Five things Your Wealth Adviser Won’t Tell You

The number of financial advisers, wealth managers and private bankers is increasing proportionality with the increase in the number of wealthy people all over in India. Earlier, various small banks and financial institutions have been used for managing money of these wealthy people. Later wealth management services have come up with wealth managers and financial advisers to manage some portion of money of wealthy investors.

Generally, wealth managing services are offered by large brokerage firms, banks and other independent financial advisers. The individual who earn an annual income of 10 lakh rupees is depends upon insurance agents and stock brokers for investment advice while those who earn more than 10 lakhs are rushing towards wealth management services, as they believe that they get more customised services and better management of their money with these management institutions.

Though wealth managers provide more services, there are five things that your wealth adviser may not tell you during the sales pitch in disclosures. These are explained below in detail.

1. When you are going to make an investment of huge amount (say in lakhs), you actually deserve to get customized services from your money manager, which the small investor generally cannot get. But, even if you choose wealth advisers and private bankers for investing your money, they put large part of your equity allocation in a mutual fund investment – which is commonly purchased by all investors.

According to regulations of Securities and Exchange Board of India, some private banks offer portfolio management services, which needs a minimum investment of Rs. 5 lakhs. Managers of these private funds, with the goal of providing better returns than mutual funds, buy stocks and bonds and use other investment strategies for getting better returns and not to lose money in bear markets.

Unlike mutual funds, these managers don’t have to share their performance results with public. This is because, the rich and sophisticated investors who buy these funds have resources to make smart financial decisions. However, these private funds work much like a regular mutual fund which buys and sells securities without considering the individual needs i.e. working is not in time with the risk appetite of the High Net Worth Individual (HNI).

2. Many of the portfolio management services seem to be quite attractive, though having better expertise and selling on possibility of better returns, most of them have not delivered on the promise. During the recession of 2009, many of the stock-oriented portfolio management services lost more money than the broad capital market as they were concentrated in only few stocks. Sometimes, these management services might lose money in a rising market also. By this it is clear that investors could have gained better returns in an index-tracking fund rather than portfolio management services.

3. In many wealth management services, wealth advisers or private bankers give investment advice for long-term investments and often talk about building long-term asset allocations or long-term portfolio for you. But actually what they might not tell you is that they don’t plan to stick with you for a long term. This is because these managers regularly switch companies as they get some good immediate opportunities for career advancement.

4. Many wealth managers usually charge a fee for giving investment advice and for managing money of their clients. But these wealth managers also have other sources of income, as they sell equity funds, insurance policies and other financial products to their clients in their investment advice.

For example, some insurance companies pay a commission of 10% to financial advisers on first year’s insurance premium for selling their equity-linked insurance policies. Whereas, mutual fund companies typically pay 1.5% to 2% of assets as “upfront” and “trail” commissions to distributors for selling their equity funds. So, be aware of how your private banker gets paid.

In case if your wealth manager makes direct equity investments for you then it is better if you watch out for excessive trading. Because these higher brokerage costs may benefit your wealth manager, but the amount will be deducted from your returns over the long term.

5. No expertise is required to become a wealth manager. While the financial company may be great, ultimately the results are dependent on the knowledge, expertise and understanding of the wealth manager to evaluate your situation and make correct decisions.

A bad wealth manager cannot compensate for good finance company or bank. While an OK-OK finance company’s wealth manager with right expertise could be more helpful to you.

Hence these are the five things which you might not know. Make sure you get answered for all these things and choose a right wealth adviser who can build a long-term investment portfolio suitable for your long-term financial goals.

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