?Life is filigree work. What is written clearly is not worth much, it?s the transparency that counts,? once said Louis Ferdinand Celine, a French writer and physician.

The world has been reeling under a self-created financial meltdown for over a year now. India too, after an amazing 2007, has had a tough time the following year and the current one hasn?t started off on the most promising note either. While in a complete system failure it is hard to point out where exactly the problem has arisen from, when one considers certain events like the Satyam scandal or the Madoff Ponzi scheme, certain weaknesses can be spotted. While everyone?s favourite target is the rules, regulatory bodies, corruption, inefficient governance and corporate greed, which all no doubt pay a big role in what has become of this world today, one must realise that they too are at fault. As kids we all use to have this saying ?finders keepers losers weepers?, and like it or not the same holds true in the real world. While this is not to anyway diminish the fact that what happened was wrong, it does lay emphasis on the nature of the con and why it worked.

India, today, has loads of wealth managers, portfolio managers, brokers, mutual fund houses, asset management companies, etc, all of whom we readily part our money with, in the hopes of making that money multiply. This is a prudent investment choice, no doubt done to plan for a brighter tomorrow. However, irrespective of one?s financial prowess, there are certain concepts that we all understand, the simplest amongst these being, the relationship between risks and rewards. Therefore, when one hears of a scheme, which claims that it will provide you with 35-40% returns by investing in an industry whose average returns over the past decade was 18%, then from which angle does one feel that this is a safe investment? While sitting back and judging from afar, it is easy to spot human errors made by others, the bottomline remains that the people often selling a scam or Ponzi scheme, are a little like magicians. They know how to distract a potential investor from the glaringly obvious tell-tale signs by maybe brilliant credentials, a noteworthy client list and of course the ace up their sleeve: the promised returns. A fine mixture of these three ingredients, when performed with professionalism, practice, ease and charm, usually disarms the investor completely. And, like a stranded man in a desert, who is promised an oasis across the sand dune, one tends to blindly follow those who are going to rob us.

Indian disclosure levels

Seldom, very seldom, does complete truth belong to any human disclosure; seldom can it happen that something is not a little disguised, or a little mistaken.- Jane Austen.

In India, wealth management and portfolio management have only recently caught on. These areas being fairly new in the Indian market are yet to be time-tested. However, with their growing popularity, it is only prudent to hypothetically see if there are any traps or pitfalls that lie within them. Portfolio management services in India are now heavily regulated. The basic procedures, which use to be followed by a PMS firm were to collect money from all of its clients and put it into one big pool account. After this, the firm invests the money from the pool account in various securities, shares, funds, etc, as they see fit. The firm will then send monthly reports to its clients detailing the capital they invested earlier and what is its current worth, which they ascertain by the percentage of the total pool account your capital formed at the beginning. This method was rather crude and even though certain firms had websites, which clients could use their username and password to log onto at anytime and see how much their money is worth now, or what are the securities the firm is investing in, there were too many problems associated with it. Some within the industry go as far as claiming that the regulators stopped this practice to curb money laundering, which could have been taking place via these pool accounts.

Currently, in India, each client who goes in for PMS, has his/her separate Dmat account and savings account opened, which the firm has the authority to use to buy/sell on the client?s behalf. This way, each client?s money is treated individually, their share transactions and number of transactions are visible to them in their statements or online, the amount of taxes, charges and fees applicable are also clearly listed for the client to verify. With this new process in place, the odds of a ?Ponzi? scheme or any other such scam taking place in India is unlikely. Of course, it is in the investor?s best interest to periodically look at their accounts and transactions done, as well as the types of stocks bought/sold. For, if the investment details appear vague or incoherent, then one should immediately be suspicious, on their guard, and try to get their money out as soon as possible. This is a suggestion only made, for while India does have very good disclosure levels, if the disclosure done is not transparent and clear, but translucent and vague, then one needs to start worrying nonetheless.

That brings us to what Sebi considers while granting the certificate of registration to a portfolio manager applicant. Sebi takes into account all matters, which it deems relevant to the activities relating to portfolio management. The applicant has to be a corporate body and must have the necessary infrastructure like adequate office space, equipment and the manpower to effectively discharge the activities of a portfolio manager. The principal officer of the applicant should have either -a professional qualification in finance, law, accountancy or business management from a university or an institution recognised by the Central government or any state government or a foreign university; or an experience of at least ten years in related activities in the securities market, including in a portfolio manager?s position, stock broker or as a fund manager. The applicant should have in its employment a minimum of two persons, who, between them, have at least five years experience as a portfolio manager or stock broker or investment manager or in the areas related to fund management. The applicant also has to fulfill the capital adequacy requirements, etc. This is an extract from an investor education questionnaire provided by Sebi, for better understanding of Sebi (Portfolio Managers) Regulations, 1993.

Wealth management – virgin territory

While trying to understand what the wealth management disclosure levels are, and rules, if any, for them to follow, many a wealth manager explained, ?Wealth management and portfolio management are very different. While the latter is a highly regulated area, wealth management being fairly nascent and unrelated to the direct raising of money, has been left out of the system for now.?

Thus, wealth management is different from portfolio management as it encompasses a person?s complete financial planning. It is an advisory position, wherein, the wealth manager, after knowing the client?s goals, dreams, current financial status, helps and advices them on where to put in how much money so as to help them achieve their financial goals. Wealth management one must also realise is completely unregulated and free of any rules and restrictions per se, except of course those which the individual banks/companies create internally. On first hearing this, most people may jump to the conclusion that they are rather vulnerable at their wealth manager?s hands. However, the good news is that it isn?t really like that, for a wealth manager as such never takes money from a client. They are not allowed to raise money from the public and hence the lack of regulations here. The position a wealth manager takes is that of advising a client on what they should do with their money and only if a client agrees, do they invest for the client in whichever product they have finalised on, be it a stock, a mutual fund, a fixed deposit or an insurance policy. Therefore, technically speaking, the biggest risk that one can have from his/her wealth manager, is wrong advice and mismanaged finances. However, if a dedicated professional is your wealth manager, who understands your needs and the financial world, it is unlikely the same will happen, for reputation and transparency are key areas in this world.

Self due diligence

Keeping a few basic points in mind and going over them every time you make a financial decision can help you avoid falling for any sort of financial trap.

• Never make a financial transaction based on something you receive in your email.

• Don?t participate in pyramid schemes and avoid multi-level marketing schemes, especially those that have no corporate backing and a track record for at least a decade. Pyramid schemes are designed so that the creator and his closest circle of friends make all the money, while all the people under them are not likely to make much at all–usually it is just a waste of time and effort.

• Never pay money upfront for things you don?t understand, allow you to work, or that promise to promote your work in some way.

• Only invest in things that have a long established history. Blue chip stocks, government bonds and established mutual funds are usually sound places to put money. Don?t put your money in the hands of a single private investor unless you are prepared to lose it.

• Wherever you put your money, investigate and do due diligence beforehand. If you are putting money in a bank, know if it is insured, how long it has been in operation, etc. If you are investing, look at the track record of the companies you are going to invest in. When dealing with a wealth manager or portfolio manager make sure to look into their records, past performance, reliability and transparency levels.

While the corporate wealth management and PMS services in India seem fairly safe and secure, this does not mean that there are no dangers lurking around, for conmen exist everywhere. In India, one should remember there is a parallel financial system, where chit funds, hundi?s and the likes are rampant.

Here, the returns promised are enticing but so are the odds of never seeing your money again. Hence, it is essential for one to make sure the people who they are dealing with are transparent and follow disclosure levels that are to your understanding and satisfaction.

Smooth returns and extraordinary returns are a fallacy. You cannot have super normal profits for a long time. History has proven that profits like the kind Bernie Madoff was handing out, means that there was something else going on. Especially when one hears investment gurus like Warren Buffett himself admitting to having made only small returns during the early days of his own highly exclusive fund.

Like the old adage goes, ?If it?s too good to be true, it probably is.?