Questions to ask your wealth manager

The name's Bond! Plain, vanilla, old-fashioned bond. Or trust.

You have worked hard to build yourself a plump financial portfolio, the least you can demand is 'trust' from the person or organisation you assign to manage your wealth. Moreover as a busy professional, you might be unable to devote the kind of time needed to take care of the money you earn and would, ideally, like to outsource your money management to a trusted person or organisation. So where do you go?

India is still at a stage where the wealth manager is not necessarily a certified entity and the term itself is used rather loosely. With banks and distribution houses, insurance agents, mutual fund distributors and chartered accountants liberally calling themselves 'wealth managers', there is a mindboggling array of people to choose from.

So, it becomes imperative to first identify the type of people you can sign on as your wealth managers.

Manager Conundrum

There are wealth managers in banks who will eagerly do your financial planning if you fall in the HNI (high net worth individual) block. The banks assign a relationship manager (RM) to you, who is expected to manage the relationship with you by proactively using his knowledge to tailor unique and innovative financial solutions that will create value.

However, he is restricted by the number of distribution tie-ups he has -- not all of them can sell all products. Besides, as banks and distribution houses increasingly compete with each other with a similar set of products, an RM may end up just pushing his own brands instead of delivering long-term advice.

The high churn among RMs in banks often leads to sudden breaks in "relationship" building and a whole lot of miscommunication between the customer and the bank ensues.

Take the case of Piyush Singhal, 40, managing director at a Delhi-based software firm, Infoedge Solutions. In 2001, an RM from a prominent MNC bank offered to take stock of his investments. Singhal was advised to invest in 15 debt mutual funds (MFs).

Within a year he had burnt his fingers and exited when his portfolio crashed. Singhal held on to the bank, but this time opted for another RM. He then fell prey to the New Fund Offer (NFO) churn game that banks play with their HNI clients. From 2003 to 2004, Singhal invested in NFOs recommended by the bank.

"There was a 50 per cent churn within the very first year, and there was at least one instance when we sold one fund and bought it back within a month," he says.

When Singhal looked at his return, net of the short-term capital gains tax and commissions, he found that he had barely made 8 per cent in a market that topped 40 per cent.

So, why is Singhal still with the bank? "They are all the same," he says. His strategy now is to diversify across banks and he has signed up with another bank a year back.

Other 'Wealth Managers'

Then there is everyone else keen on getting a slice of your pie with assurances to make you richer than you are today. Your friendly neighbours who sell insurance and mutual funds may not always be the right source.

After all, their interests in selling you a particular product is the commission that they earn through selling you a financial product. Besides, your accountant or stockbroker may not adopt a holistic approach to all your financial planning needs.

If you strictly go by the book and look for a qualification that befits a wealth manager, then you should go to the 150-odd certified financial planners (CFPs) who have been certified by the Financial Planning Standards Board (FPSB), India.

Remember that a true wealth manager uses the financial planning process to help you figure out how to meet your life goals through the proper management of your financial resources.

Once you have identified the category of your wealth manager, it boils down to choosing one. Here are nine questions to ask before you hand over that cheque. And remember to keep asking as you go along.

What is your experience and qualifications?

Wealth management requires hands-on experience and a strong technical understanding of topics such as personal tax planning, insurance, investments, retirement planning and estate planning and, how a recommendation in one area can affect the others.

Ask the planner what his qualifications are to offer financial advice and if, in fact, he is a qualified planner. Ask what training he has successfully completed. Ask what steps he takes to keep up with changes and developments in the financial planning field.

Ask whether he holds any professional credentials including the Certified Financial Planner certification, which is recognised internationally as the mark of a competent, ethical, professional financial planner.

Find out how long the planner has been in practice and the number and types of companies with which he has been associated. Ask about work experience and its relation to current practice. Choose a financial planner who has experience counselling individuals on their financial needs.

What value-added services do you provide?

Ideally, your manager should offer complete financial planning. He should be able to give you advice on equity investment, debt, commodities, art, insurance, international investment, which home loans to take and why, tax planning, estate planning, filing tax returns, superannuation, real estate, and do a cash-flow analysis.

If you don't see a mix of different asset classes, it is a red flag. Diversification is the essence of wealth management. Apart from regular services, it would be nice to get some more value out of your advisor to update your own knowledge.

Look for the factors that differentiate one wealth advisor from the others. Check whether your advisor organises any client education seminars, gives you free research reports and regular updates on your wealth portfolio.

What plan can you suggest that suits my needs?

It is important that the plan made for you is unique to your income, your financial goals and your station in life. Each person's financial plan is significantly different from the others.

Your financial planner should be able to consult with you, draw out your financial dreams, and make a plan that will help them come to fruition. The plan changes depending on your income, the size of your family, what you consider necessary expenses, your luxuries and others.

Some financial planners have a few blueprints that you have to choose from, with pre-determined asset allocation ratios. While following this financial plan may be better than no financial plan, a custom-made plan that suits just you is ideal.

How much do you charge and on what basis?

It is better to be clear on this one. These charges are over and above any other charges like an entry and exit load charged by mutual funds when you invest in them. Ask if the fee structure is available in writing. They can charge you in different ways.

Fees: They are based on an hourly rate, a flat rate, or on a percentage of your assets and/or income. At times, it is on the nature of the work done.

Commissions: Though commissions are not paid by you, but by a third party (like a mutual fund house or insurance company), it does come out of your pocket. Fund houses and insurance companies use their entry and exit loads to fund these commissions for their brokers and distributors.

Combination of fees and commissions: Here you are charged fees for the amount of work done to develop the financial plan and commissions are received from any products sold.

What is your investment philosophy?

Don't put all your eggs in one basket. Spread them around so that a downturn in the life of one asset class does not affect the overall returns of your portfolio. Sure, everyone knows that but your wealth manager should be able to put it down on paper and actually tell you how to do it.

He should be able to tell you the structural risk inherent in a product. For example, he should be telling you that within equities, mid-cap funds are riskier than large-cap oriented funds. In addition to a strategic allocation, your planner should also be able to advise on the tactical allocation of your assets.

For instance, within the debt space when the interest rates are tightening, he should advise you to stick to floaters and should be able to tell you to shift your money into gilts in a scenario of falling rates.

If he has not mentioned the words 'asset allocation' and 'risk reward', stay out. The expected returns from various asset classes he mentions should also sound realistic. If your wealth manager's promises sound too good to be true, they usually are.

Again, if the wealth manager promises no downside, there is something wrong. Since all asset classes pass through varying life cycles, you should ask your wealth manager the downside of investing in a particular asset at that point of time.

Can you give references from existing clients?

You will get one only if there are satisfied clients. Trust is the first and foremost factor that you need to establish before choosing a wealth advisor. Talking to an existing client and knowing his experience will certainly help you take an informed decision.

How can I be assured of good service?

Look for an advisor who has good support staff and a manageable client roster. You also want to get an idea upfront on what his service policy is.

How often will he sit down with you to review your financial plan and investments? How will he communicate with you in the meantime? A regular annual review should be the minimum. Semi-annual or quarterly vetting, depending on the complexity of your portfolio, is also important.

Do you recommend your own products?

This might happen when a bank is your wealth manager. If all it is doing is pushing its own group company's products, there is an inherent conflict of interest. The wealth manager should be able to impartially say which product is best suited for you among a range of them and why.

The planner should study the costs and returns of various products and recommend the most efficient among them. He should not recommend a product just because he gets fatter a commission by selling a particular one, or his internal targets are skewed to selling a certain kind of product.

If I am not satisfied, What's the exit route?

The planner is a pure wealth advisor or broker -- so you are never invested in him; you invest through him or on his advice. You have to talk to him and understand the fee structure and other details at the time the relationship is being evolved. That alone can guarantee a safe, hassle-free exit in case you feel the service is below par.

These nine questions should help you narrow your options down to the most suitable wealth manager. Review the answers every once in a while, it helps you keep track of why you hired him in the first place and whether he is still the right manager for your wealth.

Wishing Wealth: A Checklist

• If your wealth manager recommends products from only a handful of companies, find out why. He may be a product pusher, not a planner.
• Insist on a periodic evaluation of your plan.
• If your wealth manager is constantly changing your portfolio, quiz him on the reasons.
• Often, your manager may prod you to invest in New Fund Offers (NFOs). These offers have no proven track record. Tread with caution.
• Before signing up with a bank, ensure your relationship manager is there with you for the long haul. The notoriously high churns among RMs can paralyse your plan.