What is Wealth Management?
Wealth Management is defined as an investment-advisory practice which incorporates elements from a variety of financial disciplines including but not limited to investor portfolio management and financial planning. In common practice, such services are offered by financial services companies or credentialed specialists (CFAs, CAs, etc) to small businesses, family owned enterprises and perhaps most importantly to high net worth individuals.
The primary goal of wealth management services is to grow the existing wealth in the long run. The most common type of wealth management sought in India as well as globally is the private wealth management service that is provided to HNIs (High Net worth Individuals).
Wealth Management Services for Individuals
Wealth management services are most commonly sought out by high net worth individuals (HNIs) both in India as well as across the world. Many HNIs have complicated investments including overseas assets, which necessitate the use of professional assistance such as those provided by professional wealth managers. Common aspects of wealth management services provided to individuals include:
- Hedging of derivatives
- Venture capital Investment
- Stock-Options Planning
- Real Estate Planning
With the increase in wealth of the top 1% across the world, HNIs have started demanding greater personalised attention leading many organizations to form specialized divisions dedicated to personalizing wealth management solutions for their top (richest) clients.
Factors that Private Wealth Managers Need to Consider
When providing private wealth management services, the following are some of the key factors that the wealth managers need to consider:
- Investment Time Horizon:
The time horizon of investment tends to vary from one individual to another, and from one company to another. While one investor might be perfectly agreeable to invest for long periods of over a decade, others might have a much shorter time horizon in mind. At the root of this variation is the fact that an individual no matter how rich or powerful, has a finite life span. This is in stark contrast to organizations that have the same rights as individuals which theoretically have an infinite lifespan.
Wealth managers need to consider not just the accumulation of wealth for their clients but also make arrangements regarding the transfer of wealth at the end of the individual’s life.
- Multiple Tax Considerations:
High Net Worth Individuals mostly have overseas interests which makes them liable to pay taxes on their profits that vary from one country to another. The wealth manager needs to consider all such interests separately, taking into account the different taxation methodologies and rules that are applicable in the country of investment. Wealth management thus incorporates various techniques of portfolio management that are capable of providing individuals with returns that are in line with the investment objective after all relevant taxation requirements have been managed.
How do Wealth Managers Manage Investors’ Wealth?
- Risk Analysis:
This is usually the first step towards creating a customized investment plan for the client. Risk Analysis involves assessment of the client’s risk tolerance capability with respect to his/her finances. Key factors that determine this capability include current/future responsibilities, investment objectives, client personality and more. These and other pertinent details of the client are utilized to create a comprehensive profile to develop a thorough understanding of the client’s risk-taking ability.
- Asset Allocation:
After completion of the risk analysis step, the wealth manager as well as the client should have a better understanding of what risk-return relationship would be most suitable. The financial advisors and wealth managers are expected to create an appropriate allocation plan to ensure suitability with the risk-reward requirement of the client. The recommendations thus made would feature distribution of the client’s available/investable capital across key asset classes including but not limited to real estate, equity, debt, alternative investment funds, etc. in order to maximise returns while managing the overall portfolio risk.
- Investment Products:
Wealth managers in India often have close working relationships with leading banks, which ensures that they have access to a wide range of investment avenues. Beyond the discovery of investment options that already exist, wealth managers would also attempt to provide specialized investment products that may be uniquely suited to the client’s needs. The combination of various traditional and specialized investment products would vary from one client to another allowing a high degree of customization.
- Investment Process:
Wealth management typically involves achieving both short term and long term financial objectives. This is usually achieved through investment advisory support services that allow investors to access short term opportunities in a flexible manner. At the same time, they would ensure that long term investment vision of the investor is also kept in mind when selecting investment options.
- Research & Execution:
The work of the wealth manager does not end with the client making the chosen investments. The wealth manager would also be involved in keeping a close watch on the performance of the various investments over a period of time. In most cases, the client would continue to receive additional reports that use both qualitative and quantitative techniques to ensure that the portfolio is correctly executed. This is especially important considering the wide range of risk profiles, features as well as variables that add to the overall complexity of a portfolio. This long term support provided by wealth managers plays a critical role in ensuring that the goals of the clients are met not just in the short term but also over the long term.
Frequently Asked Questions
Q. Which are the top wealth management firms in India?
A. Top wealth management firms in India are:
- Bajaj Capital
- Kotak Wealth Management
- Angel Broking
Q. Do wealth management firms charge a hefty amount of fee?
A. Yes. Since the investment portfolio of the investor is customised personally, the fee charged by wealth management firms is quite high. Apart from the fixed fee charged on the initial investment amount, these firms also keep a share of profits generated as an additional management fee.
Q. Who should opt for Wealth Management Services?
A. High Net Worth Investors who are looking to get customised investment solutions for themselves, and invest in a diversified range of asset classes can consider Wealth Management firms for financial planning.
Q. Is availing Wealth Management Services risky?
A. Yes. Even though your portfolio will be personalized as per your risk appetite and financial goals by a team of professionals, the possibility of capital loss still persists owing to market volatility and its effect on various asset classes.