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Monday, 6 February 2012

What HNIs Look for in a Financial Advisor

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What a high net worth individual should check before signing on a wealth manager


   Managing a high net worth individuals (HNIs) account is a lucrative job for any wealth manager. After all, the stakes involved are high and the sums involved are huge. According to the 2011 Asia Pacific Wealth report from Merrill Lynch and Capgemini, high net worth individuals' (HNIs) wealth in India grew by 22% in 2009-10 accounting to $582 billion (Rs 28.4 trillion). India's HNI population grew to 1.53 lakh from 1.27 lakh in the same period. Looking at this huge growth and future potential, every intermediary is keen to grab a share of this growing pie. A number of brokerages, banks or boutique firms are expanding their reach beyond the metros by entering Tier II and even Tier III cities. So how do these HNIs choose their wealth managers?


HNI needs are very different as compared to normal investors. Besides traditional products such as equities, mutual fund and insurance, HNIs may also need business funding, or advice on succession planning or formation of a trust. They would consider things like capability and reputation of the organisation/ wealth manager, bouquet of products on offer, before selecting a wealth manager.

WHY HNI NEEDS ARE DIFFERENT

A normal investor's first priority is tax planning, followed by child's needs and financial planning to meet goals such as buying a home or car or an overseas holiday. Basic products such as mutual funds, bonds and insurance would often help meet these needs. However, in the case of most HNIs, many would have met these goals and would be looking beyond these goals. So HNI needs could include the likes of buying a property in Dubai, buying a structured product, picking up a stake in a promising or upcoming business, funding a real estate project through debt or could be even looking at the idea of buying into a distressed asset, or writing a complex will. These needs are far different from investment needs of a regular retail investor. Hence, they need someone with greater depth, understanding and necessary skill sets to meet these needs.

CHOOSING AN ORGANISATION

Choosing a wealth manager is not an easy task, given that the wealth management industry in India is fragmented and highly unregulated. Since all big brokerages along with private banks as well as foreign banks offer wealth management, making a choice gets that much tougher. Given the busy schedule of most HNIs, it is important to choose someone who can devote time and attention to minute details and handle things with confidentiality. The task becomes all the more difficult since wealth management firms do not have any audited or published performance available in the public domain. Hence, HNIs have to rely on their own judgement or seek references.


Larger organisations may have an edge since they can offer indepth research and views from the best analysts in the industry. Smaller organisations may score on account of their flexibility and ability to offer personalised service to their customers.


Organisations have different ways of classifying HNIs. Some foreign banks ask for higher threshold levels, while some banks may call you an HNI if you have 50 lakh in deposit, or a brokerage house may call you an HNI if you hold more than 10-lakh worth of stocks in your portfolio. If you have specific needs such as succession planning or overseas investing, then choose your organisation accordingly. Go with an organisation that has a long standing track record and one which can cater to your specific need



Alignment Of Interest & Trust

Since most organisations link a wealth manager's incentive to the amount of revenue he generates, often the wealth manager ends up selling high-revenue products irrespective of the fact whether that product fits in the client's portfolio or not. This could expose you to higher risk or tilt your asset allocation. Ask questions like what is the incentive structure for the wealth manager. Is it merely on revenue achieved or also on basis of clients' asset appreciation. This will give you an idea whether the organisation is looking to merely increase its profits by taking you as a client or there is more to it. At the same time, also see that the fees charged or charges are reasonable and is inline with industry trends. According to the PWC Global Private banking report 2011: In wealth management, reputation is everything. It is the foundation of trust, bringing successive generations to an institution for vision and advice." "Finally, ensure that there is alignment of interest. Essentially this means, for the wealth manager, the clients' wealth and objectives should always come first.

The Right Product Mix

Foreign banks have restrictions on products offerings and they can offer products only when approved by their global headquarters. Brokerages have the flexibility in terms of product offerings as the turnaround time is faster, but cannot offer a banking platform or savings bank account or forex transactions. HNIs need a wide range of product offerings with multiple products across asset classes," says Sunil Mishra. Since every individual has a different requirement, it is natural that the solution presented would be different. Check with the kind of products the organisation has come up in the past and how successful they have been.
For example, your wealth manager should be able to offer you a portfolio management scheme (PMS) from other organisations as well. Similarly he should be able to offer you structured products, real estate funds or alternate assets. You may also need advice on will drafting or succession planning. "Ensure that the wealth manager will help you meet those requirements, or at least has a tie up with a reputed agency.

Advisor Experience

More often it is the comfort with the advisor who you deal with that drives the relationship. HNIs prefer advisors with ability to understand and advice across asset classes. To advise across multiple asset classes, the advisor would need to be well educated and qualified. Hence it is important that you know how well qualified and experienced your advisor is. In countries like the US, Securities Exchange Commission (SEC) regulates advisors and each advisor has a registered number. So it is very easy to track the past credentials of any advisor. However, in India, there is no such agency tracking wealth managers and hence one would have to do his own homework.

Employee Churn

In good times, there is a lot of job hopping, where wealth managers change jobs and many a times the replacement given by the organisation may not be up to the client's satisfaction. The relationship manager whom they meet the most and do business with is the one they trust the most. It is the relationship manager who guides you in the entire journey. Of course these relationships are not build overnight. It could take as long as three years to build a strong relationship. So a new relationship manager's coming in could mean starting all over again. Hence, if the organisation has frequent employee churn, it could hurt your interest.

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