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Don't change your wealth adviser every few years

Selecting a wealth manager should be a well thought-out and long-term decision. Lisa Pallavi Barbora reports.

india Updated: Nov 04, 2011 21:11 IST

According to the 2011 Asia Pacific Wealth report from Merrill Lynch and Capgemini, the high networth individuals' (HNIs') wealth in India grew by 22% during 2009-10, accounting to $582 billion (Rs 28 trillion). The prosperity of the Indian HNI can also be judged by the number of wealth management service providers mushrooming in larger cities. As August 31, for 7,906 clients under advisory, there was Rs 84,000 crore in assets under management (AUM) for which services are being given by portfolio managers registered with the Securities and Exchange Board of India (SEBI).

For HNIs, it makes sense to seek advisory services from companies or banks that have an established practice and expertise in handling the complexities of managing large amounts of funds. Here are some factors HNIs can consider when selecting a service.

Basic evaluation
Investment threshold:
The first thing to evaluate is the threshold of investments the firm expects from a client. For example, wealth managers who provide solutions for clients with an investible surplus of Rs 10 lakh or lower, or cater to the mid-segment with Rs 10-25 lakh may not work for HNIs. You need a firm that provides customised solutions for large corpuses of at least Rs 50 lakh. Some firms even cater specifically to ultra HNIs with corpuses of at least Rs 1 crore with a potential to build up to Rs 5 crore.

Experience: Be sure that the service provider you choose has the relevant experience in handling your existing or potential corpus. It's not enough that a firm deals with a large number of clients; in fact, that may well be a disqualifier. "In case of individual advisers and private firms, the maximum amount entrusted to a wealth manager has to be assessed and a ceiling should be set based on the background and experience," said SK Bagchi, professor for finance, Narsee Monjee Institute of Management Studies, who has also authored a book titled Wealth Management.

Specific solutions: Since each individual's financial requirements vary, so should the solution. Moreover, if you are a business owner there may be additional requirements as funds can be linked to your business as well. Probe the number of specific solutions that the firm has come up with for different clients and how successful the implementation of these solutions has been. "These are early days for the mass affluent segment to accept the importance of a well-grounded wealth manager, who may even be credited with 'good advice," said Robin Roy, associate director (financial services), Pricewaterhouse Coopers Pvt Ltd (PwC).

Full service
Bouquet of products:
Your wealth manager should have access to products across asset classes, solution-specific products such as insurance and niche products such as alternate investment funds and structured products. This way there are better chances of you getting an optimal solution. Be careful of specific tie-ups.

Bouquet of services: Also, consider whether it will fulfil parallel requirements such as taxation and legal advice and family or trust-related issues. Ensure that the wealth manager has in-house capability to tackle the above, or at least has tie-ups or partnerships with experienced professionals who provide these services.

There is a caveat here: Be careful about what rights you delegate to the wealth adviser. "It's important to ensure that the adviser doesn't have any rights on the securities owned and is only buying on behalf of the client," said Bagchi.

A wealth adviser's performance is critical but don't get too bogged down by the performance of products recommended by the adviser. You have to judge the effectiveness of the financial planning and wealth creation solutions provided.

Try to understand if solutions provided have successfully met either capital protection, income generation or growth requirements for various clients. See how portfolio allocation has shifted (or not) depending on the requirements.

Usually wealth management firms, specifically those catering to HNIs, do not publish performance, hence you will have to probe on handling of funds by talking to them about various probable situations.

The charges
The absolute fee you pay will depend on the service you sign up for. In most cases you will have an advisory fee and separate product-linked fee. If you are investing a part of your funds in a private equity fund, you will have to pay the product fee, which could be a percentage fixed by the provider.

To increase the effective return for investors in mass-regulated products, distributor commissions (where they exist) are no longer a substantial amount. A recent concept paper by SEBI on regulation for wealth advisers talks about separating advising and execution, and rationalising distributor fee. "The concept of independent financial advisers, or IFAs, (relationship managers for HNIs for discretionary portfolio management) is still relatively nascent and the suggested fee model will have to be thought through. An IFA may not execute the deal, whereas a full-fledged wealth manager and their team of relationship managers may provide advice and also enable the execution/transaction," said Roy.

Contrary to what most people may say, paying an advisory fee is better than not paying.

Quality of firm
Incentive structure:
Asking relevant questions will tell you whether compensation is linked to specific products or to achieving portfolio and financial planning-linked objectives. For example, if an adviser's incentive structure is such that it encourages him/her to sell more equity products, you may be saddled with an undesirable amount of risk. But if your adviser's incentive is linked to achieving return objectives as per your financial plan, then you would be at ease with the products presented to you.

Longevity of employees: This, too, is a key indicator. A company with a high employee turnover is not one you want to sign up with as then your direct adviser may change frequently.

Selecting a wealth manager should be a well thought-out and long-term decision; you don't want to change your wealth adviser every few years.

First Published: Nov 04, 2011 21:06 IST