Individuals of high net worth may have certain financial requirements that go beyond picking suitable investments. For people with more money, managing their investments across equity, fixed income, mutual funds, alternative investments, insurance and other types of assets can be difficult. Services offered in wealth management can facilitate such management through financial planning, portfolio management, investment advice and review of investments.
Nevertheless, selection of a wealth manager goes beyond comparison of investment performance. A person with high net worth should consider certain things when selecting a wealth management firm.
What Does a Wealth Manager Do?
A wealth manager offers services that assist in managing and organising the financial assets and goals of an individual. Based on the nature of the company and the service provided, these services will involve investment planning, portfolio building, asset allocation, tax coordination, succession planning, retirement planning and access to alternative investments.
The services offered by different companies may vary. While some companies deal mainly with distribution of financial products, there are others which offer investment advisory or portfolio management services. As per the data available with SEBI, registered portfolio managers offer discretionary, non-discretionary and advisory services in various categories including listed equities, debt, mutual fund and other investments.
Therefore, the first step for HNIs is to identify what service they require and not choose a company based on their brand name and performance.
Questions to ask an investment advisor
Prior to choosing an investment advisor, there are a few key questions that one needs to think about.
1. Is the Company Properly Registered?
It is advisable to check the registration of the company and know the services that they are authorized to offer. SEBI maintains an online database of all the investment advisers and portfolio managers.
The HNI needs to determine whether the person giving advice is working as an investment adviser, portfolio manager, distributor or in some other capacity. This is because they can offer different services and earn fees differently.
2. What Fee Structure Does the Wealth Manager Use?
The fees charged could vary based on the service provided. It could be fixed fee, asset based fee, transaction fees or any other fee.
For SEBI-registered investment advisers, the current regime allows the fees to be charged based on fixed fee or AUA basis within the maximum limit allowed by SEBI. The current SEBI guidelines allow a maximum annual fixed fee chargeable from each family of client at Rs 1,51,000 and 2.5% AUA-based fee in the case of securities related investment advice.
One needs to ensure that they are getting a comprehensive plan and structure.
3. Does the Firm Have Conflicts of Interest?
Ask whether the wealth manager receives commissions, distribution income or other compensation from products recommended to clients.
This distinction is important because the incentives attached to different business models can vary. SEBI’s investment-adviser framework includes conflict-of-interest requirements and states that registered investment advisers should disclose conflicts that may affect the services provided.
Understanding how a wealth manager is compensated can help an HNI assess whether recommendations are aligned with the agreed advisory arrangement.
How to Evaluate Investment Performance
Past returns are an important data point, but they should not be considered in isolation.
An HNI should ask:
- What benchmark is being used?
- What period does the performance cover?
- Are returns calculated before or after fees?
- How much risk was taken to generate the returns?
- How did the portfolio perform during periods of market stress?
- Does the performance reflect the actual client portfolio or a model portfolio?
For portfolio managers, SEBI requires performance reporting using the time-weighted rate of return (TWRR) methodology and comparison with an appropriate benchmark.
Comparing returns with an appropriate benchmark provides greater context than looking at absolute performance alone. For example, a portfolio’s return should be assessed against a relevant market or asset-class benchmark and the risk taken to achieve it.
Assess the Investment Philosophy
Ask the wealth manager how portfolios are constructed and reviewed.
Important areas include:
- Strategic asset allocation
- Diversification across asset classes
- Risk profiling
- Liquidity requirements
- Investment horizon
- Rebalancing methodology
- Selection of investment products
- Approach to market volatility
SEBI’s investment-adviser framework requires advisers to conduct risk profiling and suitability analysis and align their services with the client’s assessed risk profile.
An HNI should also determine how frequently the portfolio is reviewed and under what circumstances the asset allocation can change.
Examine the Range of Wealth Management Services
Investment management may be only one part of an HNI’s financial requirements. Depending on individual circumstances, wealth management services may include:
- Investment planning: Structuring investments according to financial goals and risk tolerance.
- Portfolio management: Managing investments under a defined mandate.
- Retirement planning: Estimating future income requirements and structuring assets accordingly.
- Estate and succession planning: Organising the transfer of wealth to beneficiaries.
- Tax coordination: Working with qualified tax professionals to consider applicable tax implications.
- Alternative investments: Assessing opportunities such as private equity, real estate and other alternative assets.
The suitability of these services depends on the individual’s financial circumstances and objectives.
Consider Technology and Reporting
A wealth manager should provide clear and timely information about portfolio holdings, transactions, returns, fees and asset allocation.
Technology can make this process more transparent by providing consolidated portfolio views, digital reporting and access to documents. However, technology should complement rather than replace appropriate financial advice where the client’s needs require professional assessment.
SEBI’s current investment-adviser framework also requires advisers to obtain relevant financial information from clients and conduct ongoing risk profiling and suitability analysis.
Conclusion
Choosing a wealth manager is a long-term financial decision. HNIs can assess potential providers by examining their regulatory status, service model, fee structure, conflicts of interest, investment philosophy and reporting practices. Performance should be reviewed against appropriate benchmarks and considered alongside the level of risk taken.
A suitable wealth management arrangement should also reflect the client’s investment horizon, liquidity requirements, asset allocation and broader financial objectives. Comparing these factors before selecting a provider can help create a more structured approach to managing substantial wealth.
