Guest Column
FINANCIAL PLANNING
The duties of a
wealth manager
Instead of peddling various investment products, a
wealth manager should focus on building assets for
the investor, says Uma Shashikant.
M
any of us dislike product peddlers. We
like to manage our wealth holistically
and stay in control, even as we seek the
help of wealth managers to navigate
the course. The key difference
between investment managers, who handle financial
products, and wealth managers, who look after person-
al finance portfolios, is in performance targets and its
measurement.
Investment managers benchmark themselves to
market indices. Their performance is relative and can
move up or down depending on the asset class in which
they invest. They focus on making the right selection
and timing decisions for the securities in their portfolios
so that they are able to post returns higher than their
chosen benchmarks. Wealth managers have to deliver
an absolute performance within the return and risk
range agreed upon with their investors. The financial
needs of investors cannot be left to the vagaries of
market performance, and therefore, the responsibility
of a wealth manager is superior to that of an investment
manager. This distinction is lost when wealth managers
work as agents selling financial products to investors.
The wealth managers who manage the balance sheets
of investors advise them primarily on the assets to be
built. Assets are created for their ability to deliver
income or grow in value so that it can be realised when
needed. The extent to which the value of the assets
exceeds the value of the liabilities is the net worth of the
investor. Financial decisions should lead to the
maximisation of net worth in the long run; this is also the
index of wealth. This is the larger objective of wealth
management.
The fundamental personal finance
decisions are about generating a steady
income (through investment in human,
physical and financial assets), ensuring
that a surplus is created regularly (by keep- health records
ing expenses and repayments in check),
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and creating an asset portfolio whose
value exceeds any borrowings (positive net
worth). Buying insurance is a risk
management decision to reduce risk to
income (life insurance) and manage any unexpected ex-
pense that impacts the surplus (general and health
insurance). These are basic housekeeping decisions
which a wealth manager should aid.
The next level of strategic decisions is about the
quality and composition of asset portfolio. The target
rate at which the asset portfolio should grow is
determined by the uses to which the assets are to be put
in the future. Wealth managers call these financial
goals. A personal portfolio has to deliver a target return
within a tightly defined range to make sense to a
household’s finances. The key responsibility of the
wealth manager is to deliver this return through asset
allocation. He can do it passively using a model
RAJ
allocation, or actively through a tactical allocation.
The Economic Times Wealth, January 31, 2011 29
Wealth management firms differentiate themselves on
the basis of these approaches, but the responsibility for
managing the target return remains the core.
The asset portfolio features risks of various kinds. To
the investor, these have to be pre-defined as tolerance
limits for loss or maximum downside in the value of
assets. Wealth managers use risk profilers to determine
The financial needs of the
investors cannot be left to the
vagaries of market performance,
and therefore, the responsibility
of a wealth manager is superior
to that of an investment
manager.
these levels. However, they need a deep understanding
of the assets they have chosen to see how the risks come
together to impact the investor’s wealth. Since risk and
return are two sides of the same coin, advisers and
investors have to redefine how much risk should be
taken given a desired return, or the maximum return
possible given a desired level of risk tolerance. This
is the portfolio optimisation decision that every
household needs to make along with its wealth
Putting manager. The performance of the adviser has to
be measured by the quality of the portfolio that is
online
built, the adherence to risk and return
parameters that have been set, and the active
management of asset allocation to ensure
maximisation of net worth within these
definitions.
Viewed from this perspective, wealth management,
as a profession, needs to see itself playing a strategic
role in managing the balance sheets of households. At
the same time, households need to see the strategic
need to bring together the components that impact
their wealth. If we seriously want to move away from
product peddling, both the parties need to rework their
roles and responsibilities.
The author is Managing
Director, Centre for Investment Educa-
tion and Learning, and can be reached
at uma.shashikant@ciel.co.in