years.
- Absence of a holistic plan that accounts for all their investments: Most investors tend to have invested in multiple products over time like mutual funds, stocks, PPF, VPF, PF, Life Insurance, FDs, Gold etc. Most online platforms do not account for these and consequently their asset allocation recommendations are not ideal.
- No guidance on what to sell, only what to invest in: I have seen many investors take exposure to sectoral funds and high risk products. Whether these were as an outcome of the platform they chose, or their independent views and research is not known to me. But what I do know is that they were not guided on what to exit and when to exit.
- Absence of a long term strategy: Any experienced wealth manager will tell you that wealth creation is more about EQ (Emotional Quotient) than IQ. Investors need to be told things like the importance of saving more, the importance of taking risks and the importance of giving investments lots of time. Online platforms may offer the IQ but are unable to provide any personal guidance. This softer aspect of money management is invaluable in not just preventing bad decisions but also in building a high performing long term portfolio. Here are some of the common mistakes I’ve observed young investors make before coming to me
- Too many funds or stocks being invested in
- Tendency to take exposure to sectoral funds and then forgetting to exit
- Refusal to cut losses and sell bad investments
- No idea of their asset allocation
- Too many folios leading to operational issues
- Too many loans
- Not saving enough from their monthly income even though they can
- Too many investments in a single asset class
Investors need a helping hand with a lot of these, and in many cases they even need to be pushed (e.g. to save more every time they get an increment, to cut unnecessary expenses, and to save well early in their life). This softer aspect is probably the single most important reason for opting for a personal financial advisor. At a young age, there is a tendency to follow the herd which generally leads to bad financial decisions. Just by being able to talk to someone, many of these bad decisions can be avoided.
Yes DIY is cheaper by about 0.15% to 1% and this can be a meaningful saving over time. But likewise one can save on cheaper hotels, cheaper doctors, cheaper clothes and cheaper wine. Does not make them the right choice. It only takes one bad financial decision over your lifespan to wipe out all the gain made from lower costs. A good advisor should be able to repay this 10 times over.
Advantages of DIY
- Lower fees: DIY investors choose Direct Plans of Mutual Funds vs Regular Plans used by financial advisors or distributors. This can save you anywhere between 0.15% to 1%. However platform subscription or brokerage charges may apply.
- Superior Digital Interface of online platforms: Most new age investing platforms have an excellent UI making it easy for investors to transact on.
- Unbiased advise: Most investing platforms use Robo or AI tools which recommend funds or stocks based on pure data without any human bias. This can be both a good thing and a bad thing.
Disadvantages of DIY
- Absence of a holistic portfolio view: Online platforms do not account for holdings of clients across multiple asset classes and products thereby making the recommendations far from ideal. Recommendations from financial advisors on the other hand tend to be more holistic & personalized after accounting for the client’s entire investment portfolio resulting in better recommendations.
- No consideration for tax implications: Most financial advisors will evaluate tax implications before recommending a transaction. However online platforms using AI / Robots are unable to consider this in their recommendations. This can have a significant bearing on the decision.
- No tactical inputs basis market opportunities: No recommendations provided based on tactical opportunities that come up e.g. opportunity to purchase auto sector funds prior to their recent run-up in Sept 2022.
- Need to spend significant time and energy investing & monitoring the portfolio
- Limited products available: Most online platforms will offer Mutual Funds, listed stock and fixed deposits. Some larger stock brokers may also offer insurance. But products like PMS, Alternate Investment Funds, Unlisted Stock, Unlisted Bonds & Startup investing are opportunities that may still require assistance from a financial advisor.
- Limited operational flexibility: Most online platforms are limited in their ability to make complex operational changes like change in nominees, bank change, converting minor to major, etc. Additionally every MF investment is usually in a new folio making tracking of the portfolio complex over time.
Don’t underestimate the soft aspect of having an advisor whom you can speak to
If you’re looking for a quick solution to your financial goals, then DIY investing may be right for you. But if you want to build out a long term financial plan, DIY will take up a lot of your time and effort and may be very overwhelming. From compiling all your wealth together in one place, to identifying how much wealth you will need in the future (and therefore how much you need to save today), to then building out an ideal asset allocation model, to then choosing the right schemes or funds or insurance plans, and finally executing and tracking it, are some of the many things that DIY investors will need to account for. Needless to say this takes a lot of time, energy and dedication.
However for an extra 0.15% to 1%, you get the peace of mind from having built a good portfolio that’s specific to your needs, you avoid a lot of the hassle of managing this yourself as well as the possible fall out from a bad decision. A good financial planner will repay his fee several times over !
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Founder – Pagdiwala Investments
AMFI Registered Financial Distributor