A few years back when I started my career in Wealth Management, it was extremely difficult to convey what I actually did. Things haven’t much improved even as we are in the mid of 2020. The problem in India is due to lack of financial literacy, alternate careers in managing wealth haven’t picked up. And as every optimist would hope for a better tomorrow, we hope too that people realize the importance of hiring an expert to create or manage their wealth.

A major trouble that we encounter is trust deficit towards wealth managers or financial advisors. 

Traditionally, brokers were thought of as experts who will help a person create wealth. Even today, after tonnes of research / studies showing how holding an investment for a long term creates significant wealth, affection towards making a quick buck doesn’t seem to go away.

Hence, to understand who is a wealth manager, we should first look at who is not a wealth manager. 

• Broker

A broker earns his bread and butter through commissions. And these commissions are a result of constant ‘buy / sell’ transactions of securities. Hence, the alignment of interest for a broker is to over-trade on an investment account.

It’s not that a broker tends to have bad intentions towards managing money. But he isn’t getting money for simply buying a share that doubles in price, unless he sells that share too. And who knows, that share might just triple from there too. All of us have a few regrets of not holding on to a share that just went right up after we sold.

• Chartered Accountant

A chartered accountant is specialized in audit and tax. Hence, his perspective towards investment is to help save taxes. The problem is that a person can’t get super rich by saving taxes. It’s a false assumption. A chartered accountant is never pro-active with their client’s life. They usually enter at a post mortem stage. As a professional, their role doesn’t allow them to create a financial plan for their clients and see whether the goals will be achieved in timely manner. They can merely suggest which investment product is safe.

If you invest in a 7% RBI Bond and lock your money for the next 10 years, then truly you haven’t beaten your own lifestyle inflation. At 7% (assuming cumulative interest and not simple interest), your money will double. At simple interest, interest amount will be paid out to you and only principle will return. But in that time, a Toyota Innova that you wish to buy will more than double in price and come with unbeatable features. And yet, the money parked in RBI Bonds will not be enough.

Due to this narrow perspective, they don’t usually help in achieving a long term goal of children’s education or marriage.

• Life Insurance Agent

Life Insurance Agents are still the first people who get approached while thinking about investments. For most people it makes sense because they come once a year, take the premium and promise to double the money in next 20-25 years (depending on the policy). And they provide insurance too, so if something happened to you, money is coming back.

Their interest is merely selling an insurance product. They are biased towards the company that they represent. And don’t offer complete wealth management solutions to their clients. 

It was a great choice during the 1990s and early 2000s when wealth management as a profession wasn’t evolved. For a risk averse generation of the 70s and 80s, they’ve created a good deal of wealth by offering them insurance, post office investment products, fixed deposits, etc. 

Back in those days, interest rates were high too. Which have now started to come down significantly. Double digit interest rates on investments are now a distant dream. As a result of increased sophistication in financial services, an Life Insurance Agent is not as effective. He may help you save taxes, but wealth creation simply doesn’t happen.

• Relative / Friend

If you read business newspapers regularly, then you are well aware of so many scams that happen every now and then. Other newspapers too cover some internal fights in the family or between brothers that have resulted a massive wealth destruction for shareholders.

In such times, we naturally bend towards our friend or relative that has made some money by investing in stock markets. We go to them for gaining some information on which stock to buy that will double or triple. In some risk averse people, they invest in safe companies they consider won’t be shut down. YES BANK was one example that most people thought was safe. What happened after that is a story that needs a separate article.

The problem here is that our friend and relative don’t have a complete access to the way we are looking after our money. Despite their best intentions, we tend to put only around 1-2% of our investment amount. Even if that particular stock triples in value, our overall portfolio doesn’t change a bit. Hence, we still are on the starting point.

• Mutual Fund Distributor

A mutual fund distributor is like a broker. His interest is in selling mutual funds that offer him highest commissions. It’s not tailor made to suit a person’s risk taking appetite. Investors too get lured into higher returns offered without understanding its impact on wealth creation or destruction in some cases.

Hence, in all the above examples, we understand that it’s not that these professional has a bad intention. They are just limited to their own knowledge and perspectives. It’s like your local grocery store who has good intentions but has limited band-with of products and services. The local grocery store won’t have a sophisticated infrastructure like Amazon, D-Mart, etc. Hence, as a customer, your choices will be limited to his capacity.

Same is the case in financial services. I’m sure, your mind will now be running a question that who really is a wealth manager then? And what does he bring to the table that is so different from the ones listed above? Also, how does he make money and the biggest one – can I trust him?

So who is a Wealth Manager?

Wealth Managers have specialized understanding about the unique financial challenges and decisions faced by high net worth clients. If you’re a high net worth family or individual, you want a wealth manager. You have unique needs when it comes to money. You will face complex questions that most people do not face. You will need help with things other people don’t even have to think about. 

These areas of specialisation generally include:

• Strategic Goal planning
• Tax accounting 
• Retirement planning
• Legal planning
• Estate planning
• Risk management
• Trust services
• Banking services
• Philanthropic planning

In our case, we do not consider these additional services optional. For most of our high net worth clients, these do become essential services at some point in their life, and the process of navigating the issues that arise in each of these categories is complex that needs a special attention.

Wealth managers wear multiple hats. On any given day, they might be an investment planner, a consultant, an advisor giving counsel about a big decision, a data-cruncher, a retirement planner, a fixer of someone else’s costly mistakes, a locator of resources and specialized expertise, or a financial trouble-shooter who looks at the client’s financial situation and finds ways to refine and improve it.

In other words, the wealth manager reduces the complexity of life that their clients would otherwise have to grapple with on their own. The wealth manager helps you not have to worry.

Investment Management

It’s a subset of wealth management. Yet highly misunderstood. As most people think it’s searching the next best investment product or which mutual fund is good. But it’s not so. Investment management involves a lot of work that starts from selecting the right securities in the portfolio to exiting them.

• Security selection or portfolio creation

The first part is to create a portfolio of securities that include mutual funds, bonds, equity through a portfolio management service provider, etc. The portfolio so created is unique to the financial goals and risk appetite of the investor. 

• Monitoring of security

Creating a portfolio isn’t enough. A lot of time is invested in constantly monitoring the securities. Since, a lot of events happen around the world may or may not have a direct impact to the securities in the portfolio. When China devalued its currency in 2016, Indian markets started falling, IL&FS and DHFL showed signs of troubles – our equity markets went through a very tough time, most recent event is coronavirus and lockdown.

In such times, a wealth manager tends to take proactive calls with the portfolio that result in protecting the portfolio and eventual wealth creation.

• Rebalancing the portfolio 

There are some events in an investor’s life, where his finances get altered. It can range from a huge bonus or promotion to some additional unforeseen expenditure or job loss. In such cases, an investor’s profile changes and the portfolio needs to be rebalanced to suit the right risk appetite.

• Exit

Buy and Hold is a good strategy to have. Also, it makes equal sense to exit a security in the portfolio when it’s useful life is over. A wealth manager is never married to the security he adds to the client’s portfolio. For him, it’s a tool for wealth creation.

How does a Wealth Manager make money?

Wealth managers tend to charge fees directly to their clients. The general ballpark figure for most wealth managers’ fees is about 1% of their client’s invested assets. The idea here is to have a complete alignment of interest with their clients.

So when they charge fees or in other words earn their income from their clients then they would like to work for them. If they would be dependent on commissions like a broker, life insurance agent or a mutual fund distributor is, then they would simply look to offer an investment product with high commissions. Even if it doesn’t result in any wealth creation.

And lastly, how do you TRUST your Wealth Manager?

It’s difficult to trust a person who sells you services that can’t be valued immediately. It’s not like buying a new software or an app. Managing wealth is an intangible thing. Value and returns are parked in the future. It’s difficult to estimate whether you’re overpaying or under-paying!

The simplest way out is to look for whether your wealth manager simply talks or he walks the walk too. So if your wealth manager starts a conversation about an investment product in your portfolio rather than your life, then he surely shouldn’t be trusted. A wealth manager is more interested in your life than any investment product.

Thumb rule here is to have a look at his own financial plan, retirement plan, statements of financial investments, etc. If he is consuming the same financial product which he intends to put in your portfolio, then you can be rest assured that he too has skin in the game. And he won’t take any foolish decision which might hamper his portfolio and reputation at the same time.

Other aspects to look out for are his professional education, experience in the industry, expertise and most importantly alignment of interest. Once you have all these elements in place, then just enjoy the ride because your retirement destination is closer than it appears currently. 

– Jinay Savla