The conversation clients need to have with their wealth managers

“This artilce was originally published in… Forbes India”

When wealthy clients engage professionals to work with them, they broadly have one
demand above everything else – preserve what they have made and do better than the prevalent risk free rate

The business of wealth management in India works mostly with bankers or individual financial advisors approaching clients and soliciting relationships, with a reference or otherwise. Often, a client has to evaluate among various wealth managers before he decides to work with two or more. I have heard clients confess that they do not know how to evaluate the people who approach them. “All of them speak well, seem to have relevant experience & a research team backing them, how do I know who will do the best for me.”

For the purpose of this article, I will refer to only clients who have made a substantial amount of wealth and are at a life stage different from clients who are young and saving for multiple goals in future. This distinction is important because these two sets of clients approach risk in a significantly different manner. Also, the following discussion may help you choose the person you will work with and not necessarily the Institution. Maybe, I can cover that separately.

When wealthy clients engage professionals to work with them, they broadly have one demand above everything else – preserve what they have made and do better than the prevalent risk free rate. Ideally, after adjusting for inflation, their wealth should be preserved or should grow at a ‘reasonable’ rate.

What should be obvious in this mandate is this – to enhance returns above the risk-free rate, the client is signing up to take some degree of risk. However, sometimes what should be obvious, is far from it.

The conversation most clients have with their wealth managers today, is a broad level agreement on the return expectation, the time horizon the funds are invested for, and the consequent asset allocation. After that is agreed upon, the discussion mostly moves to product ideas and exploring the fees. The conversation they do not seem to be having is the level of risk that they are willing to take to enhance that return.

In finance, risk is defined as the uncertainty of a return & the potential for financial loss. Let us understand broadly, the kinds of risk that your wealth manager can take on your portfolio:

• Credit and Interest rate risk: leading to volatility in Debt holdings and a probable loss if traded at inappropriate times. • Business and environment risk: leading to volatility in your Equity holdings and a probable loss.
• Leverage: leading to partial or total loss of capital: Not all leverage leads to bloodbath but some may.
What risk are you taking and what is the return differential expected to accrue from it -that needs to be known.

1. Insist on an Investment policy statement (IPS) from your wealth manager. The Wikipedia definition of IPS is – “a document, generally between an investor and the assisting investment manager, recording the agreements the two parties come to with regards to issues relating to how the investor’s money is to be managed”. What an IPS does in addition to stating how the money is to be managed, is that it makes the client cognizant of the risks he is signing up for. Without an IPS, there is no definition of risk. Many clients believe gilt funds are the safest and have no clue about the volatility. Most clients think Mutual Funds are safe but PMSes are not. Even if a structured product only buys options and protects principal at maturity, it maybe dismissed by some so called ‘experts’ who neither understand nor can design one. So ask for a detailed ‘disclosure’ of risks, make an attempt to understand them, whether or not you want to understand the product features and past performance records.

2. When your wealth manager flaunts the number of years of experience he has, ask him how many clients she/he has been working with, continuously for a considerable length of time. Private Banking does not allow for client profile disclosures so your wealth manager may not be able to give you names but surely, clients could give letters of recommendation – personalised or on LinkedIn perhaps? Ask yourself, would you or would you not endorse your wealth manager if he has worked with you for a decade and grown your wealth several times over.

Surely, continuity in relationship is a great parameter to explore. Why, you may ask. The wealth management industry has many professionals who have been ‘managing’ clients because they have worked with banks, have had access to large clients’ bank accounts just by virtue of being assigned to those relationships and sold one product or the other. If things didn’t work well with one, there were always ten more accounts to explore. If your wealth manager has no one to endorse her/him, the number of years he has been at ‘it’, is I am afraid, of no relevance. It could well be the number of years of experience he has in distribution of financial products – a skill you don’t need to use.

3. Don’t hesitate to ask the person who will take risks on your money if he is qualified to do so. Unfortunately, the private wealth management business in India has no barriers to entry. It may not be widely known but people who have sales experience in various sectors are today wealth managers. The ONLY mandatory requirement today is to pass a very basic course designed by the AMFI in order to sell mutual funds. Ask to see if your wealth manager has studied Finance at some point in time in life. If he has not, then has made that extra effort to get a relevant certification like a Chartered Financial Analyst or Certified Financial Planner or a Certified Private Wealth Manager? These are certifications of the highest order in the industry today and if one has neither, one just needs to go and take a test. Surely passing it cannot be an ordeal if you are a practitioner for a reasonable length of time? Insist on it. Just as you expect your doctor to know more than you, expect your advisor to know more than you and to that extent, the relevant certifications will give some confidence.

If the person who has approached you passes these three tests, go ahead, give him a chance and let him work within the mutually acceptable framework of risk disclosures and return expectations. After all, the only way to make a person trustworthy is to trust him. Trust you should, but there should be a basis to that.

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