How safe is your money with a wealth manager?" "Not very" is the answer to this question that has returned to haunt investors in the wake of the Citibank scam. After the bank's relationship manager Shivraj Puri swindled starryeyed investors of over Rs 300 crore, many people have lost faith in wealth managers and are not only questioning them about the various checks and balances adopted, but also carefully reviewing what is recommended. Some investors are even looking to educate themselves about managing their wealth. While one cannot extrapolate this incident to taint all private banks and firms, the need for more consumer awareness has been underlined again.
The Citi incident highlights two issues: one, the gap in the bank's security and, two, the blind trust that investors had in the manager. The power of attorney model which wealth managers work with can open a can of worms, say bankers, as it gives managers enough authority to invest their clients' money in any product they choose.
"This will hopefully be a wake-up call for the industry," says Rohit Bhuta, chief executive of Religare Macquarie Wealth Management. The trust, however, is clearly shaken. Himanshu Kohli, founder partner of Client Associates, a boutique wealth management firm, says that his clients, some of whom also have money invested in Citi, have asked him to verify their accounts independently.
Scams in banking aren't new or exclusive to India. Last April, Rhonda Breard, a Washington-based broker, pleaded guilty to stealing $9.4 million from her clients. In June, the Securities and Exchange Commission in the US charged Life Wealth Management and its owner with fraud and breach of fiduciary duty for placing clients in unsuitable investments and failing to disclose the risks of the investments.
However, over the years such scams have led to the evolution of mature markets such as the UK and Australia into better investor protection and stringent policies by regulators. The relationship manager, too, has come under the spotlight with clients concerned about his role: whether the manager is an advisor or product salesman.
In India, wealth management is a small but rapidly growing industry. It is present in many layers, starting with relationship banking which is typically offered by banks to clients with over Rs 2-3 lakh in their account, private banking where the banker handles clients with an investible surplus of Rs 25 lakh and above, and wealth management where the threshold is typically above Rs 5 crore. These services are offered by banks, brokerage firms, boutique wealth management firms and even independent financial advisors. It, therefore, becomes extremely critical to select the right one.
"The most critical step is to understand your manager's pedigree and exposure," says Bhuta. With the financial services, and more specifically wealth management, industry facing a shortage of talent, companies have seen a high churn, which has resulted in high salary jumps. "So you have people who have doubled their salaries in the last year, but are without adequate experience," says a knowledgeable Panipat-based investor, who sacked his private banker "after his portfolio went nowhere". He adds, "He was purely incompetent. He invested in some products but at the end of three years, we made no money. My son, who invested in the same product on his own, recovered his principal with interest."
The next step is to discuss your risk profile with your manager - whether aggressive or low risk. Those with a low appetite for risk could invest more in fixed income products like post office products, bank deposits and dead mutual funds, and not gold, equities and property which are higher on risk. Rajat Bhargava, an independent advisor, says it is wise to stick to simple products that are also transparent.
It is also crucial to discuss the tax implications of your investments, a fact investors often overlook. In a bid to diversify their portfolio, many firms turned to 'exotic' assets such as cinema and art funds, natural resources funds, climate change funds and ethical funds. Not all worked, though.
For instance, take the various art funds that surfaced around 2006-07. Mostly not SEBI-approved, these got hit hard by the recession and many are now struggling to pay back. Filmmaker Vasant Nath was one such investor. He invested in the Osian Art Fund, sold to him by his private banker at ABN Amro (now RBS), promising returns of 20-22 per cent in three years. But Nath is yet to recover his principal, let alone any interest. Kohli says he had studied the fund but decided against it as expenses were too high.
"It listed 46 per cent in expenses through the life of the fund. So even if a 20 per cent return came, we would struggle to recover the principal," he says. "Moreover, there were questions on the transparency of the art market or the auction process. Was it self-audited or independently done? The wealth manager should understand all this and then suggest it to his client." Banks often make clients sign reverse inquiry forms, which absolves them of liability.
That also points out to the commissions that wealth managers work on. For instance, equity assets give them a 0.5 to 1 per cent margin, while debt assets give a 0.4-0.75 per cent commission per annum. The commission on insurance and ULIP (Unitlinked Insurance Plan) products can go as high as 25-40 per cent in the first year. "About 80-85 per cent of private bankers push higher income generating instruments (for the bank) in order to meet stiff targets set by their employer," says a wealth manager. "It's a systemic failure."
For example, traditional insurance plans pay 50-70 per cent in agent fee in the first year of premium collected, met out of the high administrative cost and a high mortality premium. Kohli suggests that people buy pure term insurance policies which are very cost-effective and where the agent fee is far lower. "Let's not confuse insurance with investment," he says. Surveys have shown that consumers often prefer low-margin, safe products.
Wary companies are stepping up security. While Client Associates has moved up audit of client accounts from once a year to once in six months, Religare Macquarie makes sure that no investor policy is offered to clients unless it is verified at three levels: by the research team, the investment team.
The Citi incident highlights two issues: one, the gap in the bank's security and, two, the blind trust that investors had in the manager. The power of attorney model which wealth managers work with can open a can of worms, say bankers, as it gives managers enough authority to invest their clients' money in any product they choose.
"This will hopefully be a wake-up call for the industry," says Rohit Bhuta, chief executive of Religare Macquarie Wealth Management. The trust, however, is clearly shaken. Himanshu Kohli, founder partner of Client Associates, a boutique wealth management firm, says that his clients, some of whom also have money invested in Citi, have asked him to verify their accounts independently.
Scams in banking aren't new or exclusive to India. Last April, Rhonda Breard, a Washington-based broker, pleaded guilty to stealing $9.4 million from her clients. In June, the Securities and Exchange Commission in the US charged Life Wealth Management and its owner with fraud and breach of fiduciary duty for placing clients in unsuitable investments and failing to disclose the risks of the investments.
However, over the years such scams have led to the evolution of mature markets such as the UK and Australia into better investor protection and stringent policies by regulators. The relationship manager, too, has come under the spotlight with clients concerned about his role: whether the manager is an advisor or product salesman.
In India, wealth management is a small but rapidly growing industry. It is present in many layers, starting with relationship banking which is typically offered by banks to clients with over Rs 2-3 lakh in their account, private banking where the banker handles clients with an investible surplus of Rs 25 lakh and above, and wealth management where the threshold is typically above Rs 5 crore. These services are offered by banks, brokerage firms, boutique wealth management firms and even independent financial advisors. It, therefore, becomes extremely critical to select the right one.
"The most critical step is to understand your manager's pedigree and exposure," says Bhuta. With the financial services, and more specifically wealth management, industry facing a shortage of talent, companies have seen a high churn, which has resulted in high salary jumps. "So you have people who have doubled their salaries in the last year, but are without adequate experience," says a knowledgeable Panipat-based investor, who sacked his private banker "after his portfolio went nowhere". He adds, "He was purely incompetent. He invested in some products but at the end of three years, we made no money. My son, who invested in the same product on his own, recovered his principal with interest."
The next step is to discuss your risk profile with your manager - whether aggressive or low risk. Those with a low appetite for risk could invest more in fixed income products like post office products, bank deposits and dead mutual funds, and not gold, equities and property which are higher on risk. Rajat Bhargava, an independent advisor, says it is wise to stick to simple products that are also transparent.
It is also crucial to discuss the tax implications of your investments, a fact investors often overlook. In a bid to diversify their portfolio, many firms turned to 'exotic' assets such as cinema and art funds, natural resources funds, climate change funds and ethical funds. Not all worked, though.
For instance, take the various art funds that surfaced around 2006-07. Mostly not SEBI-approved, these got hit hard by the recession and many are now struggling to pay back. Filmmaker Vasant Nath was one such investor. He invested in the Osian Art Fund, sold to him by his private banker at ABN Amro (now RBS), promising returns of 20-22 per cent in three years. But Nath is yet to recover his principal, let alone any interest. Kohli says he had studied the fund but decided against it as expenses were too high.
"It listed 46 per cent in expenses through the life of the fund. So even if a 20 per cent return came, we would struggle to recover the principal," he says. "Moreover, there were questions on the transparency of the art market or the auction process. Was it self-audited or independently done? The wealth manager should understand all this and then suggest it to his client." Banks often make clients sign reverse inquiry forms, which absolves them of liability.
That also points out to the commissions that wealth managers work on. For instance, equity assets give them a 0.5 to 1 per cent margin, while debt assets give a 0.4-0.75 per cent commission per annum. The commission on insurance and ULIP (Unitlinked Insurance Plan) products can go as high as 25-40 per cent in the first year. "About 80-85 per cent of private bankers push higher income generating instruments (for the bank) in order to meet stiff targets set by their employer," says a wealth manager. "It's a systemic failure."
For example, traditional insurance plans pay 50-70 per cent in agent fee in the first year of premium collected, met out of the high administrative cost and a high mortality premium. Kohli suggests that people buy pure term insurance policies which are very cost-effective and where the agent fee is far lower. "Let's not confuse insurance with investment," he says. Surveys have shown that consumers often prefer low-margin, safe products.
Wary companies are stepping up security. While Client Associates has moved up audit of client accounts from once a year to once in six months, Religare Macquarie makes sure that no investor policy is offered to clients unless it is verified at three levels: by the research team, the investment team.
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