INTRODUCTION TO WEALTH MANAGEMENT
Wealth Management combines both financial planning and specialized
financial services, including personal retail banking services, estate planning, legal
and tax advice and investment management.
Definition:
According to Investment Management Consultant Association (IMCA),
Wealth management is defined as "A distinct field of practice through which
qualified professionals help high networth client achieve their goals and objectives
related to accumulation, protection and distribution of wealth by applying a set of
specialised 'knowledge and skill."
COMPONENTS OF WEALTH MANAGEMENT
The scope of wealth management is broadly classified in the following areas:
1. Cash Flow Management: Cash flow is a very important projection aspect for
a client. Cash inflow gives clear picture of inflow and outflow of cash. It also
includes debt elimination plan, retirement plans as well as comprehensive
saving place.
2. Investment Planning/Investment Management: Investment management is
the professional management of various securities and assets in order to
meet specified investment goals for the benefit of the investor. Investment
planning includes tax planning, retirement planning etc.
3. Retirement Planning: Retirement planning involves an analysis of the
various choices you can make today to help provide for your financial future.
Wealth managers help to assess how to plan your adequate financial
resources for your retirement.
4. Trust and Estate Planning: Estate planning is a process by which an
individual designs a strategy and executes a will, trust agreement or other
documents to provide for the administration of his assets upon his
incapacity or death. Tax and liquidity planning are part of trust and estate
planning process.
5. Tax planning: Tax planning is a way by which you arrange your financial
affairs in such a way that without breaking up any law you take full
advantage of all exemptions, deduction, rebate and reliefs allowed by law so
that your tax liability will be reduced.
6. Insurance Planning: Insurance planning is the process of analysing what
type of insurance is needed for the protection of a person's assets and ability
to create assets. Insurance could be used to cover risk under personal,
property and liability. Wealth manager must assess the profitability and
impact of potential loss and provide accordingly.
7. Accounting and Reporting: Wealth managers provide various reports to the
investor in order to understand their gain/loss position and also these
reports help them in understanding their tax liabilities.
8. Portfolio Management: Portfolio management is the art and science of
making decision about investment mix, matching investment to objectives,
asset allocation for individuals and institutions and balancing risk against
performance.
9. Fiduciary Services: A fiduciary is generally defined as a person or firm that
has agreed to act for and on behalf of someone else in a role and manner
that produces a relationship of trust and confidence.
SCOPE OF WEALTH MANAGEMENT:-
Wealth Management is gaining more and more popularity in India the rising
incomes along with the favourable economic conditions have made people more
concerned about wealth preservation and creation to ensure a stable future. The
scope of wealth management can be explained as follows:
1. Helpful in Tax Planning: Chartered Accountants (CAs) have the
responsibility of advising clients on various investment options. They also
help the clients with their tax planning to minimize tax and save more
money.
2. Helpful in selection of investment strategy: A wealth management
professional provides advice to his clients about the investments in various
schemes to ensure maximum returns with minimum risks.
3. Public issue of companies: Since 1991, a series of large families listed their
companies on the local exchanges which led to significant wealth creation
and generation of tremendous (huge) shareholder value.
4. Structure of Wealth Management: Large investment banks helped promoters
with their needs on taxation. investments. etc. by helping them to manage
and invest their wealth.
5. Wealth of High Net Worth Individuals (HNWI): HNWIs in India consist of 81%
of the total wealthy households but constitute around 45% of the total
wealth. Among the HNWIs in India only 20% consult financial advisor. India
has so far registered tremendous growth in the population of HNWIs and
their wealth.
6. Seeking Advices: Around 69% of the Indian HNWI population is in the age
group of 30-35, that have long term investment plans and thus require
wealth management and advisory asset management services.
7. Wealth Accumulation: Around 39% of the HNWI wealth has been
accumulated on the basis of business income leading to tax planning
solutions that can help to protect the wealth and mitigate (reduce) risks.
8. Wealth Development and Protection: Once wealth has been accumulated, it
can be developed (increased) by diversification and proper asset allocation.
In order to protect your wealth develop ways to minimize taxes.
9. Regulatory actions: The Securities and Exchange Board of India (SEBI) has
become very active and vigilant (aware) over the years to block and safeguard
against the malpractices (any fraud).
WEALTH MANAGEMENT PROCESS :
1. Data gathering to identify the current situation: Establishing details about
your assets and liabilities, income and expenditure, the wealth manager
tries to collect information that can be analysed in order to arrive at clear
goals and objectives of the client. The client will give details of all
investments, his liabilities and other financial assets.
2. Define the terms of engagement: Wealth manager for providing his service
has to define the term of engagement, the service deliveries and the fees the
wealth manager is going to charge the client for his service.
3. Goal setting: The wealth manager makes the investor understand his short
term and long term goal. Correct and meaningful identification of client
needs and objectives help in achieving the appropriate solution for the client.
4. Identification of needs: After analysing the current position and assessing
gap, the next step is to identify the needs to be done to meet client's
objectives. The wealth manager also attempts to understand the risk profile
and the life cycle of the client.
5. Analysing the opportunities and challenges: The next stage includes
identifying opportunities and challenges associated with each investment
alternatives. The wealth manager helps to recognise the risk factor
associated with each investment alternatives.
6. Report preparation: The analysis and recommendations after consultation
with the client are presented in a written report. The report includes the
investment objective, the suggestions and recommendation of the wealth
manager, the opinion and clauses discussed by the client, the risk factors
and disclosures made by the wealth manager, etc.
7. Implementation: After identifying the investment alternatives the wealth
manager helps the client to invest his fund which helps him to achieve goals
and objectives.
8. Review and Revision: Wealth Management is a long term plan that requires
regular annual review.
WEALTH CYCLE
While the life cycle guide is a useful approach to financial planning, another
somewhat supplementary approach that many experts recommend is that of the
wealth cycle. The life cycle approach groups all investors in age group, irrespective
of their financial condition. The wealth cycle stages of an individual can be
classified as:
1. Accumulation Stage: In this phase, investors look to build wealth for their
financial goals. Typical client needs such as savings for retirement, for
children's education, acquiring assets etc . The investor's primary aim is
long term wealth accumulation.
2. Transition Stage: During this stage, one or more of thei investor's goals are
approaching or about to be approached in clear short-term future. Because
of the investor's lower risk appetite, liquid and medium-term investment is
suggested.
3. Reaping Stage: This is the cashing out stage, because the goal and purpose
towards which the investors have been investing have arrived. Therefore,
this is a stage of utilizing the money accumulated for the desired goals.
4. Inter-generational Transfer Stage: In this stage, investors need to start
thinking about how to share their wealth, either during their own lifetime, or
by bequeathing through their will after their lifetime. Such transfer of wealth
may have to be done in favour of different categories of beneficiaries such as
the investor's children or grandchildren or to family or charitable trust or
causes.
5. Sudden Wealth Surge: This stage is one where due to certain event investors
receive sudden flow, which increases their wealth significantly. These events
may be like winning lottery/contests, inheriting estate, huge appreciation of
shares held, etc. In this stage, wealth preservation is the key priority.
WEALTH MANAGEMENT NEEDS AND EXPECTATION OF CLIENT
The basic needs for wealth management are as follows:
(1) Better utilisation of funds: Though raising of funds is important but their
effective utilisation is more important. The funds should be used in such a way
that maximum benefit is derived from them. The returns from their use should
be more than their cost. It should be ensured that funds do not remain idle at
any point of time.
(2) Minimizing tax on investment: Tax planning is a way by which you arrange your
financial affairs in such a way that without breaking up any law you take full
advantage of all exemptions, deduction, rebate and reliefs allowed by law so
that your tax liability will be reduced.
(3) Maximising return on investment on a given risk appetite: Investing in different
types of securities help to minimize risk. It is also important to diversify within
each asset class.
(4) (The other needs for wealth management are as follows:
(a) Income: It's possible to manage income more effective' through planning.
Managing income helps you understand how much money you'll need for tax
payments, other monthly expenditures and savings.
(b) Cash Flow: Increase cash flows by carefully monitoring you're spending
patterns and expenses. Tax planning prudent spending and careful budgeting
will help you keep more of your hard earned cash.
(c) Capital: An increase in cash flow can lead to an increase in capital. Allowing
you to consider investments to improve your overall financial well-being.
(d) Family Security: Providing for your family's financial security is an
important part of the financial planning process. Having the proper insurance
coverage and policies in place can provide peace of mind for you and your loved
ones.
(e) Investment: A proper financial plan considers your personal circumstances,
objectives and risk tolerance. It acts as a guide in choosing the right type of
investment to fit your goals.
(f) Standard of Living: The savings created from good planning can prove
beneficial in difficult times.
(g) Financial Understanding: Better financial understanding can be achieved
when measurable financial goals are set, the effects of decisions understood,
and results reviewed.
(h) Assets: A nice 'cushion' in the form of assets is desirable. But many assets
come with liabilities attached. So, it becomes important to determine the real
value of an asset.
(i) Savings: It used to be called saving for a rainy day. But sudden financial
changes can still throw you off track. It is good to have some investments with
high liquidity. These investments can be utilized in times of emergency or for
educational purposes.
(j) On-going Advice: Establishing a relationship with a financial advisor you can
trust is critical to achieving your goals. Your financial advisor will meet with
you to assess your current financial circumstances and develop a
comprehensive plan customized for you.
(k) Comprehensive financial advice: Wealth management offers a comprehensive
analysis of your financial health. It will provide you details of the current status
of your money. When you know where you stand, it is easier to get advice and
make decisions for investments and financial plans.
(l) Develop strategy for your business: Creating a road map based on your
financial status lets you set realistic goals and strategies for the business.
Comprehensive wealth management involves strategic planning of your goals.
CODE OF ETHICS OF WEALTH MANAGER
A Wealth Manager is a type of financial advisor who utilizes the spectrum of
financial disciplines available, such as financial and investment advice, legal or
estate planning, accounting, and tax services, and retirement planning, to manage
an affluent client's wealth for one set fee.
To encourage, the independent, diligent, professional and ethical behaviour of
Wealth management professionals, certain Code of Ethics has, been established,
defining globally accepted standards for the professional conduct of Wealth
managers worldwide.
The following are the Code of Ethics or principles that wealth manager should
inculcate:
1. Compliance with laws and regulations: Wealth manager should adhere to all the
relevant laws and regulation (including in relation to anti-money laundering and
counter terrorist financing and anti-bribery/corruption) as well as codes, circulars
and guidelines issued by applicable regulatory authorities
2. Independence: Members must independent and objective judgement in their
professional activities. Members must at all time aria-under all circumstances
exercise an independent judgement. They must exercise their professional activities
in a manner independent from their own personal interests and the interests of
their employer.
3. Integrity: Provide professional services with integrity. Integrity demands honesty
must not be subordinated to personal gain and advantages. Wealth manager
should act responsibly, in an honest and fair manner, with integrity and care.
Fraudulent, deceptive and manipulative practices should be strictly forbidden.
4:.Objectivity: Provide professional services objectively. Objectivity requires
intellectual honesty and impartiality.
5. Competence: Competence means attaining and maintaining an adequate level of
knowledge and skill, and application of that knowledge and skill in providing
services to clients. Wealth manager should attain, maintain and ensure that their
staffs have an adequate level of abilities, skills and knowledge in the provision of
private wealth management services.
6. Fairness and Conflict of Interest: wealth manager should try to avoid conflicts of
interest, and ensure that its clients are fairly treated if conflicts cannot be avoided.
Wealth manager should refrain from advising or dealing in such a transaction
unless appropriate disclosure of such material interest has been made to the client
and all other reasonable steps have been taken to ensure that the client is treated
fairly.
7. Confidentiality: Wealth manager must protect the confidentiality of all client
information. Wealth manager should exercise utmost care in observing
confidentiality and preserving client anonymity. Client information must be
protected and maintained in such a manner that allows access only to those who
are authorised, unless disclosure is otherwise required by applicable laws or
regulations.
8. Professionalism: Wealth manager should act in a manner that demonstrates
exemplary professional conduct. Professionalism requires behaving with dignity
and courtesy to clients, fellow professionals, and others in business-related
activities.
9. Diligence: Wealth manager should provide professional services diligently.
Diligence is the provision of services in a reasonably prompt and thorough manner,
including the proper planning for, and supervision of, the rendering of professional
services.
10. Competence: Wealth manager should attain, maintain and ensure that their
staffs have an adequate level of abilities, skills and knowledge in the provision
private wealth management services.
CHALLENGES IN WEALTH MANAGEMENT
Wealth managers won't necessarily face every problems. Following are the
challenges that have been identified as defining how wealth managers will work in
the future.
(1) Vying for the same pot: Among private investment houses, the baby boom
generation is the main client base, with a preponderance of 50+ year old clients
who are retired or semi retired.
(2) Finding a distinct voice: In an environment where firms are directly competing
in the same demographic space, businesses have to differentiate. There is a belief
that a firm's level of personal and professional service was an important part of
standing out, as well as offering an end-to-end solution.
(3) Clients becoming more complex: From pension reforms to new tax rules, clients
have to rethink the way they manage their finances. They are living longer, and
therefore require more money to see them through retirement.
(4) Shifting the demographic dial: Given the many challenges associated with an
older client base, there is a need to tap into younger generations. This is a trend
that is becoming more prominent as clients hand money down to younger
generations.
(5) Upgrading digital infrastructures and capabilities: As client expectations
surrounding transparency and delivery of information are leading firms to invest in
their online portals, one interviewee went as far as to say that the one biggest
threat is settling for the status quo.
(6) Embracing robo-advice: Executives do not see face-to-face client interactions
going away, but they understand the growing need for digital self-service models.
Wealth managers will need to have an omni-channel strategy in order to serve a
range of customer needs, as when it comes to significant investment decisions
around matters such as pensions, face-to-face will still be required.
(7) Regulatory impacts: Firms are therefore looking for technology solutions to help
them deal with the increased transparency and reporting requirements, as well as
reducing the cost of complying with these.
(8) Margins and fees squeeze: Aware that margin pressure is going to be
significantly greater in the future than it is today, some firms are moving away from
third-party funds and instead focusing on direct investing and passive solutions
where required.
(9) Geopolitical tensions: While most believe it is too early to tell what the true
impact of Brexit will be, there is concern that it will have a "corrosive effect" over
the longer term. This view -was, however, tempered by confidence that the UK, and
markets generally, have weathered crises of a similar magnitude in the past.
(10) Inorganic growth triumphs: More firms may now aim to own the whole of the
value chain in order to get back the margin erosion they've lost on their core
business.
(11) Outsourcing for profit and growth: According to the majority of firms, profit
and growth will come from within. They believe that the secret to success is
upholding the quality of their own proposition by focusing on their core skills.
