- This article discusses the role of a financial advisor in diversifying their clients’ portfolios to maximize returns and minimize losses.
- It is primarily aimed at investors and entrepreneurs who wish to understand how a financial advisor identifies investment opportunities to improve portfolio returns.
- At FlexFunds, we offer the possibility of issuing exchange-traded products (ETPs) to allow financial advisors to reach a larger client base.
To protect a certain capital from inflation, or even significantly increase it over time, it is essential to have strong analytical skills, solid knowledge of the capital markets, and, most importantly, experience.
However, the reality is that not many investors, whether individuals or legal entities, meet these requirements. In these cases, it is important to have a trusted financial advisor.
Why is it important to have a financial advisor?
Financial markets are constantly fluctuating, especially in the equity segment. Take, for example, the case of the S&P 500, which includes the 500 largest and most important companies in the United States.
Although it has appreciated by 385% over the past 20 years, there were significant downward movements in between: from 2007 to 2009, it contracted by 58%; in 2020, it fell by 35%; and in 2022, it dropped by 27%.
While the S&P 500 is one of the most solid and reliable indices in history, as seen, it is not immune to declines, so an investor who entered at a bad time could have suffered severe losses.
However, a financial advisor should be responsible for warning about these possible scenarios and recommending other financial assets to complement the portfolio, which would cushion a potential fall and maximize overall returns.
“A financial advisor can help you keep things in perspective and suggest some small steps you could take to rebalance and help protect your accounts,” explains Merrill Lynch. “They might even offer suggestions on investments you might consider while the markets are down,” they add.
The dialogue with the financial advisor is so important that, according to a survey conducted by Morningstar with 312 investors, 17% of those who hired such a professional did so for behavioral guidance.
How do financial advisors identify investment opportunities?
To identify investment opportunities that enhance benefits and/or reduce losses, a financial advisor applies two main strategies:
1. Research reports
Firstly, the vast majority of financial advisors rely on analysis and research reports conducted by brokers, investment banks, or consulting firms specializing in economics and finance.
These companies periodically send reports that discuss the past, present, and future of markets, the economy, and certain financial assets, all to help make buy, sell, or hold decisions.
The financial advisor reads the information, and may even clear up doubts with those responsible for writing it, to interpret it and relay it to their clients if necessary, thus managing the portfolio they are responsible for more effectively.
The Corporate Finance Institute detailed that “the main benefit of investment research is the ability to make well-informed decisions based on financial data.”
2. Conversations with specialists
On the other hand, financial advisors often engage in discussions with various experts in the stock market sector, including business owners, analysts, traders, investment banking executives, and other consultants.
In these conversations, ideas or suggestions for assets emerge, which financial advisors then thoroughly investigate on their own to determine if they fit what the clients are looking for and if they match their particular situation.
In search of the ideal investment
Using both strategies, the financial advisor seeks to identify investment opportunities to improve returns and reduce the risks of the managed investment portfolios. But not just any opportunity will do.
Potential assets to buy, sell, or hold must be compatible with the client’s investor profile, time horizon, and goals and needs.
For this reason, the most important task a financial advisor must undertake is to know their client. To achieve this, they ask multiple questions (in what is known as the “investor test”) and take note of their responses.
Among the points consulted, the financial advisor considers some purely financial parameters:
- Annual income: The amount of money earned in a year, including salary, bonuses, overtime, commissions, etc.
- Liquidity needs: This refers to the client’s need for cash to cover short-term expenses.
- Financial assets and net worth: This equates to the dollar value obtained by subtracting liabilities (debts) from assets (properties).
- Leverage to finance investments: The financial advisor must know if the investor is using debt to finance the purchase of financial assets.
In all cases, to keep this information updated, York University advises that the financial advisor meets with their client at least once a year to review the data and investments.
Beyond classic products
By knowing their client, a financial advisor can build an investment portfolio that is properly diversified, and in which there may be innovative solutions such as the exchange-traded products (ETPs) developed by FlexFunds.
FlexFunds is responsible for coordinating the asset securitization process quickly and efficiently, handling all its phases, and providing a turnkey solution for its clients.
For more information, feel free to contact our team of experts. We will provide the most suitable solution for your needs.
Sources:
- https://www.ml.com/articles/financial-advisor-advice-volatile-markets.html
- https://www.visualcapitalist.com/sp/the-top-reasons-for-hiring-a-financial-advisor
- https://corporatefinanceinstitute.com/resources/capital_markets/comprehensive-guide-to-investment-research
- https://www.yorku.ca/osgoode/ipc/know-your-client-a-short-guide-for-retail-investors
