What should HNIs see in a wealth manager

Apart from Sebi-approved wealth managers, one can find bank-linked wealth management, small financial service providers, brokers, non-banking financial companies and independent advisers.

Jayachandran/Mint

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 ₹ 10 lakh or lower, or cater to the mid segment with ₹ 10-25 lakh may not work for HNIs.

You need a firm that provides customized solutions for large corpuses of at least ₹ 50 lakh. Some firms even cater specifically to ultra HNIs with corpuses of at least ₹ 1 crore with a potential to build up to ₹ 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. Says S.K. Bagchi, professor for finance, Narsee Monjee Institute of Management Studies, who has also authored a book titled Wealth Management, “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."

Specific solutions: What you must also assess is whether it will be able to handle your wealth creation or preservation requirements, as the case may be. 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. Says Robin Roy, associate director (financial services), PricewaterhouseCoopers Pvt. Ltd (PwC), “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’."

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.

But be careful of specific tie-ups. For example, your wealth manager should be able to provide you the best private equity fund from a selection of providers and not just funds launched by one entity; they should provide you the best insurance solution, not just give limited options from one or two insurers.

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. Says Bagchi, “It’s important to ensure that the adviser doesn’t have any rights on the securities owned and is only buying (transacting) on behalf of the client."

Performance

Just like a fund’s performance is important for you to see before you invest in it, a wealth adviser’s performance is critical. Here, however, don’t be too bogged down by the performance of products recommended by the adviser. Rather you have to judge the effectiveness of the financial planning and wealth creation solutions provided.

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

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. Also, references from existing clients may help.

According to a report titled, Anticipating a New Age in Wealth Management, a global private banking and wealth management survey, 2011, from PwC, globally, only 37% of the respondents to the survey believe their clients are highly satisfied and would recommend them to potential clients.

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. For example, your adviser may charge a fixed advisory fee, say 2% of your overall corpus, when you sign up. 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 rationalizing distributor fee. Says Roy, “It will take some time for such an approach to stabilize. 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."

Contrary to what most people may say, paying an advisory fee is better than not paying. An adviser that bills you for advice values what is being said to you and will be more sincere in giving advice than one who is ready and willing to offer free advice.

Quality of firm

Incentive structure: Though this is not the most obvious way to evaluate your wealth management firm, there is some merit in asking how it earns commissions and what is its 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.

According to the PwC survey, levels of trust between wealth managers and their clients reached new lows during the crisis (2008), leading to increased scrutiny of client relationship managers behaviour, especially as financial institutions have faced penalties for mis-selling.

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. It is also in the wealth manager’s best interest that a client remains with them for a long time. So don’t shy away from asking as many questions as you need in order to narrow down to the adviser that suits you best.

lisa.b1@livemint.com

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