Investing in stocks directly can be exciting. It may even have worked well if you started investing in 2020, post the pandemic-fall.
Whatever you picked went up in value, and making money seemed rather easy. And then came October 2022, the time from which it has become difficult beating the Nifty 50, let alone making money.
The last six months have made a case of why you could be better of with an advisor rather than investing by yourself. They’d just do a better job at asset allocation, and stock selection.
The primary argument against advisors is that most active managers aren’t able to beat the benchmark.
However, data shows this may be true for the US, and not for a country like India. And evidence can be seen from how US investors have hence moved to passively-managed ETFs rather than active funds or direct investing. Whereas in India, many active managers are able to beat the markets.
There are more reasons though for why you should be getting an advisor:
Returns - Investing in stocks and managing portfolios requires knowledge and expertise. There’s a larger probability that an advisor would make money in stocks than an individual with no experience would. Professionals keep a close track on factors and developments related to the global and domestic economies, sectors and stocks. They are able to use their experience to draw better inferences, and act on them to suit portfolios more appropriately.
Time - Investing is a full-time job. Analysts keep track of every single move in a company, and usually can’t keep up if the number of stocks increases to more than 20, despite being in the business. How do you expect to work full-time, and then match that level of resource allocation towards research and investing?!
There are two interesting mathematical viewpoints for why and how advisors make sense.
1. The ask rate
If an advisor were able to beat the market, they would have to beat it by the amount of fees you pay them, for your money to be worth it. In short, if your advisor charges 2% per annum, he would have to generate market returns + 2% at the very least for the fees to be justified. If they’re generating lower, you’re just better off buying a Nifty 50 ETF and sitting on it. If they’re generating higher, you’re making more money than you would have by yourself.
2. Value of your time
Say you earn Rs. 12 lakh per annum. At 8 hours per day, and 250 working days, you earn Rs. 600 per hour. Managing your own money only makes sense if:
Your portfolio size is Rs. 6 crore, and you are spending 8 hours a day managing that; rather than giving 2% to an advisor to do it.
As long as your advisor makes more than the markets by how much he charges, and as long as your hourly income is more than the amount you would give to your advisor (assuming equal investing competence), getting an advisor is quite economical!