Getting your funds managed through a wealth manager? Here are key things you need to keep in mind

A nice joke about finances goes like this: I need a new bank account! Why? Because my old bank account has run out of money!

Well, this is a joke but managing your wealth is certainly no humorous matter – especially if you are getting your funds managed through a wealth manager or a financial manager.

And please don’t assume that just because you have given your money management to someone else, your money will automatically grow and be safe. You, Dear Investor, must do some work on your own too.

“The key question to solve here is why are you investing?,” says Srikanth Subramanian, CEO, Kotak Cherry, about an investor sitting with a financial advisor in the first place.

There are various goals which an investor will have, some would be short-term goals, some medium-term and some of them would be long-term aspirations. These goals are specific to each user so it’s important to categorise them clearly so that there is no mismatch in expectations.

Once an investor is aware of the timeframe and his/her risk tolerance, it will help them determine where they should invest money and how much they should invest to achieve that goal.

Different asset classes serve different needs of investors. Thus, it is important to align the investment avenues basis the overall goal and timeframe available to achieve that goal.

“In context (of appointing a financial advisor), it is pertinent for investors to evaluate what they are actually looking forward to, along with realistic expectations,” says Sriram BKR, Senior Investment Strategist at Geojit Financial Services.

So it is vital for the person seeking a financial manager to share key inputs (like one’s monthly / periodic cash flows, liability, etc) which in turn will help advisors gauge the individual’s financial position and get some idea about their risk appetite as well.

Your manager or advisor must have the ability to listen and understand your requirements.

“To understand the client's financial goals, the advisor should begin by asking open-ended questions about their short-term and long-term objectives. These may include plans for retirement, purchasing a home, funding education, or starting a business,” says S Ravi, Former Chairman of the BSE and Managing Partner of Ravi Rajan and Co. Additionally, understanding the client's current financial situation, income, expenses, debts, and assets is vital in tailoring suitable recommendations.

Himadri Chatterjee, Senior Managing Partner & Head - Advisory, 360 ONE Wealth, gives an idea into the financial advisory planning from the advisor’s perspective.

The company creates investment strategies that are in line with long-term goals by first understanding the client's goals and constraints.

To better understand these goals, their advisors meet with the client and ask a series of questions about the portfolio's objectives which include Risk Assessment Questionnaire to assess risk tolerance and discussion on detailed Investment Policy Statement (IPS) to define the approach to Portfolio Construction and Asset Allocation.

According to Chatterjee, the main areas where clients expect wealth managers to provide unbiased recommendations, include;

• How to protect, preserve and grow their wealth in a meaningful manner?

• How to reduce complexities in their investment and holding structures?

• How to seamlessly transfer wealth to the next generation, including when settled abroad?

“A financial advisor typically provides personalised investment advice tailored to an individual's financial goals, risk tolerance, and current financial situation,” says Ravi. They offer recommendations on various investment vehicles, such as stocks, bonds, mutual funds, real estate, and more.

The advice often focuses on creating a diversified portfolio to spread risk and optimise returns over time. Advisors may advise on the importance of long-term investing, emphasising the potential benefits of compounding and patience.

Additionally, they may suggest tax-efficient strategies to minimise tax liabilities and maximise after-tax returns. Regular portfolio reviews and adjustments are part of their service to align investments with changing circumstances and market conditions. The advisor's ultimate goal is to help clients achieve their financial objectives while maintaining a balanced approach that considers both risk and potential rewards.

However, it's essential to remember that all investment carries inherent risk, and past performance is not indicative of future results. Clients should carefully assess the suitability of any investment advice with their specific financial situation and consult with the advisor regularly for ongoing guidance.

Another important aspect is diversification or very simply reducing your exposure to one asset class.

“While diversification may seem pretty simple, it could cost you money if not done correctly,” notes Subramanian.

There are diverse set of asset class available to invest into having different risk and return expectations over different time periods. It is important to take note of the fact that all of these asset class perform differently in different points in time. Thus it is important for an investor to maintain diversification across these assets. To diversify one’s portfolio, it is important to first take note of financial goals, the time you have to accomplish these goals, age, income streams and risk appetite. These factors will help you understand which assets you should invest in and how much you should invest. Diversifying across asset classes will not only help reduce volatility that may arise in just one particular asset, but also provide you to tap into opportunity that arises in different asset classes.

An important aspect of financial advice is risk management.

“I stress that the advisor should set the returns expectations right. Most people go wrong here. Having unrealistic return expectations will force them to take risks, that many a time could be disproportionate to their risk taking ability itself,” says Sriram.

Understanding more about an individual’s financial position and their awareness about the financial products, will help advisors to guide them on the right path and mitigate risks. The corollary to this is creating awareness… on the products (where needed) that are going to form the investor’s portfolio.

Even otherwise, taking high risks need not necessarily result in higher / expected reward. Instead, advisors should insist and guide investors to start their financial planning journey earlier so that the possibilities of reaching the goals becomes simpler at the setting up level, easier on the investor pocket (the investment amount needed), higher on the outcome… with compounding effects.

Advisors should guide in such instances, as to what is realistically possible, given the goal's nature and duration.

Free or pay?

There are various business models for financial advisor. Fee based – where the investor pays for the advice and the other alternative is where the advisor makes a commission from the company whose product s/he sells. The investor needs to consider this point of payment very carefully so that he may receive the best service with no conflict of interest situation.

“To identify potential conflicts of interest with your financial advisor, you should engage in open communication and ask pertinent questions,” says Ravi. Start by discussing the types of compensation your advisor receives and whether they earn commissions from any specific financial products they recommend. Requesting a clear breakdown of fees, commissions, and incentives can help you understand if their interests align with yours.

Financial advisors have a fiduciary duty to act in their clients' best interests, which includes disclosing any conflicts of interest that could affect their advice. This obligation ensures transparency and helps you make informed decisions about your investments. If your advisor receives commissions, they should disclose this information upfront, allowing you to evaluate whether their recommendations are influenced by potential financial gains.

While it is a financial advisor's duty to inform you about such conflicts, it is also crucial for you to proactively inquire and stay informed about the potential biases that may impact their advice. Remember, an honest and transparent relationship with your advisor is key to safeguarding your financial goals.

“A fee-based option is appropriate for a client who is not a subject matter expert and needs guidance in managing his goals and risk tolerance while also ensuring an optimal return profile in his or her portfolio,” notes Chatterjee.

Having an advisor oversee the portfolio also means that the portfolio is better protected from misconducts such as mis-selling by distributors disguised as pseudo advisors.

Also, the most dreaded of financial exercises – taxation – is where your advisor must help out.

Tax-Loss Harvesting: Investors may advise on selling investments with losses to offset gains, thus reducing the taxable income.

Estate Planning: Helping investors with strategies to minimise estate taxes and efficiently transfer wealth to beneficiaries.

Tax-efficient Investments: Recommending investments with lower tax burdens, like municipal bonds with tax-free interest.

Overall, tax planning advice from an investor aims to optimise an individual's financial situation by minimising the impact of taxes, allowing them to keep more of their earnings and potentially accelerate wealth accumulation.

Final tips in choosing your wealth advisor are shared by Sriram. It is important to know how better a firm is on the digital and technology side, in terms of enabling ease of transaction execution and helping investors in tracking their portfolio on an ongoing basis.

Also, the availability of a customer care or customer support facility.

Your redressal

In the worst case scenario when you feel that your financial advisor has not been to the mark; experts share what can be done to right a wrong.

Advisors are primarily regulated by SEBI under the Investment Advisor's Regulations by SEBI, 2013, and partially under the Portfolio Manager's Regulations by SEBI, 2020. From the initial investment to its execution, each client portfolio will adhere to the guardrails established in the regulatory policies and will be redressed accordingly. SEBI has a dedicated website called "SCORES" for clients who use advisory services in the industry. Each complaint made on the platform must be returned to SEBI within a specific TAT with a resolution, say experts.

Manik Kumar Malakar is a personal finance writer.