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Private Wealth Managers-Fact Checks

Private wealth management is an investment advisory practice that incorporates financial planning, portfolio management and other aggregated financial services mainly for individuals and families. Private wealth management is the practice of solving or enhancing client`s financial situation and achieving short-, medium- and long-term financial goals.

Who Needs Private Wealth Managers?

Many individuals & families would need such experts due to lack the time, effort or knowledge to manage their finances successfully.

There is generation of Ultra High Net worth Individuals (UHNIs) who places a lot of emphasis on the investment process.

Technology as an imperative: The new generations of wealthy are digital natives. They spend a considerable portion of their day in the digital realm and are quick adopters of technology. Consequently, they also expect their wealth managers to optimally use technology to improve user interface, reporting and engagement.

Some HNWIs may want to consider opening a family office.

A family office provides a wider range of services tailored to meet the needs of HNWIs. From investment management to charitable giving advice, family offices offer a total financial solution to high net worth individuals. There are two types of family offices: A single-family office supports one affluent individual or family, while the more common multifamily office supports multiple families and individuals.

Who are Private Wealth Managers?

Private wealth management services can be provided by banks (mainly private sector banks) and large brokerage houses, independent financial advisers or multi-licensed portfolio managers who focus on high-net-worth individuals, and family offices. They are smaller groups within larger financial institutions that are focused on providing personalized service to their clients. Most private wealth management firms are fee-based and they charge their clients a percentage of the assets under management and sometimes as a % of gains over fixed respective benchmark.

Wealth managers generally begin at personal net worth of Rs 20-25 crore.

HNWIs may believe that fee-based financial advisers have less conflicts of interest as compared to traditional commission-based advisers but there have been instances where interest of clients have been compromised to push for particular products where other arms of their company have interest such as

1) Pushing Insurance under the garb of Investments even though Clients do not need such insurance.

2) Subscribing to IPOs where they are Investment Bankers

3) Pushing for complicated and exotic products without clearly highlighting risk factors

4) Downplaying traditional government backed saving products offering good returns like post office schemes

5) Many products they bring to table promising high returns but never bringing risk factors associated with these products including lock in period

6) Recent defaults in “AAA” rated instruments such as IL&FS, DHFL & many well-known Promoters Groups suggest that even rated instruments carrying “AAA” defaults and become junk.

7) Recently many HNIs have their Investment stuck with Real Estate Developers due to weak property market, leveraged developers and their troubled finances. Many of these Developers have defaulted and/or opted for Bankruptcy. HNIs money were invested in FMPs, PMS or exotic instruments. This reminds us of 2007-08 American Financial Crisis when exotic instruments were used by shadow banks to invest for HNIs.

8) Recently, nonbank finance companies (NBFCs) are facing a liquidity shortage of their own, they’re passing on their illiquid, poor-quality builder loans to bespoke funds by indicating 20%-plus returns to investors and selling commission was in the range of 6-10% upfront.

9) Investors were lured to invest in unlisted securities, whether potential IPO candidates, young startups, distressed assets, commodities or builder debt, alternative investment funds take complex, risky bets etc. and many of them are stuck with their Investments with probability of huge capital losses.

10) Be careful about “get-rich-quick schemes” where fees for distributors are so juicy that they will somehow convince you with their PPTs & Excel sheet wearing “Costly suit” drawing huge “fancy salary packages & incentives” at your cost.

11) It is now well known and accepted facts that mis-selling of ULIPs (unit linked insurance plans) were a scam which defrauded the investors off estimate Rs. 1.56 lakh cr.

12) Private Wealth Mangers from many private sector Bank still try to mislead people into buying products they don’t need

13) They are probably doing so because banks set stiff sales targets for relationship managers, forcing them to push products that fetch higher commissions instead of investments that suit the investor’s needs. Most of the mis-selling happens at foreign banks and new generation private sector banks. The relationship managers are trained to stonewall any question from the customer. These wealth Managers from Banks were found pushing sub-optimal, or risky products.

14) Private Sector and Foreign banks cross sell the financial products of third parties to earn distribution commissions. The relationship managers in these banks aggressively sell risky financial products like equity mutual funds, ULIPs etc. to their unsuspecting customers, mostly senior citizens. These bank managers highlight the high returns earned on these products in the past, but conceal the inherent risks associated with such financial products like equity funds. The returns on mutual funds depend on the vagaries of stock markets and are not guaranteed. When markets are down, there can even be capital loss in equity mutual funds.

15) A senior citizen needs guaranteed returns without any loss in the principal amount. Products like equity mutual funds do not suit to the needs and risk-taking capacity of senior citizens and hence tantamount to mis-selling. Financial products like Bank Fixed Deposits, Senior Citizens’ Saving Scheme, post-office saving schemes or Government Bonds suit better for the needs of older people. These products offer guaranteed returns and there is no fear of loss in the principal amount. On the other hand, the risk-taking capacity of young people, who are in still in their earning cycle, is high. They can afford to invest in risky financial products in order to earn higher returns. The distributor or agent needs to properly understand the needs and risk profile of customers and offer financial products that are best suited to them.

16) Whenever an agent or distributor aggressively pitches to sell a particular financial product, do not just get carried away. Read the product brochure carefully, collect more information about the product through internet, take a second advice from other sources and then only make an investment decision. Ask questions about the following aspects of product – market risks associated with the returns, lock-in period if any, regulatory authority that has approved the product, premature exit load and other charges.

17) In case a bank has mis-sold a financial product, you can approach the banking ombudsman for redressal, under the amended RBI Banking Ombudsman Scheme.

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