What is real alpha ( Returns better than similar investments) to be expected from an advisor?

In life, everyone evaluates return on Investments i.e what you are paying and what you are getting in return. There is no exception while Investing in a financial advisor.

Typically Financial Advisors’ performance is measured by the Alpha he or she has generated.

Industry term Alpha means ‘return generated by fund manager/Advisor over its benchmark’. If you have invested in a Small Cap fund recommended by your agent and your fund has given 15% return whereas during the same period small-cap index has appreciated by 13% than your advisor has generated 2% more returns than it’s benchmark which is advisor alpha.

If you are dealing with a mutual fund distributor who primarily sells you a mutual fund scheme, measuring his performance on alpha as above may be the right thing to do.

But how do you measure comprehensive Personal Financial Planner and Advisors performance?

The Planer and Advisor’s role includes looking after your investments but is not limited to your investments only.

A planner would help you by ;

1) Clarifying and Prioritising Your Financial Goals
2) Articulating Your Investment Objectives
3) Help you Manage your cash flow as per your Priorities
4) Conduct your Risk Profile and based on your Risk profile create an Investment Policy to be followed
5) Help you identify Financial Products based on your need
6) Manage your Behaviour by Educating and coaching you ( Not all Planner provide this service)
7) Save you from your own wealth-destroying behavior

Now if you consider the above services, you will get the following benefits out of your engagement with a proper financial planner or coach ;

1) Remove Uncertainty from financial life and lead towards more certainty
2) Clarity about what is important to you and what’s not
3) Aligning your finite financial resources towards your own priorities leading to satisfaction from your life
4) Help in optimizing wealth-creating opportunity based on your financial life
5) Help you choose the right investment products based on your own need
6) Help you manage various risk(s) including Investment Risk along with help you take risk based on risk profile to create wealth
7) Last but not least is help you save from your wealth-destroying behavior such as spending your future income by taking unnecessary loans.

Now how do you tangibly measure above intangible benefits delivered by your financial planner?

So what’s real alpha, during my career as a wealth coach I have saved families in the worst situation of being bankrupt to bring them on the path of creating wealth.

Now how do you measure the alpha of saving an investor from being bankrupt due to his/her own spendthrift behavior?

Whats should be value of living a Life of more certainty?
What should be value of Having complete clarity about your financial priorities?
What should be the value of having enough money when you need it?
What should be the value of having the ability to not to let in financial products that are not suitable to your financial life?
What should be the value of helping hand to make the right decision whenever you are up against making choices about your financial conflicting goals?

There are 3 pillars of wealth creation – 1) Your Savings and Investments Rate, 2) Returns (Growth) from your Investment, and 3) managing debt efficiently.

Would it be fair to compare compensation to an advisor who deliver just return on investments ( Alpha) and ignore expertise provided on the other two pillars?

The ultimate need of an investor ( Not Trader) like you is to have money when you need it i.e funds for financial goals and objectives.

So consider the above points whenever you engage with a financial planner and pay them well for having peace of mind about money and don’t choose him/her based on Alpha i.e return on investments.

Your peace of mind and increased confidence for your financial life delivered by a genuine financial planner/Advisor/Coach is real alpha.

I would love to have your views on my above thoughts. Please comment and share this post.

By-the-way if you want to generate alpha as described above, pls click here and book a one-hour free consultancy call with me to discuss how we can work together to generate alpha in your financial life.

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PlanetWealth Financial Advisors
Email: care@planetwealth.in
Phone: +919328190022
First Floor, Modh Mahodaya Bhavan, Opp Chandreshwer Mahadev Temple, Nr. Meghani Circle
Bhavnagar, Gujarat 364001