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How to select the right wealth manager for your investment

A trusted and licensed adviser should understand the gravity and reality of managing your money well besides also offering a holistic financial planning

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The news is both good and bad. While wealth management is now accessible for all investors and not just the very rich, there is a caveat. You have to choose your wealth investor with the care and attention that you would a surgeon operating on you.

You and your advisor must have a total meeting of minds so that your investments may be secure and you can enjoy the fruits of your labour.

"One of the biggest misconceptions that investors have is that 'wealth management' is only for the wealthy," says Erik Hon, managing director, iFAST Financial India. This misconception stemmed from how the full-service brokerage houses branded and priced their services.

MANAGING MONEY

  • Like any other profession like a lawyer and doctor, the ‘right’ wealth advisor has to be qualified and licensed
     
  • As a coach, the wealth adviser should be learned in various aspects of behavioural finance
     
  • A skilled wealth manager will know how to guide his/her client to make a rational decision

"Today, any investor can avail the service of a wealth manager," – Seemant Shukla, senior vice president, Edelweiss Personal Wealth Advisory. Technology is the key driver in democratising the service of wealth management and is helping the investors to choose services depending on their requirements. "However, for a retail customer, the services and offerings will be different as compared to that of HNI's (High Networth Individuals) or Ultra HNI's," says Shukla.

Do remember that wealth management covers three individual aspects of wealth creation, wealth preservation, and wealth transfer.

Obviously, you need to select the right wealth manager for your investment.

"Contracting the 'right' wealth adviser is as important as finding the right surgeon for cardiac surgery," stresses Satyen Kothari, founder & CEO, Cube Wealth. Wealth advisors who are uninformed or ill-informed can do more harm than good.

"Our overall well-being starts with a strong foundation of financial well-being," says Hon. Having the wrong adviser is akin to having an unlicensed surgeon performing the wrong procedures that can have devastating long term consequences. The worst part is that you may not even be aware of it.

But your search for your wealth manager has to start with an understanding of your own financial goals.

"When we know our monetary goal and the time we have to achieve it, only then can we understand what is our target rate of return given the inflation rate, and most importantly, how much risk we will need to bear to make those returns," says Hon.

This also helps to know if the goal is realistic or not. Only the right adviser, who is not focused on making money out of you by pushing products, will insist that you go through these deliberations. Once we understand the gravity and reality of managing our money well as early as possible, then we will understand how important a trusted and licensed adviser can be.

"You want someone who listens to you and understands your financial goals," says Kothari, rather than an investor who pushes you into a decision whether directly or indirectly.

Like any other profession like a lawyer and doctor, the 'right' wealth advisor has to be qualified and licensed, transparent and ethical. "I'd say that the good adviser is a good mix of a fiduciary wealth manager and life coach,' says Hon about the characteristics of the ideal wealth manager.

A wealth manager needs to be qualified to perform holistic financial planning for their clients' goals; understand multiple asset classes and product types to deliver the right mix of return and risk profile, transparent on all costs to the client and will seek to reduce the costs and, of course, be licensed and regulated by the correct authorities.

Another important characteristic is the adviser's approach: is there a clear financial planning process? Do they consider your existing investments when advising you on asset allocation strategy? What is their portfolio review process? How frequently would they meet you or service your calls in case you have queries? These are all important questions that help investors assess how committed the adviser is to their long-term interests.

"There is no one size fits all when it comes to the qualifications of a wealth advisor," notes Kothari. Generally speaking, good wealth advisors tend to have a background in finance, economics, business, statistics or similar fields. They are often generalists but you can also find those who specialise in retirement, taxes, real estate, insurance, and mutual funds etc.

"Don't forget the psychological factor," notes Shukla. Remember in this technological age, where information is transmitted in seconds, an investor can go from exuberance to pessimism, in those seconds. A skilled wealth manager will know how to guide his/her client to make a rational rather than an emotional decision.

As a coach, the adviser should be learned in various aspects of behavioral finance, so that they can anticipate and avoid common mistakes that investors may make with regards to their investments. "As most experienced advisers will tell you, behavioral coaching gains in importance when you offer holistic wealth management rather than pure distribution services," says Hon.

Your advisor and his remuneration

"Globally, the financial products distribution model started with the embedded commissions and bundled product distribution model, because it is the most effective way to promote sales," says Erik Hon, managing director, iFAST Financial India. In this, the commission structure is embedded in the product cost but is not transparent to the investor: investors feel they are getting advice and transaction services for free, and the product manufacturers decide on the commission structure and can devise various means to incentivise sales. It is a win-win for both the sellers and product manufacturers, but not for the investors.

Next is the hybrid model, wherein non-transactional services like financial planning, estate planning, etc., are offered for a fee, while the core investment portfolio is still operated on a commission model.

The highest in the value chain is the pure fee-only wealth advisory model, where the adviser performs all services related to wealth management in a fiduciary capacity - meaning, only in the best interests of the investor. In this model, advisers are bound by contract and law to not earn any commissions on investments channelled through them; they must also reveal any conflicts of interest that may exist when recommending any particular investment to their clients.

"You can pay your financial advisor through commissions on the products you buy, or a percentage of the assets they manage for you or pay a direct flat fee for advice," informs Satyen Kothari, founder & CEO, Cube Wealth, about compensating your advisor.

"Absolutely!,' said Kothari when asked if a client could ask his/her wealth advisor about their remuneration.

Your investor and the regulatory oversight

Sebi (Securities and Exchange Board of India) is the regulatory authority for securities markets in India. It regulates mutual funds, depositories, custodians and registrars and transfer agents.

Asset Management Companies (AMCs) in India are members of the Association of Mutual Funds in India (AMFI), an industry body that has been created to promote the interests of the mutual fund industry. All intermediaries who distribute mutual funds including banks have to register with Amfi and abide by the Amfi's code of conduct for intermediaries of mutual funds. In the event of a breach of the code of conduct by an intermediary, the registration can be cancelled and the intermediary cannot distribute mutual funds. For insurance, the Insurance Regulatory and Development Authority (IRDA) regulates the insurance agents.

Sebi launched the Investment Adviser Regulation in 2013 to protect the interest of Indian investors and introduce a clear differentiation between an adviser and a distributor. The Sebi Registered Investment Adviser (RIA) has to act in the fiduciary capacity, i.e. in the investor's best interest and cannot have any conflict of interest. According to this regulation, only investment advisers who have obtained the Registered Investment Adviser (RIA) licence from Sebi after due verification and process, can call themselves as 'advisers' and offers investment advisory services.

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