Top 10 wealth management mistakes

Written by Akash Joshi | Abhay Rao | Updated: Sep 28 2008, 06:50am hrs
What is the difference between wealth management and portfolio management

This is easily one of the most frequently asked questions by many even those who are already tied up with wealth management services. And, with the number of wealth management service providers increasing by the day, the definition will tend to get more diffused.

Wealth management does mean a lot many things to many people. For some it actually amounts to managing the asset portfolio, which usually has three components, like real estate, equity holdings and some insurance. And even in this, the real action is around the equity portfolio how much you are earning, how your capital is growing, and so on.

But the essence of wealth management, as most managers would tell you, is distinct from portfolio management. It is more long term and entwined with your life rather intimately. It is the creation of wealth to meet individual goals and the goals of the family. It even goes beyond your own life, it could even include your philanthropic and other related aspirations of seeing that your wealth has grown and is well distributed.

Often in India, wealth management is seen as accumulation of money and not about the wealth as such. More money does not mean more wealth, says Patrick Schneider, who provides consultancy services to many overseas wealth management firms. And this is not an India-specific phenomenon. Many countries that see an explosion of wealth will have a large number of people who will have to deal with such dilemmas, he adds. And, India has the fastest growing number of millionaires in the world and therefore the problem is rather prevalent here.

1. Going it alone

And one of the biggest mistakes people make in this area of wealth management is to do it alone. I think I can manage stuff on my own and after all I have the knowledge to handle it, is the usual response. And after completing his post graduation in business studies, even Dhiraj Nikam felt this way. But it gets more than that. I cannot concentrate on my profession and business and also manage wealth. This is a realisation I had, he adds.

Professionals like lawyers, doctors and even trained financial professionals need specialised wealth management support. And this is because it is not about placing monies in pre-designed compartments 10% in fixed income, 40% in real estate 40% in equities and the rest in insurance. It is not a product of a software program, but a series of iterations that result in asset allocation, which is designed to meet your life goals.

Professional wealth management service providers go a long way in understanding you and your needs, your lifestyle and your family. They then come up with several plans that could enable you to grow and distribute your wealth. It is better to involve professionals here.

2. The right partner

By an extension of the previous mistake, often high net worth individuals tend to pick up more than one service provider. Vikas Agnihotri, CEO, Religare Macquarie Private Wealth says, In India, clients provide only a portion of their portfolio to one wealth manager, hence the advice is suitable for only a part of the overall client portfolio. This is in contrast to international practice where investors engage with one wealth manager to provide holistic advice on their entire portfolio. It not only allows disciplined approach to investments but also helps clients achieve their investment objectives.

And when you express your desire to chose a wealth management partner, there will be many who will line up for what is known as the beauty pageant and will present their abilities to manage your wealth. Here, it can be said that it is better to avoid service providers who base their income on commissions from financial product vendors. These are advisors who, often enough, would peddle products based on the commissions that they receive and not the efficacy of the product itself and its match with your life goals.

While most financial planners and wealth managers would be good and competent, one can never be sure of their genuineness. Hence, doing a background check before deciding on someone is a must, for there are still those unscrupulous advisors lurking around, only waiting to catch their next prey.

Yes, the process of choosing a wealth manager should be even more carefully done, then choosing someone to employ. Hence, references are more important here, and, checking up with them equally so. It is, after all, your entire wealth and life you are going to be discussing with this person.

When you go to a wealth manager, note, most of them will have the gift of the gab, but under no circumstances should that intimidate you or make you passive. After all it is a service you wish to buy, hence it is important to ask questions, determine what their plan of action will be and how your money will be invested. Prepare a list of questions you would like answered, to put forth to your wealth manager. Remember, being free and open about talking to your manager, being able to disclose everything and, most importantly, having a comfort level and rapport with him is a must.

3. Clarity

Lokesh Nathany, national head of wealth management, Almondz Global Securities feels One of the most important parts of wealth management is asset allocation. This is a critical area where many people have made mistakes, by jumping around too much or not changing at all. And this happens because there is no clarity in why the wealth manager was approached.

We often get clients who have come to us because their friends told them at a party that our firm had helped them get some quick returns. So here they are, says a relationship manager with a global wealth management firm.

Though not water-tight, you have to have some clarity on the broad goals that you want to achieve in your life. These goals could be in the form of your childrens education, buying a farm house, childrens marriage, retirement and even beyond your demise.

4. Revisiting objectives

Obviously, as life goes on, objectives and goals keep changing. And when these happen, the wealth manager or the relationship manager must be consulted to reset the entire portfolio. And this is a critical aspect many clients tend to forget, says a wealth manager. In case you have a marriage plan changed to a closer date than planned then you would might have to liquidate a few assets that you have kept for that date. Now, which are the assets that you would liquidate and how do you restructure the portfolio Such decisions must be taken after great thought, reckon experts. But revisiting objectives just because market circumstances have changed and reshuffling the overall asset allocation mix at regular intervals might not be the right thing to do. But if there are compelling reasons, like the huge bull-run in the past three years (which is not exactly short-term), revisiting objectives and a reshuffle might actually work.

Nathany adds, Asset allocation, however, should be reviewed periodically and strictly. If it was decided your allocation would be 70% equity and 30% debt, during an equity boom this may change to a 90-10 ratio.

5. Panic / greed

Wealth management is a long term process and there will be times, especially in the bull-run, when you would be tempted to risk more. These are the times when long and detailed wealth management plans are often shelved, sometimes broken down to indulge in speculation. One of my clients actually broke our relationship and placed all his wealth on the markets, he even borrowed and took large positions. And when the markets started to tank, he panicked. But then, around 30% of his wealth was washed out in three months, says a relationship manager not wanting to be named.

Its first greed and then panic, he adds. You might want to keep some funds aside for speculation, but do not interfere with your wealth management capital and your life goals, unless any of them have changed.

6. Communication hassles

Wealth managers usually will keep sending you a lot of mailers and documents to keep you abreast of your wealth position. Now, there could be an information overkill situation. However, you need to be clear about where your funds are being allocated and how are they being monitored. And this relationship should be clarified at the very beginning of the association. Moreover, it is prudent to work with those who ensure maximum confidentiality and address your communication needs.

7. Protection

Often enough, wealth management is considered to be just about growing a set capital and then deciding how to distribute these monies. Many times, the aspect of protecting and covering assets and lives is not looked into. And many wealth managers, especially those attached with broking firms, tend to overlook this factor as well, or would include this in the investment basket, by using the unit linked route.

This is a grave mistake. You need to insist to your wealth manager to include the insurance aspect as well. And it is most likely that your wealth manager will actually provide you with some sound advice here. The commissions from life insurance are quite attractive, says Nikam.

8. Neglecting succession/estate planning

There have been umpteen cases where the family members of the deceased have been involved in bitter legal wrangles over sharing the estate. And most of this happens because a proper legal will was not prepared. Planning the will much earlier will ease much of the tension. Your philanthropic activities can also be scheduled in the will.

Moreover, wealth managers now offer trust services where trusts can be created for various purposes and their execution can be managed by the wealth managers. And trusts can be created even when you are alive and they will be managed according to your wishes and direction.

9. Involving family

Though it comes at the bottom of the rankings, not involving your family in the wealth management process could easily be one of the biggest mistakes. Experts recommend that speaking and sharing your overall plans with your family.

Discussing the life goals helps as the clarity, understanding and alignment of all family members is enhanced and therefore the wealth manager can then set up a solution that best fits your requirements. And with the family members involved, the sense of participation also increases, reckon wealth managers.

10. Overdependence

Lastly, wealth managers are human too and they make mistakes. Being completely dependent on them could be as counter-productive as constantly prodding them with suspicion. However, a healthy sense of accountability must be established where performances are questioned and monitored.

Having looked at all these factors, wealth management can be a rewarding experience that can help you fulfill your dreams and aspirations. It can, as a wealth manager says, enable you to see the fruits of your labour and enterprise be translated into happiness. It just requires some smart diligence.