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Wealth managers are not serving the investors' interest because they have failed to offer distinct solutions to different segments.
It is now common to see financial advisers calling themselves wealth managers, private bankers or managers of the family office. The wealth management business is trying to extricate itself from being product pushers to the more noble pursuit of investor interest. In this pursuit, it seems investing is all about making financial plans and allocating assets. The proposition, process and advice are too similar. When it comes to long-term wealth creation, one size does not fit all. Wealth management is not a standard fee-based advice offered after framing an elaborate financial plan that leads to an asset allocation strategy. It is more nuanced. There is a combination of factors working against differentiated offerings to various segments of investors. Which are these segments and what are the factors?
The segments differ significantly in their saving and investing habits and preferences. Saving requires both ability and willingness. We have all met people in low-paying jobs, keen and willing to save for a better life, but unable to do so as their incomes are too low for savings. Then there are those who earn well and can save, but are unwilling to cut back on expenses to develop a saving routine. To create wealth, the ability to generate regular surplus over expenses is the critical first step. The income should be stable and adequate to meet mandatory expenses. Investment solutions will not help someone with inadequate income. Youngsters who take on jobs early and fail to upgrade their skills later, and women who choose not to pursue a career, risk lower surplus and wealth in the long run. For many such investors, ability to save falls short of willingness.
Those who earn a comfortable income and are confident about a sustained and increasing income, tend to allocate a higher income to discretionary spending. After one reaches a level where money spent on rent, food, education, etc, is taken care of, regular surplus is generated. The surplus that can be saved tends to be directed towards discretionary expenses on entertainment, holidays, lifestyle upgradation, etc. Over time, some of these tend to be seen as mandatory expenses. Regular saving is possible only when pre-emptive saving is done before the income is available to spend. This segment tends to choose assets such as property or buy excessive insurance-linked-investments, drawing comfort from the fact that compulsory saving is achieved. Planning for future goals and investing in the long run tends to appeal to some of the more disciplined savers in this segment. Emotional hooks are needed to get them to save regularly. For the rich, mandatory expenses are a tiny portion of the income and there is enough surplus available after large discretionary spending. This segment generates a large and regular surplus and, hence, is the target of the wealth management industry.
Those who generate an intermittent surplus that can be saved prefer a productbased approach to investing. Closed-end structures that mature after a point and provide funds for a financial need appeal the most to them. They are unwilling to risk the little they can save and choose bank deposits, bonds and safer investments. They may want to take risks in equity, but their financial position would neither support losses nor allow them to stay when the markets fall. The ones who generate a regular surplus can invest to a plan and seek long-term assets like equity. They can work with their planners to create an asset allocation and invest with discipline. To this segment, execution is everything. Without it, many of them may end up with an unutilised surplus, poor quality investments and incomplete paperwork. Very high net worth investors have no planning needs, nor are they enamoured by the advice of rookie wealth advisers. They seek differentiated products and exclusivity, and place a premium on trustworthy wealth managers.
However, several factors are impeding the offering of distinct products to different investor groups. Product pushing has led to a curb on commissions in the mutual fund business, making it unviable for banks and advisers with reach to service specific products to simple investors with intermittent surplus. Armies of wealth managers with banks and brokers recruited to sell standard products fail to upgrade themselves to earn investor trust, and, hence, languish as insurance sellers. They have no training in acquisition or execution for clients. The small bunch of experienced wealth managers is seeking the same HNI with multiple propositions. The HNI is appalled at having to deal with the frequent change of his private banker or wealth manager. None of the segments, therefore, is satisfactorily serviced and this is the problem that needs fixing.
Source: http://epaper.timesofindia.com/
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