Wealth Management - More complicated than you think

This Article was originally published in The Global Analyst

How we manage our wealth is as important as how we manage our health with one difference though. When it comes to health management, we do not think twice about taking experts help. However, when it comes to managing our own wealth, we invariably think that we can do a better job than an advisor or we may think that our wealth levels are not high enough to warrant a specialist look and care. Welcome to the world of financial planning and wealth management for the wealthy but un initiated .

Many investment calls in life are made rather casually and without any serious research. And when they do go sour, we refuse to accept the fact and persist with the wrong investment till the losses mount to levels from where reversing course becomes difficult. The occasional wins are invariably attributed to our innate skill than pure luck! This is true for all types of investing be it equities or real estate. The only investment that we all make consistently with least risk is fixed deposits.

The need for an independent advisor to guide you through your investments mostly arises in the mid-career level typically when you are in the age bracket of say 40 to 50 years. This is when you would have accumulated reasonable savings, developed many failed experiences and when major expense planning in terms of children education or marriage or apartment purchase requires serious planning. This is also a phase where you might be endowed with some inheritance or esop’s that can have significant value requiring expert management.

While taking professional help to manage your savings is a no brainer, what is difficult is to identify the right advisor. The current crop of advisors mostly stem from banks that you may have your account or relationship with. Other advisors can be aligned to major brokerage houses. In either case, we have two problems to contend with. Banks/brokerage houses are incentivized to sell third party funds/products for hefty commissions and fees. Most of the times, they may not be transparent on these hefty fees (both what they show and what is hidden). Hence, client interest comes secondary. Also these institutions, given their aggressive targets, experience high resource turnover making continuity a major problem. An NRI that visits India every year or two may be meeting a new face during their visits to their banks. In the western world, they have a concept called independent financial advisors who charge their clients for the service rendered and hence are not incentivized to push products. It is important to verify the independence of advisors and question them on the source of their revenues and how transparent they are in this respect. Independent financial advisors can also provide better continuity which builds better trust and relationships. Remember, wealth management is more about service rendered than about performance. Professional advisors have a good system for regular updates through personal meetings, assuaging clients fears when markets experience severe corrections, counsel clients from being aggressive when markets go through euphoria, explain new trends, encourage clients to embrace technology to keep a tab, etc etc.

Another problematic angle for a high net worth client is the myriad nature of investments that he is engaged with. They may range from equities, to real estate to individual businesses or some private equity exposure. If the asset size is significant, it may be worthwhile to have a dedicated family office manage the affairs. Needless to say that the family office should be headed by a qualified professional who will make decisions in the interest of the client. However, if the wealth level is not very high, then the unit economics may not warrant setting up a family office. In this case, either one can enroll into multifamily office or source independent advisors for each asset class. While advisors may be inclined to advice across asset classes, it may not be in client interest to mix up say equity advice with real estate advice or insurance advice. They are so different in terms of expertise that they all need careful attention from the respective specialists just like the medical professional where ENT specialist cannot attend to broken joints! Ironically, clients more often than not, tend to view wealth management as a holistic function!

For many NRI’s and other high net worth clients, they share a ephemeral relationship with their auditors. Given this, it is natural for them to look up to their auditors for financial advice as well! While some auditors might have developed the expertise over time and therefore be in a position to discharge that duty as well, more often than not they are trained for a different function. Hence, it may be a good idea not to mix up the two.

In wealth management, the key is continuity. It is better we shun the attitude “I know what I am doing” syndrome and engage spouse and children in financial conversations that you have with your financial advisors. It may be a great idea to take them along to advisor meetings. Wealth management is a family problem more than a career problem. It should not be undertaken as a solitary act.

Happy Investing!

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