Smart About Investments – Financial Doctors
Guest post by Miklós Konkoly, Head of Private Banking, Budapest Bank
At a time like this, the task of investment advisors and private bankers is not to offer complicated products to investors, but to convince them of the importance of self-provision and that this is something that one should spend time thinking about. A good financial advisor works like a “financial doctor”: he/she provides information on the possible treatment methods, points out their advantages and risks, and tries to find the best solution together with the “patient.”
The first lesson that a bank advisor has to make a client understand is that inflation is the enemy of his/her savings and assets. It is difficult to talk about long-term investments as long as people believe that the best place for their savings is in time deposits. Once the client understands that because of inflation, deposit interest rates are not really suitable for protecting the value of their hard-earned money, they will immediately be open to formulating an efficient savings strategy and seeking out new possibilities.
This is when the next step in the learning process comes in: talking about the concept of risk. We have to make them understand that riskier investment forms that carry an above-inflation yield potential must be an important part of their savings strategy.
The recent turbulences on financial markets provide good long-term examples on what risk means and why it is important to deepen financial knowledge. We know more about markets, we know their characteristics and properties better. The basis for a good decision is no other than experience, information and knowledge. At the end of the day, the role of the private banker / investment advisor is to assist the client in making long-term investment decisions. Finally, in the wake of these decisions, every investor creates his/her own long-term investment strategy which helps him achieve his/her goals.
Come a long way
True, the role of the financial doctor has come a long way since the two-tier banking system was formed 25 years ago in Hungary. The regime change in 1989 also brought a fundamental shift, as from then on the weight of the financial sector in the economy grew and the number of banks significantly increased. But a lot of time was needed for a change to come in the financial consciousness of people, and especially the investment culture – in effect, this process has not ended to this day. This does not only apply to Hungary, but to all the other post-communist countries of the region too,with the development of financial culture working out at different paces in different countries.
In the new system, the decline in the caretaker role of the state gave rise to increased receptiveness towards self-provision. But people needed help for this proclivity to manifest itself in the selection of the right products, the careful assessment of risks and well-grounded decisions.
What was there to invest in at the time? Even 10-15 years ago, choices were still quite limited, with the options ending at about 1-3-6-12-month deposits, with deposit interests of above 20% being the norm. Of course, if someone was bent on diversifying there was also the possibility, as there is now, to buy discount treasury bills or government bonds. But as economic developments led to a decline in interest rates on risk-free deposits, the demand for new products offering high-yield potentials also on the long term started to appear.
These developments led to the rise of alternative investment forms (corporate bonds, investment funds, structured products, etc.), as well as service providers, investment advisors and private banking providers to mediate these products to clients. Thanks to this transformation, today there are plenty of products to choose from for clients wishing to set aside savings. But for many, selecting the right financial provider and the right products still poses a tough challenge. Nothing proves the lack of being adequately informed better than the fact that to this day the majority of investors (close to 85-90%) are willing to consider only time deposits. This phenomenon is much more the consequence of an attachment to old habits than the result of a professionally grounded decision.