Wealth Management and Private Banking: Building a Proactive Model

Wealth management and private banking divisions are increasingly gaining importance in the banking sector, as banks in India are being considered a one stop shop for providing financial solutions by the customers. Changing investor demands and tax regulations are helping banks in providing a complete portfolio advisory module in addition to traditional banking products. The structure of the banking industry is shifting by attracting talented advisors and helping in client retention and penetration aspects.

Banks are currently looked upon by both corporate and individual investors in providing innovative financial solutions like selection of best managed products and structured products.

Differences between the traditional type banking players and complete solutions providers can be noticed in the existing industry players based on the fee income these players generate from wealth management and private banking services. The quality of advice and level of service play an important role in building a winning business model for banks.

Various wealth surveys conducted in the recent past suggest that investors need broader wealth management advice on tax planning, business succession planning, international Wealth Management and Private Banking Building a Proactive Model investments, art, real estate and other innovative investment options. Managing investor needs, aspirations and goals are the three key drivers for all the players to ensure customer retention and further penetration. Customer confidentiality is increasingly gaining momentum in the Indian space and is being promoted as important criteria by most players in their positioning.

Sophisticated financial products and solutions are no longer seen as value proposition by the ultra affluent investors, as these products with little variation are available from all the players in the market. The real difference stands out in the personal touch and technology of the service provider. Offering investors online purchase, sale and tracking capability in addition to personal touch are critical drivers of this business.

Right quality of advice and experience of the advisor are two important drivers of wealth advisory business. With more number of banking players now offering advisory services, attracting the right quality of advisors with good understanding of capital markets and experience becomes critical in developing a strong advisory model. Unfortunately, many players are experimenting with new talent in this space as there is a shortage of experienced talent.

Currently, banks are investing very little in training their advisors on market and economic trends. Very few players have invested in developing internal on the job training grounds for their wealth advisors. Moreover, very few banks have the so-called product specialist to guide their wealth advisors and clients. Product specialists help both internal advisors and clients in identifying market trends and opportunities well in advance. Portfolio regular reviews with product specialists help in building the client’s confidence and rebalancing the portfolio on regular intervals.

Attracting and retaining clients, places an enormous demand on expertise, technology and product capabilities. A complex range of services needs to be provided online and off-line. Personalized advice covering a diverse range of investment alternatives and related services (at a minimum, tax and inheritance planning and extending to real estate, art and gems) needs to be matched with sophisticated financial advice. Most individual investors believe they have a better understanding of their assets than their relationship managers do. They value personalized, timesaving service and expert advice on a wide range of investments. The challenge lies in dynamic implementation of investor suggestions and feedback and building a proactive model.

Practice Models and Fees Structure

Responding to continuous increasing demand for wealth management services by HNWI’s, many individual wealth managers, investment management firms, private banks and other financial institutions are competing fiercely amongst themselves to tap maximum possible market. Each entity invest considerable amount of time in deciding practice model that would address issues such as time management, income growth, client service and business growth in a satisfactory manner. Further due to intense competition amongst the service provider, it forces them to think hard on methods of fee structure to be charged to the clients. Let us see few of the practice model and fee structure of wealth management service.

Practice Models

There are three different ways of classifying wealth management practice models. They are as follows

1) Individual planners

2) Corporate firms

3) Team structures

Individual planner: It is further divided into three parts namely:

- The Hourly Planner

- The Niche Planner

- The Virtual Planner

The Hourly Planner: Many clients do not qualify for the need of full time wealth manager because of limited net worth. Moreover they cannot afford the costly fees charged by wealth managers for such services. Alternatively, some of them have sufficient knowledge about the wealth management and prefer doing it on their own, some of them feel insecure disclosing their all wealth to wealth manager. These clients under certain situations are not able to take right decisions at right time and feel

themselves at the cross roads. At that time they need advice for that particular situation only. The Hourly Planner, type of wealth manager provides guidance at that particular time and charges equivalently. This results in win-win situation and does not require both of them to have permanent relations.

The Niche Planner: Clients wealth management goal, profit expectation, risk taking capacity not only varies from person to person but also from profession to profession. Niche Planners are known to provide services to certain group of clients, who have unique requirement than other people. Such planner builds expert level knowledge about the particular profession and takes into consideration the future prospects of the client’s profession while providing wealth management service.

The Virtual Planner: Leveraging the technology, wealth managers provide services to the clients through internet. They use advanced technological tools, in order to get in touch with distant clients and provides services at their ease and convenience. Though it involves high investment in initial days, this model helps wealth managers to reduce overheads cost by a great margin. Technology is also helpful in outsourcing certain administrative work and helps wealth manager to concentrate fully on his core job.

Corporate Firms: Corporate entities including private banks, brokerage firms and family offices apart from providing their core services, have now started providing wealth management services on a large scale. Such firms hire professionals and have offices across the world.

Private Banks no longer operate merely as banking destinations. HNWI’s in recent times, apart from asset management services, demands services to manage their excess wealth in manner that compliments their lifestyle. Major global banks with the help of robust technological infrastructure and extensive research provide comprehensive wealth management services such as tax advice, retirement planning, international property acquisition and so on.

The Family Office: By this model, wealth managers provide investment management, tax planning and wealth management services to a single family or a number of families.

Moreover they also provide guidance to personal issues of family such as security, travel, distribution of wealth to legal heirs etc. Family offices operated in three different models depending on the number of families served.

Single family offices serve only one family. Multi family offices serve more than one family, where one family operates as anchor family. Commercially family offices serves number of families, but there exists no anchor family.

Of these, Multi family offices are most renowned model. They provide services to a group of families, which share common needs. Sometimes assets of the families are pooled together, which results in economies of scale for wealth managers.

Team Structure: Alternative method of classifying model of wealth management is method of forming different team structures. Three widely prevalent team structures are discussed below:

i) Sole Model: Under this model, sole practitioner possesses requisite advisory talent and other client characteristics. This model is generally consider to be the first stage in career of most wealth managers. Such wealth managers prefer to remain in direct contact with the clients and hence do not hire more people and delegate responsibilities to them. Though they engage themselves in servicing few clients, they derive immense satisfaction from them. They have flexibility to choose the number and type of clients.

ii) Ensemble Model: This model involves multiple wealth managers working together, towards a unique goal. This model can be further classified into three types depending upon the kind of relationship maintained amongst the professionals.

The most simple and widely prevalent structure is Parent Company Team.

Here wealth manager would maintain relationships with experts from other fields such as insurance agents, income tax professionals, and charitable trusts experts and so on. These experts are not hired but are consulted when specific need arises. Hence it results as cost effective model.

Second model is Self contained team, whereby experts from different fields are hired by the organization and they provide, whereby experts from different fields are hired by the organizations and they provide client service as a team. The cost incurred by this model is high as compared to parent company team but with large number of clients being served, the incremental profits may overshadow the cost.

Third model is Virtual team, where managers work themselves and consult the specialists as and when needed. Once the need is taken care of, there is no compulsion to maintain relation with the experts.

iii) Silo Model: This model is combination of solo and ensemble model. Under this model a group of solo practitioners come together and establish organizations, but however they have individual goals. They provide individual client services and earn individual profits. Since they operate from same office they share the overhead costs. Moreover they also share their expertise as and when required.

Fee Structures: Wealth managers invest their knowledge, time and resources for the client and in return expect decent profit for their sustenance. Unless profit is ploughed back, wealth managers cant grow and provide more advanced services to the client. At the same time increasing competition and ever increasing demands of the client has resulted in experimentation with different fee structures.

Depending on the model of practice adopted by the wealth manager, the fee structure vary from as simple as fees for a particular advice for an individual client, to a lifetime fees charged for multi family office. Generally there are four types of fee structures:

1) Percentage of Assets Under Management (AUM): It is a most traditional pricing mechanism. But, there exist a constant argument on which assets to be

included in AUM and which to be excluded. Further since the AUM keeps on fluctuating, depending on the investment activities, revenue of wealth managers also fluctuates equally. Moreover sometimes clients may suspect that in order to earn more fees, wealth managers would take more risk while investing client’s assets.

2) Hourly basis: Hourly planner and solo practitioners use this model on a large scale that has its roots from accounting and law firms. Fee charged depend on the time spent by the wealth manager in understanding clients goals, needs and thereby, providing advice. Though it looks simple, it can be difficult to keep a track record of exact time spent on a client.

3) Flat Fees: Depending on the services to be provided to the client, wealth managers decide a flat fee per year and charge them quarterly. Many large financial institutions are generally known to follow this practice. Only disadvantage with this pricing mechanism is that, the extent of service provided to client may increase sometimes, than what was agreed upon at the start of year. In those cases it becomes very difficult for wealth manager to ask for extra fees from client.

4) Percentage of Net Worth: Though it is less practiced it is an important fee structure.

Apart from above four pricing mechanism, a new mechanism called Unbundled pricing is emerging. Under this mechanism, the client is allowed to choose from the list of services, the services he intends to receive from wealth manager. Each service is allocated fixed basis points. After deciding portfolio of services, a consolidated fee is charged from client based on cumulative basis points of services.

It is very tough to identify any practice model and fee structure to be the best one. It rests with wealth manager to choose the optimum options depending on the services provided by him, characteristics of client, industry movements and competitor behaviour.

Wealth management: under the umbrella of the Income tax.

Wealth management is the need of hour. If we do not agree, then we need to think over it again. Income tax laws have already spelt out some of the basic attitudes, beliefs and strategies of the government towards economic growth. We may say that rebate under the small tax savings scheme is to make the citizen of country liable towards their one social objective of saving for oneself and one’s kith and kin. Maximization of wealth through strategic planning in the income tax law would make the deal sound better. Let us see the income tax law through two different dimensions i.e. individual level and company level.

Tax saving instruments:

At individual level, the needs of each one is unique so as the style and pattern of investing and managing wealth. Today, at individual level, professional like certified financial planner (CFP) carves out strategies for individual to satisfy one’s unique needs with various instruments of investing. The major instruments are

- Mutual funds through ELSS way.

- Life insurance

- Public Provident Fund

- National Saving Certificate.

All instruments are invested for taxation benefits. Each of them get rebate under section 80 C. But all the instruments has some pros and cons

1) Mutual funds through ELSS way: One should invest in such scheme if one lacks time and expertise to analyze and invest in stock market. Professionals managing funds are experts in such fields and have enough access to lot of information. The commonor invest in haphazard manner and ends up in investing one or two scrip as compare to fund managers who will never invest in same but diversifies the risk. One may invest in tax savers through Systematic Investment Plans (SIP) which tends to reduce the effect of fluctuations and is based on rupee cost of averaging i.e. money is invested throughout the years with ups and downs to minimize average cost of holding in volatile market. Mutual funds works on the

principle of never putting all eggs in one basket. All tax saver plans in long term give good returns.

2) Life Insurance: Thus is popular mode of investment and all investor tend to protect against the risk of one’s life. Insurance protects one against all odds that work against the investor’s life in monetary sense to the family members of investor. In case of death, the beneficiary gets the sum assured. Investor does not invest in pure insurance or term product plan, but prefers to invest in endowment or money back policy. Generally, the insurance companies help the people to cultivate the habit of saving the money annually though small but create the value for money in the long term. Insurance company has now discontinued guaranteed return products due to decreasing trend of bank rate and today ULIP has taken over the investing pattern of investor. The overall working of ULIP does matche with the mutual funds with the added benefits of insurance cover.

3) Public Provident Fund: A low risk option, one can invest in maximum RS.70000 annually in designated banks or post office. Currently one gets 9%tax free interest and is subject to change as per the government policies or implementing Exempt Exempt Tax (EET). The period of the scheme is 15 years and can be extended for 5 years thereafter. The best part of PPF A/c is that even court cannot attach this A/c for any types of dues payable.

4) National Saving Certificate: National Saving Certificate (NSC) is a low risk investment with tenure of 7 years backed by government. Rate of interest is 8% which is taxable.

Housing loan: An important question arise that if one is buying a new house, should one buy with the money he saved or go for housing loan???? If one does not have saved money then obviously he has to go for loan. But should one go for a loan if money is available????? If housing loan is taken then one get deduction from tax in two ways; first the interest paid is fully deductible up to RS.150000 and second principal paid is deductible under section 80C. Hence keeping one’s money intact he can go for housing loan and avail all the deductions. As the interest rates are firming up for last three years from 7.5% to 9%, it is advisable to go for fixed rate of interest.

Depreciation: Depreciation is allowed as a deduction, while calculating the profits of the business. This is calculated on fixed assets except land. The rate of depreciation has been changed since 2005-06. this is one of the financial tools for the replacement of the assets at the end of its effective useful life. It is non-cash expenditure hence there is no cash outflow. There Is provision of additional depreciation on the new purchases after April 1, 2005 and one can avail the same on fulfilling conditions thereof.

There are various provisions in income tax laws. If one effectively uses those provisions, one can maximize one’s wealth. Thus when to invest, where to invest and how much to invest depend on the particular need of investor.

ELSS: Growing Strong

What is the traditional thinking of any investor??????

It is nothing but to generate more income. This indulges for a tax saving investment with a base in equity- Equity Linked Saving Scheme (ELSS). ELSS is equity diversified fund with its corpus invested in equities. It invests more than 90% of its corpus in equity market. In other words, it is an instrument where savings is linked to the equity. It has a lock-in- period for three years for its investor, comprising higher risk and returns as well. The main benefit attached to the ELSS is tax advantage under section 80 C where assessee gets deductions up to Rs.1,00,000 per year on investment under the scheme. The minimum amount under ELSS scheme for investing is Rs 500. Thus, this gives opportunity for small investors to invest and earn handsomely.

Advantages of ELSS

1) The main benefit of investing in ELSS is tax benefits. The benefit is given under section 80 C and it could be availed by any individual or HUF irrespective of their income level.

2) Investments are equity linked, so investors get higher returns which along with dividends are non taxable.

3) Capital gain on ELSS is not liable to tax as its investment focuses more than one year.

Disadvantages of ELSS

1) These funds are subject to high risk as investment is equity based.

2) The lock in period of three years is the main disadvantage of this scheme. This does not allow short term gain from this investment.

3) The past performances are not the predictor of the future, hence proper analysis has to be done.

Investment In Arts

It is widely accepted that the key to creating wealth is through building a diversified portfolio of investments with a long-term horizon. The recent performance volatility in world markets, particularly in the traditional asset class of equities has demonstrated the benefit of including alternative investment strategies as part of a diversified approach, especially those that have an established trend of showing capital appreciation over a longer term.

Study has shown that art holds demand in the market during an economic boom as well as a slowdown. Investing in art is one alternative investment strategy, which has been gaining increasing acceptance around the world. The increasing activity of art auction houses over the last decade has provided an important secondary market which has resulted in liquidity, promoting art not only as an object of pleasure but also as an inevitable asset.

The Indian Art Market

Art is an inherent part of Indian culture. Its presence plays an important role in Indian history and society. The following are the trends in the current Indian art market scenario:

 Contemporary art grows as economies globalize: it is happening here and now

 Growth of GDP & and the economy as a whole

 An immense increase in purchasing power of HNI’s & NRI’s

 Art is regarded as a trend for safe haven emulated by HNI’s & NRI’s

 NRI’s looking for identity

 Indian affluent looking for a new status symbol

 Availability of documentation and authenticity of works of art.

 Awareness about artistic significance and pricing of paintings

 Growth of services and expertise within the art world

 Market infrastructure is falling into place

 Growing secondary market has resulted in liquidity.

 No secondary market for any other collectable category

 ‘Never sell culture’ resulting in limited supply

 Increasingly being viewed as a component of portfolio analysis and investment

 An increasing realization regarding the limited supply situation for great works of art; hence they tend to command a high premium in price.

 Investment in a new age market. Enter in early growth phase

 Supply side has matured over 3 decades with established art history, artists and galleries

 Buy side is consolidating after a break out

 Market is firmly in the sight of affluent Indian Diaspora

 Early mover scenario is still on offer

 Asset has a long term investment perspective

 Established artists have sustainable value

 Younger artists have higher risk/higher return

 Best value as an investment in times of economic depression.

Art Investment VS Other Investments
5 years

Percentage Return

With a simple buy and hold investment strategy, Indian Art has given a 2000% return over the last 5 years. This figure has been calculated by taking an average appreciation in value of paintings by 50 artists over the last five years.

The best Equity Mutual Funds have given a return of 1100% over the same period as compared with the Sensex which has appreciated by only 200% And property which is considered a safe investment has given a return of 250% over the same term.
Thus, compared to the other asset classes Art has out performed them considerably giving the highest returns.

Benefits

 Buy side will dominate market for many years driving prices and growth market width and depth increasing every day

 Well managed early movers will reap the whirlwind

 Above average returns only expected from ‘niche’ asset classes such as paintings

Gold: King of Commodities Investments

Out of all the investment option available, gold is single, easier and safest to invest in. Physical gold is easy to buy, requires no upkeep, and great deal of wealth can be secured and stored in relatively trivial volume. Investment in gold is always welcomed by the analysts mainly due to depreciation of currencies and inflation. Investment in gold can be treated as hedging against inflation. Looking at stock exchanges gold is performiong very well as compare to debt instruments. It has been giving good returns of around 15%-25% covering on year to year basis. For short term, it may not be a better investment avenue but if one thinks for long term, gold can be a better investment avenue. If we take currencies, gold has increased 31% in terms of yen, 16% in terms of dollars.

Gold shares can be owned through mutual funds or stocks of gold mining companies. But after introduction of Gold Exchange Trade fund (Gold ETF) by World Gold Council across the world, trading on bullion market has become effective and it is now easier to own gold shares. These Gold ETFs are available in the stock exchanges called Gold Bullion Securities. Each share of gold securities will be equal to 1/10^th of an ounce of gold and is supported by physical holding of gold in the custody of HSBC. Presently, these gold securities are the most efficient way of investment in gold. Only 0.3% management fees has to be paid towards insurance and storage including brokerage charges.

As volatility is always there with this metal, one can purchase it to invest for future once the price come down. Few analyst believe that after touching the specific price the value of gold will fall. But on other hand, few believes that price will increase to such a level where it ordinary person will find difficult to buy gold. So even if one buys now he is not going to lose anything. Gold will remain bullish in times to come and one can diversify one’s portfolio towards gold.

Real Estate: The Hot Market

Property has always been looked upon as lucrative investment. The government clearing 100% FDI investment on the automatic approval route in construction and development project in February 2005 has seen a buoyant boom in the real estate market. The real estate market in India is expected to touch US$50bn in 2008, is expected to grow at 30% per annum and is predicted to be one of the key contributors to GDP.

According to experts and analysts, investment in real estate is expected to yield between 13%-16% returns. The booming real estate sector has seen a host of new property developers entering the market which include both foreign and domestic developers. The boom in Indian real estate sector is mainly due to demand for official and commercial space. Also the economic growth of the country is strong reason for boom in real estate.

Reasons for Investing in Real Estate:

1) Higher risk adjusted returns as compared to various asset classes over a period of time.

2) Assured regular income

3) Capital appreciation

4) Inflation Hedge

5) Portfolio diversification.

Advantages of Investing in Real Estate Market

1) Theee is low correlation between real estate and other asset classes such as equities and bonds. Thus investor holding diversified portfolio of real estate securities across the world can yield more benefits than equities and bonds.

2) Investment in real estate are not prone to severe shocks as experienced in equity market and FII outflow from India.

3) Profits from real estate investments results from various factors such as:

- A dependable and growing flow of income

- Amortization

- Value creation (appreciation)

- Instant gain (bargain purchase and selling price)

- Government benefits (Tax deductions, etc)

- Hedge against Inflation

- Portfolio risk diversification

Disadvantages of Investing in Real Estate Market

1) A mere possession of real estate property without any intention to seel it, would not reap any benefits

2) Real estate requires expenditure for maintenance at regular interval of time.

3) When needed to sell, it is not easy to find a buyer.

4) The market value keeps on fluctuating

5) Real estate properties are bounded by geographical restrictions, because their value keeps on fluctuating with respect to changes in local laws, government policies etc.

Strategies of Investing in Real Estate

Cost approach: The investor should subtract the depreciation that would accumulate on the real estate, compare the present time value with the cost acquiring any other asset for the same amount and then decide to purchase the least cost investment.

Comparable Sales Approach: The investor should compare the cost of similar property that would have sold in recent past and considering the market trend, appropriate decision should be taken by the investors.

Income approach: The investor should compare the prospects of the income of intended property with other alternatives, keeping in mind the market trend, inflation, and other economic factor.

Though real estate is not considered as an attractive avenue for investment compared to other alternative investment but it is promising in long run.