Wealth management - Part 2

The following is a broad categorization of wealth management services being offered by various firms.

• Property or Estate Services

• Investment Services

• Tax Services

• Consulting Services

Property and estate services

Property or estate is acquired by wealthy individuals for various purposes. Property is the most preferred form of investment, and it has proven to be a very good store of value. The continuous increase in population across the globe has put a demand side pressure on good properties and hence there has been a great surge in property prices all across the world. Many high net-worth individuals invest in either residential or commercial properties.

The investment in commercial properties is usually made to attain fixed income out of renting such properties or for developing such properties and selling at a higher price thereby generating capital gains on such investments.

The investment in residential properties is usually made to use such property as vacation houses or guest houses for friends and family. Sometimes these properties are rented to others during vacation time. Very rich individuals sometimes acquire entire Islands like Mr. Richard Branson of Virgin Group. These Islands are given on rent during idle times to various celebrities or family get-togethers.

These estates are usually located at popular holiday destinations or tourist places, away from the residential place of the individual. Wealthy individuals usually consult the local real estate agents or dealers for such purchases. Since the documentation of purchase or lease or sale is different from the documentation that happens in the resident country of the owner, these real estate agents provide an important service to the owner. Traditionally, such services are provided by the local real estate agents. However, since the 1980s a number of fi rms such as banks, investment banks and other financial institutions having global presence are providing such services. Due to their global presence the services offered are much wider in scope. For example, a local real estate agency may give the details of local properties in that region in a particular country. However, sometimes like fashion the preference of global travelers’ change, and so new holiday destinations might become more attractive in terms of price and appeal. This new destination might be located in a different country than the country in which the local real estate agent is operating. Hence, the real estate agents would not be in a position to offer such solutions to prospective owners.

However, multinational banks and large financial institutions would be in a position to use the advance of their global presence and provide wider opportunities to their clients.

• Usually, the following are the services that are offered by these institutions with regard to properties or estate.

• Presenting various property or estate options to their clients.

• Discussing and explaining the clients the advantages and disadvantages with

  regard to each such property.

• Suggesting the most suitable property(s) or estate(s).

• Working on the process of acquisition of the property – outright purchase,

  through mortgage loan, long lease, short lease, etc.

• Working on the documentation with regard to the selected property –

  preparation of agreement for sale and sale deed, registering the property with

  the appropriate government authorities, payment of necessary stamp duties,

  and settlement of purchase through transfer of money to the seller using

  banking channels or any other channel as agreed upon using necessary foreign exchange.

• Appointment of caretakers for the property.

• Payment of taxes like property tax, municipality tax, etc. using the direct

  payment facility provided by modern banks.

• Payment of utility bills such as electricity bills, gas bills, water bills using

  the direct payment facility.

• Providing foreign exchange services to the owner whenever the owner wishes

  to visit the property using the banking system.

• Helping the owner to find tenants during vacancy or unused periods.

• Helping the owner to find prospective buyers if the owner wishes to sell the

  property.

• Helping the owner with necessary documentation with regard to sale or lease of such property.

• Any other services that the institution is capable of rendering for a fee.

The list of services that can be rendered is vast. As new and new properties are developed and as the uses of a property and estate change over time new services are created and are offered for a fee.

Investment Services

Currently, this service is the most widely offered service by wealth managers all across the world. The reason for this is the sheer scope of the fi eld of investments. The products that the wealth managers have at their disposal include stocks, bonds, fixed deposits, foreign exchange trading, investment into commodities and commodities trading. Investment services, usually, include the following services.

• Risk profiling of the client to find out the risk-taking capacity.

• Identifying various investment options that would suit the risk profile.

• Making asset allocation between the varying investment options keeping in

  mind the risk profile.

• Making the client understand the steps mentioned above and taking his approval for the same.

• Making the client open the necessary accounts like savings bank account,

  depository account, trading account, etc., which will help in buying various.

  investments in the name of the client. Sometimes the wealth manager (on

  behalf of the fi rm that he represents) can take Specific Power of Attorney on a legal paper from the client and open all the necessary accounts without the

  client having to sign all the documents. In such cases, the clients will have to

  be informed in advance regarding such a Power of Attorney. The client will

  also need to be briefed with regard to the contents of the Special Power of

  Attorney to make the relationship trustworthy.

• Setting up investment horizons and investment management rules. Every

  client is different in terms of his/her risk-taking capacity, age, the purpose of

  the investment, etc. Hence, investment objectives will need to be developed and followed up by clearly mentioned investment duration that the investment objective will cater to. Sometimes, the duration might change due to the changing circumstances of the client. In such cases, the investment objective might be required to be modified. It is always better to have a clearly defined investment objective for each investment type that is being made. This would help as a reference during turbulent times when the investment might not perform as good as expected. For example, one of the investment options or asset classes that can be selected is Equity. Let’s suppose that the wealth manager selects 5 stocks in which investment can be made and he figures out that the holding period of investment is 7 years. It is possible that at the end of 2nd year the markets might be going through a bear phase and hence the value of the investment made might be negative or lesser than expected. In such circumstances, inexperienced wealth managers might be tempted to sell the equity stocks in panic. To avoid such a situation, it is better to write down the investment objective and duration. A written investment document will help the wealth manager as a guide or reference during testing times. If the wealth manager comes to know that the duration is 7 years and that markets are known to go through bull and bear phases, then he might not be as tempted to sell the investments as he initially was. He might then resort to holding such securities even through turbulent times. The investment management document also can be a guide to the client. He might use such a document to question any unnecessary changes that might have been made to the investment which is different from what is stated in the document.

• Setting up Performance Monitoring systems. Many times, inexperienced wealth advisors or managers mistakenly identify the function of Performance Monitoring to be the same as Portfolio Tracking. However, in reality, they are quite different concepts. Portfolio Tracking involves tracking or measuring the current value of a portfolio and to see the changes in value at periodical intervals or any particular period of time. Performance monitoring, however, is a much broader and very different concept. Performance monitoring involves the monitoring of performance of a portfolio as was originally envisaged. Portfolios are designed based on many assumptions. Assumptions can be related to very broad parameters like stability of the current government, continuation of peace in a country, estimates of inflation during a particular period of time, estimates of economic growth, assumptions on the health of the banking sector, assumptions on liquidity in secondary markets (stock markets, real-estate markets, commodities market, foreign exchange market, primary markets, etc.). The performance of the portfolio mainly depends on these assumptions. Sometimes, these assumptions might be wrong or might no longer hold good. Hence, a wealth manager has to always look out for information and try to see whether the portfolio that he/she has built for the client based on various assumptions still holds good or not? If the assumptions change, then the wealth manager will have to ask himself the question whether such change in variables or assumptions necessitate a change in portfolio allocation or asset allocation. The topic of Performance Monitoring, thus, involves the job of continuously monitoring the various assumptions upon which the portfolio of the client is constructed. If the assumptions hold good then the portfolio would, in most cases, give the estimated results. One of the tools of Performance Monitoring is Portfolio Tracking. Hence, Portfolio tracking is a subset or a tool to effectively monitor performance of a portfolio.

• Setting up reporting systems. Reporting systems involve the various ways in which the results of the portfolio are reported to various people concerned with the portfolio. The various people who might be concerned with the portfolio are the wealth managers, manager of wealth managers, the client whose wealth is managed, the personal secretary of the client and any other person whom the client has authorized to view the portfolio. Reporting system is usually done both in electronic and print modes. Verbal communication via telephone is also used to communicate the portfolio performance and various parameters to the client on demand. A good reporting system helps in building good relationships with clients.

• Winding up of portfolio. Once the investment objective has been achieved, the next step is to wind up the portfolio and surrender the wealth back to the client. Usually, many wealth managers tend to continue the existing portfolio for business retention purposes. Continuation of the portfolio is a good strategy as long as the assumptions underlying the portfolio still hold good and also there is an approval of this by the client. However, in most cases it is found that wealth managers do not stick to the investment duration. They seem to have either forgotten the duration or have no regard for it. While this practice does not make it a financial crime, it certainly is not ethical. It is in the interest of both the business of wealth management and the client relationship that the client be consulted before prolonging the duration of any portfolio. In fact, an ideal thing to do would be to have a thorough re-risk-profiling of the client and adjust the portfolio according to the new risk-profile. By doing so, both the client and the wealth manager will have a clearly defined future course of action.

• Any other services that might be required to strengthen or maintain the relationship with the client. New inventions in technology will have to be utilized to enhance the client-relationship experience. New assets being discovered, invented or created will need to be accessed, quantified and introduced into the portfolio with prior discussions and approval of the client.

Tax Services

Taxation is one of the most important aspects affecting investment decisions. Various taxes are imposed upon investment viz., income tax, property tax, wealth tax, service tax, security transaction tax, inheritance tax, etc. Taxes can be levied at the time of investments, on profits/interest or on withdrawal or maturity. These types of levies can be described in the following simple manner.

• TEE (Tax Exempt Exempt) - Tax at the time of investment, exempt on profit / interest earned and Exempt on final withdrawal or redemption.

• ETE (Exempt Tax Exempt) – Exempt at the time of investment, Tax on profits / interest earned and exempt on final withdrawal or redemption.

• EET (Exempt Exempt Tax) – Exempt at the time of investment, exempt on profits / interest earned and Taxable at the time of withdrawal or redemption.

Usually, the tax is levied at only one of the particular phases of investment that is either at the time of investment or profits or maturity. It is very uncommon to find tax upon investment. It is also very uncommon to find taxes being implemented at two different phases on an investment i.e. taxes like ETT, TET, etc. are rare.

Taxes are always taken into account before considering any investment. Taxes are sometimes deducted at source. In most countries, however, taxes are to be calculated by the tax assessed and paid to the tax authorities. On many investments made by individual citizens, taxes are not deducted at source. Because of this the onus of calculation of tax and payment of it to the respective tax authorities lies with the citizens. One of the important services that the wealth managers render to the client is calculation and payment of tax on behalf of the client. The wealth managers employ tax experts whose job is to help the wealth managers in discharging their tax related services to the client. This service is usually provided for a fee. Some countries have introduced tax-exemption investment schemes while others have introduced investment schemes that give a rebate (discount) on tax. Wealth managers usually make themselves aware of all such investment avenues and try to design portfolios based on them.

In places where money can freely move from one country to another, wealth managers tend to study the benefits of investing in a country where the tax rates are lesser. The evolution of Euro Bonds is an example of such a choice of investment. Taxes are never constant and are subject to change with change in government policy. Hence, old un-attractive investment options may suddenly become attractive with change in taxation rates. The wealth managers will have to have the keenness in finding such opportunities.

Consulting Services

Consulting services are also known as Advisory Services. Sometimes wealthy individuals might have their own qualified and experienced staff to take care of investments but might not have the necessary experience in a new or specific sector. In such cases, they may consult the wealth managers who often provide advisory, or consulting services related to that sector. The service is offered for a fee. The task of a wealth manager in such a case is just to offer the appropriate advice to the client.

Consulting services can include the following.

• Assistance with development and review of investment policy statement

• Asset allocation studies and analysis

• Investment manager and mutual fund search and recommendation

• Information and advice regarding setting up private foundations, trusts, charitable institutions, etc.

• Portfolio evaluation and review.

• Investment opportunities available at different countries

• SWOT (Strength, Weakness, Opportunities and Threat) analysis of country specific parameters for investment or business decisions.

• Any other service that can be provided by the wealth management fi rm for a fee.

• Consulting services have gained importance in recent decades due to the complexity of security instruments and the growing list of emerging economies which offer themselves as promising investment destinations.