Wealth Management: Make Your Money Dance To Your Tune

When we think about high net-worth individuals (HNI), we tend to view them as people who are sitting pretty on a stash of wealth. People without any problems and living a life studded with utmost luxury. The very reason that they have amassed a significant amount of wealth over the years, we think they are set for life. On the contrary, having a huge wealth is far from a care-free status. Wealth needs to be taken care of. Some of the things that wealthy people need to worry about are implementing tax planning and creating a successful investment plan which preserves as well as helps to appreciate the value of the capital. It's not a task which an investment advisor can carry out as it requires more than just investment. It is a terribly complex affair which requires high skills and due diligence. To give your assets the value they deserve, wealth management is an absolute must.

What Is Wealth Management?

Wealth management is a professional service that consolidates all the financial services like investment advice, tax planning, retirement planning, etc. Wealth management simply means to provide complete financial services and products to clients in a consultative manner through which their capital remains safe, enjoys appreciation at the same time has high liquidity.

Asset Management Vs Wealth Management! What's The Difference?

There is a lot of confusion between wealth management and asset management. On the face of it, these two terms might come across as agencies which carry out similar responsibility. However, there is a sea difference in their functionalities.

Asset Management- Is a firm where investment advisors focus only on managing the assets in the portfolio of an individual. These assets may constitute varied asset classes like equity, fixed income, real estate, etc. Asset managers assess various investments and make suggestions for your portfolio based on your goals and risk appetite. However, the term Asset Management Company (AMC) also refers to a mutual fund company. These companies provide asset management services like a mutual fund and ETFs, etc. The important thing to understand is that asset management is unidimensional work that focuses only on one aspect -- investment.

Wealth Management - The concept of wealth management centres on developing effective strategies for a familys or individual's wealth. Unlike asset management, wealth management focuses on various aspects like financial planning, tax planning, portfolio management, retirement planning, estate planning, etc. In a way, it deals with every avenue where either you have to invest money or have any monetary liability.

Objectives Of Wealth Management

The objective of wealth management is to provide a fitting balance of return and safety and is usually connected with greater compounded growth rates over time. While it attempts to consistently produce the best returns possible, its principal interest is in protecting clients capital. Wealth management can be best described as an agency that balances the objectives of preservation and growth. It involves creating both a strategic and tactical asset allocation which takes into account the market volatility and the possibility of market declines.

Wealth Management Is Your Key To A Happy Retirement

Wealth management is important. Just like for the working professionals, happy retirement is a priority of HNIs too. The ever-increasing cost of living in India and the decreasing interest rates (savings and fixed deposits) are some of the reasons why it has such a strong relationship with the issue of retirement. Unlike western nations, India doesn't have a pension system to support the elderly people in the country. In absence of any government-sponsored pension scheme, the onus of looking after yourself lies entirely on you.

So for the HNIs, the question staring at them is mainly lifestyle maintenance and preservation of financial independence. For them, it is extremely important to regulate the gap between actual wealth and perceived wealth. A good wealth manager helps them to understand whats needed to support the current lifestyle and the income needed for consumption and material assets at the same time keeping high liquidity.

Challenges to Wealth Management in India

Regulatory Environment

The regulatory environment in India is still in the primary stage as there still is a lot of ambiguity in the jurisdiction of a number of regulators and that is one of the many reasons for the absence of experimentation. Also, different products like the commodities, derivative and debt market are not as evolved as the equity market in India.

Awareness & Finance Literacy Amongst HNIs

One of the biggest challenges for Indian wealth management firms is the lack of awareness amongst the target population about the financial products that are available. On top of that, many investors have a sense of insecurity owing to scams and malpractices of some advisors. They feel there is an absence of investor protection and a safe environment, which is one of the biggest roadblocks. As this atmosphere has sustained, a narrow-minded view concerning long-term investments has prevailed.

Higher Penetration Of The Service

Statistics suggest that a huge number of the HNI population lives outside metro cities. In these regions, they are mostly served by the unorganized players. Hence, this non-metro HNI class is still away from experiencing the professional wealth management services in India. If the wealth management sector and wealth management products have to have a larger penetration, its reach to non-metro High Networth Individuals (HIN) will play a crucial part in securing the untapped wealth and transforming it into assets under management (AMU).

Innovative Product and Service offerings

Another big challenge that needs to be addressed is that the product portfolio offered must be innovative in terms of meeting the diverse needs of the customers and be up to the standards of mature market players.

The Tools Of Wealth Management

Mutual Funds - Is one of the smartest and the most dynamic tools of equity investment. Mutual funds are available in equity, debt and liquid forms. All these types of mutual funds have their own set of pros and cons which depend on the Asset Management Company (AMC) managing the fund. Equity is a dynamic investment domine while debt offers risk-free growth. On the other hand, liquid funds offer, as the name suggests, extreme liquidity without any exit load. A smart wealth manager can guide you on points like what schemes to choose, how much fund allocation to which scheme, etc. One of the qualities of the mutual fund is that it can be a potent tool to meet your short-term as well as long-term goals (retirement). At moderate risk, investors get decent returns and also get to experience the power of compounding.

Government Schemes: Public Provident Fund (PPF) & National Savings Certificate (NSC) - Is the most reliable and trustworthy investment scheme as it is operated by the government. PPF investment comes with certain stern conditions like 7 years lock-in period plus certain limitations on the quantum of investment. But due to tax benefits and compound interest, it has become quite popular amongst investors. Some portion of your income should be allocated to PPF, however, it provides fixed returns and the interest rates get reviewed periodically. Thus this instrument should be inducted in your plan but should get limited weightage.

Direct Equity investment - Many people try to avoid direct exposure to stock investment due to fear and ignorance. But there are means like stock advisory firms to help you reduce risk in stock investment. Over the years, stock investment has given uncapped growth to the investors. Every smart investor should have a stake in equity. As we discussed above, equity not only keeps the value of your money on the equal footing with inflation but most of the times, a step or two ahead.

A Word Of Caution - Though direct equity investment is the most rewarding asset class, it requires a lot of research and analysis to get the stocks. Those who dont have adequate knowledge of equity should seek the support of a financial advisor or certified financial planner or a SEBI registered equity research firm.

Efficient Tax Planning - There is no magic which can totally remove taxes but there are wealth management strategies which can help clients that can reduce the tax liability considerably. In the Income Tax Act, there are several provisions for donations to NGOs, donations for charitable causes which gets tax rebates and concessions. It's entirely incumbent upon the wealth managers to bring down the tax burden as much as possible.

The Role Of Equity In Wealth Management

To accomplish the long-term goal of wealth creation, equity investment is an absolute must. The same equity can be used for wealth management. Fixed income investments instruments i.e. fixed deposits (FD), National Savings Certificates (NSC) and Public Provident Fund (PPF) offer the fixed return, which can't grow your money than 5-6% annually. These avenues are more suitable for deriving near-term regular income. But just not good enough if you want to grow your wealth. Usually, wealth managers advice to part some portion in equity, if moderate to high risk is acceptable to the client.

On the other hand, investing in equity is like participating in the growth of a company. Thus over a period of 5-10 years, your money can grow alongside the wealth of the basket of companies you have bought the shares of. The historical data suggests that equity investments held more than 10 years, have delivered compound annual growth rate (CAGR) returns of 12-15%. This makes is it an essential asset class in the scheme of wealth management.

Also, for interest earned through fixed income products (except PPF), investors have to pay tax at your income tax rate, whereas equity returns are tax-free if held for the period more than one year. Most importantly, while planning, if you consider that long-term inflation can be somewhere between 5% and 7%, then your investment has to give returns at least more than that. Equity can easily manage that but fixed income instruments barely cover inflation post-tax returns.

Role Of Your Wealth Manager

These days everyone in the financial world is calling himself or herself a wealth manager or at least a financial advisor or a money manager, even if the roles these people fill are wildly different. People usually confuse what wealth management with mere investment management. There is a sea difference between an investment planner and a wealth manager. An investment planner is someone who advises about stocks, bonds, exchange-traded funds (ETF), mutual funds, etc. Whereas the role of wealth managers is far more evolved. Here some of the responsibilities that a wealth manager has to carry out.

Interview clients to understand their current income, expenditures, insurance cover, tax status, financial goals, risk appetite.
Answer clients' questions about the plans and details of financial plans and investment strategies.

Recommend strategies for cash management, investment planning, insurance cover or other domains to assist them to achieve their financial goals.

Review clients' portfolio and plans regularly to ascertain whether life changes, economic changes, financial performance designate a need for plan reassessment.

The Avenues Of Wealth Management

In India, there are mainly three types of wealth management service providers i.e. banks, brokerage firms and advisory firms.

Banks Most of the major banks in India like ICICI and HDFC provide wealth management services to their clients. However, as banks have a larger investment distribution model, it is not possible for them to concentrate on just one investment option but they focus on a large investment portfolio. Also, they provide service to mid-level segment clients apart from the HNIs.

Brokerage Firms Some of the full-service brokerage firms provide advisory and wealth management services. The point to remember is that brokerage firms' main focus is investing customers' money in equity, mutual funds and IPOs.

Advisory firms If you want customised wealth management solutions, advisory firms are your best option. The principal business of these firms is to provide their clients financial services like customized financial plans, wealth management, equity research and portfolio management service. From such firms, a customer can expect a more personalised service.

Niveza offers Personalised Research Service (PRS) where the investor literally doesn't have to do anything. Just open the lifetime free demat account with SMC (Our broker partner) and you are good to go.

Following are the highlights of Niveza's PRS

- Research and analysis by our in-house analysts

- Buying & Selling by the in-house equity dealer

- Handsome returns on investment

- Hassle-free investment experience