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Introduction to Wealth Management


Before we understand wealth management, we should first understand what wealth means? Prior to the 20th century, wealth meant property and gold. The securities industry had not developed until the beginning of the 20th century. Even though there were plenty of securities in the form of Bonds and Stocks available, the demand for those was limited. Moreover, the securities were available only in a few financial centers like London, Amsterdam and Paris. Stock exchanges were few and lacked adequate liquidity. All this meant that traditionally wealth was synonymous to Property and Gold or Currency.

With the rapid development of the securities industry in the 20th century, the definition of wealth changed to include Stocks, Bonds, Mutual Fund units, Precious metals, Art, Royalties on Books, Songs and other intangible assets, apart from the Property and Gold.

The field of Wealth Management is concerned with management of wealth.

To understand the subject further, we need to answer three fundamental questions in the topic of wealth management – Whose wealth are we talking about? And what is the nature of management that we are talking about? And why should anyone’s wealth needs to be managed?

Whose Wealth?

Everybody was has got some sort of property or income can be said to have some wealth. Even a person who is working as a Clerk in a small office without any immovable property (like land or house) can be said to possess wealth – the wealth of his knowledge and experience in dealing with everyday work or the employability of such a person due to his skill-set renders secured future income. However, when we talk about the subject of Wealth Management we only consider current accumulated wealth and wealth that can be readily traded or exchanged for cash or other financial assets.

By defining wealth as above we are not discriminating between current wealth and future wealth. It is possible that future wealth can be more than the current wealth or vice-versa. However, for practical reasons, importance is given to current accumulated wealth. Future wealth carries uncertainty and it is difficult to estimate.

While wealth can be possessed by anyone from a small office executive to a rich business person, we often associate Wealth Management with rich or very wealthy individuals. People with little wealth, often, manage their wealth on their own. They might lack the necessary expertise to manage their wealth but it is practically difficult for them to outsource the management task of their wealth to another person. The reason is that the person who has the expertise in managing wealth would charge fee that would be expensive to afford. Hence, wealth management is usually concerned with wealthy individuals.

What is the nature and scope of wealth management?

Traditionally, even wealthy individuals used to manage their wealth themselves. The wealth was mainly in the form of Property, Gold, Bonds, Stocks and currencies. However, as the amount of this accumulated wealth grew, even the wealthy individuals’ found it hard to manage this on their own. They employed assistants or accountants to help them. The management task involved the following:
  1. Keeping track and records on all forms of wealth
  2. Storing the documents relating property such as property deeds, share certificates, bond certificates, etc.
  3. Estimating the current value of wealth and maintaining records of such estimates.
  4. Preparing timely reports with regard to the current value of wealth
  5. Paying taxes on wealth such as Property tax, Wealth tax, etc.
  6. Analysing how various instruments of wealth have fared over the past periods in terms of value.
  7. Reporting any material information (that might be necessary to take appropriate decision) to the owner of wealth.
These assistants or managers were paid a regular salary and they were also entrusted with the job of physically inspecting various assets, preparing documentation with regard to new assets that were to be acquired or sold and to deal with banks and other financial institutions for raising reverse mortgage loans etc.

These assistants were true wealth managers in their own right. The demands of their job required them to be well versed with the technicalities of all assets, have sufficient knowledge in accounting methods, to possess knowledge in tax laws and the social skills to deal with Government departments, banks and other financial institutions.

However, as the securities industry exploded with numerous instruments during the 20th century (a trend that is likely to be continued in the 21st century), it became practically impossible for a single assistant or accountant to keep track of all the assets and/or to deal with them. Hiring a team of assistants is expensive and might not provide the best of results. Since the securities industry is global in nature and as wealthy individuals chose to diversify their wealth across different geographical regions, a small team of assistants would not have the requisite skills to manage such diversified wealth.

This led to the concept of outsourcing the task of wealth management to specialised firms or institutions who usually had teams of people who had specialised knowledge in a particular field. The concept was a win-win situation for both the owner of wealth and the firm that managed the wealth. For the owner, the cost of outsourcing is cheaper than the cost of recruiting a dedicated team of specialists. For the wealth management firm, they can utilize the knowledge that they had attained to manage many wealthy individuals and thereby make a profitable business.

While the concept of outsourced wealth management is quite old, big institutions and firms started evolving only during the 1920’s. However, it was during the 1980’s that the business of wealth management came into prominence. As the economies of the west, particularly USA, Germany and UK and the Oil rich Gulf countries grew, the number of wealthy individuals exploded. With new inventions came new industries and new wealthy individuals. The wealth that these individuals accumulated is unheard-of in the past centuries.

As barriers to trade and capital movement were eased, wealth started to move from one country to another with little or no restrictions. This made the role of wealth management firms grow in importance. As the demand for wealth management grew, the need for specialists in various areas related to wealth management grew. This also led to more and more specialization with respect of skills needed for rendering the services.

Due to the global nature of services, banks and other big financial institutions who have presence in various countries were in undue advantage to render these services. Unlike other specialised wealth management firms, banks were able to offer not just wealth management services but also traditional banking and investment banking services. This meant that wealthy individuals need no longer have to deal with different institutions for their varied needs. They can get all their financial solutions from the banks that they deal with for their day-to-day operations.

Currently, the majority share of wealth management services is offered by a few big banks that are able to utilize their expertise and presence in various countries to render these services.

Internationally, the following are the big wealth management service providers. Domestically, in India, the following are the major wealth management service providers.

Why should anyone’s wealth be managed?

As discussed above, the wealth of today’s wealthy individuals is spread across various countries. Wealthy individuals have the freedom to acquire properties (either commercial or residential) in the destination of their choice. Individuals prefer such diversification for various reasons – to avoid the risk of being nationalized in case there is a nationalization drive in their country, to avoid taxes or take advantage of favorable taxes in other countries, to socialize, to relocate after retirement, to create vacation houses in frequently visiting places or to rent out to someone else for commercial gains.

Property laws differ from country to country. The rates of taxes, the requirements and forms of registration and other legal and administrative aspects relating to property differ widely between countries. Apart from this, a wealthy individual is more likely to be busy in his everyday work life that he might not be able to get himself fully involved in aspects relating to acquisition of new properties, sale of old properties, payment of taxes, finding tenants, administrative work related to movement of cash acquired from one property to another and so on. The individual might or might not have the time for this but most importantly he might not be aware of the various legal and operational complications with regard to holding properties in various places. All this means that unless such an individual appoints or outsources the work of management of existing wealth to someone else, he might not be able to concentrate on his current work at hand or his regular office duties. Hence, there is a need to outsource wealth management services.

For the wealth management firms, the growing list of wealthy individuals means that there would be greater demand for their services. This, in turn, makes their business model quite profitable.


Wealth Management Services


The following is a broad categorization of wealth management services being offered by various firms.
  1. Property or Estate Services
  2. Investment Services
  3. Tax Services
  4. Consulting Services

1. Property or 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 sometime 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 at the resident country of the owner, these real estate agent 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 firms 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 on in a particular country. However, sometimes like fashion the preference of global travellers 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
  1. Presenting various property or estate options to their clients.
  2. Discussing and explaining the clients the advantages and disadvantages with regard to each such property.
  3. Suggesting the most suitable property(s) or estate(s).
  4. Working on the process of acquisition of the property – outright purchase, through mortgage loan, long lease, short lease, etc.
  5. 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.
  6. Appointment of caretakers for the property.
  7. Payment of taxes like property tax, municipality tax, etc. using the direct payment facility provided by modern banks.
  8. Payment of utility bills such as electricity bills, gas bills, water bills using the direct payment facility.
  9. Providing foreign exchange services to the owner whenever the owner wishes to visit the property using the banking system.
  10. Helping the owner to find tenants during vacancy or unused periods.
  11. Helping the owner to find prospective buyers if the owner wishes to sell the property.
  12. Helping the owner with necessary documentation with regard to sale or lease of such property.
  13. Any other services that the institution of 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.

2. 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 field 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.

3. 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 levy can be described in the following simple manner.

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 assesse 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 investments 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 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.

4. 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.
  1. Assistance with development and review of investment policy statement
  2. Asset allocation studies and analysis
  3. Investment manager and mutual fund search and recommendation
  4. Portfolio evaluation and review
  5. Information and advice regarding setting up private foundations, trusts, charitable institutions, etc.
  6. Investment opportunities available at different countries
  7. SWOT (Strength, Weakness, Opportunities and Threat) analysis of country specific parameters for investment or business decisions
  8. Any other service that can be provided by the wealth management firm for a fee.
  9. 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.

Wealth Management Products


Various products are used for providing wealth management services. The following is a brief list of those.
  1. Equities
  2. Fixed Income Securities or Bonds
  3. Mutual Funds
  4. Commodity Trading
  5. Foreign Exchange Trading
  6. Precious Metals
  7. Private Equity and Venture Capital Investments
  8. Real-Estate Investments

(i) Equities: –

They comprise the most widely used product for providing wealth management services. The popularity of this product stems from the relatively negligible entry and exit barriers. The capital markets have become global in nature and wealthy individuals can invest in any company they wish in any country both through the primary and secondary markets. Even if there are barriers to investment by foreign citizens, most countries have permitted FII (Foreign Institutional Investment) investments in their countries. Hence, wealthy individuals can invest in a mutual fund or hedge fund which can be registered as a FII in a particular country and thereby participate in both primary and secondary markets. While this is an indirect form of investing in equities, it does provide a way at least to participate in a growing economy and reap benefits. However, direct investment into equities is common and forms a meaningful part of any portfolio. Investment in equities is usually spread between large cap companies and mid or small cap companies. Investments are also diversified among various growing industries so that any unforeseen and negative events relating to a particular industry does not affect the overall portfolio performance.

The wealth manager usually opens the necessary Depository and Trading accounts on behalf of the client and buys the equity stocks through them. The equity investment can be either common or preferential stocks. Common stocks are usually preferred to preferential stock and thus form a major chuck of investments.

Any corporate actions by the equity investments such as bonuses, dividends, rights, etc. are usually dealt by the wealth manager on behalf of the client. The wealth manager also monitors whether such corporate actions have been received into the respective accounts of the client or not. He even undertakes necessary actions with regard to such corporate actions like subscribing to rights issues, proxy voting, etc.

The privatization reforms and spectacular performance of the BRIC economies (Brazil, Russia, India and China) and some Eastern European (like Poland, Czech Republic, etc.) economies has opened up the route for direct and indirect investment into these countries. The capital markets of these economies have become stronger and very liquid over the last two decades. This has provided the wealth managers with opportunities to invest in promising private sector companies in these countries and thereby reap benefits which are higher than the returns generated by other forms of investments.

The presence of very liquid derivatives markets has provided the wealth managers with the opportunity to hedge their portfolios against market risk.

With widening of credit markets and availability of non-traditional funding options, new types of product and services firms are being created by creative entrepreneurs. As these small firms expand their businesses and reach out to established capital markets for funds, new industries and equity investment opportunities are created. All this has meant that equity investments will continue to form a substantial portion of any clients’ portfolio over the coming decades.

(ii) Fixed Income Securities: –

Also commonly known as Bonds, these have been the preferred form of investments since the 18th century. Bonds carry very little risk compared to other forms of investments. Central and State Government Bonds, Fixed Deposits of Banks and bonds issued by other statutory bodies like municipal corporations, electricity boards, etc., carry almost no risk and hence are the most preferred form of investments. The regular interest feature and implicit guarantees provided by these bonds act as safe haven for investments during turbulent economic times.

Preserving existing wealth is as important as creation of new wealth and hence any portfolio should include risk-free or relatively less-risky investments. The development of corporate bond markets (both primary and secondary) has increased the scope of bond markets in terms of the various instruments available for various degrees of risk taking capacity for investments.

(iii) Mutual Funds: –

Since the 1970’s the mutual fund industry has made great strides and has become the most preferred investment vehicle. They offer diversification, easy entry and exit and have access to a wide variety of instruments and markets. Their products are also designed to cater to varying risk preferences. Due to the above, they have become important options for investments. Many wealth managers increasingly prefer investments through mutual funds to traditional direct equity investments. The reason for this is the convenience and diversification that they offer. Mutual Fund NAVs are widely published in many newspapers and are accessible through various websites. Many mutual fund companies offer fund-of-fund schemes wherein investments can be done in a single fund which would in turn invest in a number of selective funds. This facility has increased their appeal and has further increased the convenience factor for investments. Many mutual funds also offer investments into emerging economies. With the development of ETFs (Exchange Traded Funds), investments can be made in precious metals, commodities and real-estate through mutual funds. All this has helped in increasing the scope and reach of mutual funds. Most mutual fund companies now offer PMS (Portfolio Management Schemes) which are targeted to HNIs (High net worth individuals). Wealth Managers can use such PMS schemes if there is a specific requirement to manage their wealth in a particular manner.

(iv) Commodity Trading: –

Commodity trading involves trading various commodities on commodity exchanges. The surge in commodity prices all across the globe due to ever increasing demand caused by increasing population has made it an option worth considering. Strictly speaking, commodities’ trading is akin to speculation rather than investment. It is not the intention of the client to hoard or stock commodities for future and neither is there an intention on part of the wealth manager to take delivery of the commodities. The commodities’ trading is chosen to place speculative bets on the future price movements of a selected few commodities. The duration of the speculative bet depends on the outlook of the particular commodity in question and the liquidity position on the exchanges on which the commodity is traded.

Wealth managers need special skills to understand the market dynamics of various commodities that they wish to trade. Close monitoring is necessary for such activity as the movement of commodity prices can be very sharp. Wealth managers usually get the expert opinion of an in-house commodity trader to place bets.

The risk involved in such bets can be high and hence only a small portion of the portfolio is used in such bets.

(v) Foreign Exchange Trading: –

Like commodities trading, foreign exchange trading is done to place speculative bets rather than long term investment purposes. Trading in foreign exchange currencies is done only when sufficient knowledge is built to substantiate a trading position involving two or more currencies. The level of knowledge required in foreign exchange trading is high as the number of factors affecting the movement of foreign exchange prices is numerous.

Wealth managers tend to consult their in-house foreign exchange specialists to trade in foreign exchange markets. The positions have to be monitored very closely and appropriate stop loss positions have to be made in order to limit losses.

The risk involved in such bets can be high and hence only a small portion of the portfolio is used in such bets.

(vi) Precious Metals: –

Precious metals such as Gold, Silver, Diamonds, etc. can be bought and stored in the custody of Banks. Precious metals, usually, provide a very good bet against inflation. Unlike other fixed income securities, the value of precious metals do not erode during inflationary situations. The recent surge in the prices of precious metals due to their increasing demand for jewelry and commercial purposes has made it into an attractive investment option. Gold, particularly, has been the most preferred metal and its price has been increasing continuously for more than a decade. The returns that gold has given over the last decade are comparable to the returns of other forms of investments like property, equity, etc. In fact, the returns from gold investments have been more than the returns from Property during the first decade of 2000.

Precious Metals can be stored in the custody of banks for a nominal fee. The metals can also be used for mortgaging against personal or business loans.

Investment into precious metals can also be made through mutual funds and Gold ETFs. Gold ETFs have gained prominence and are traded widely on various stock exchanges. Gold Mutual Funds provide amechanism to invest in the equity stocks of the gold mining companies.

Wealth managers can use either any of the above methods to invest in precious metals on behalf of their clients.

(vii) Private Equity and Venture Capital Investments:-

Private Equity Investment involves buying stock or share in a company through privately negotiated deals. They are different from financial investments. Financial investments are mainly made for the purpose of buying stocks on primary or secondary markets for the purpose of receiving dividends or reaping capital gains out of increase in share value. Private Equity Investment, on the other hand, is more of a partnership than investment. While the private equity also would like to make money through dividends and increase in share price, its primary objective is not that. The primary objective of any private equity investment is to help business grow. The investment is done through a deal with the management whereby fresh capital is induced into the company to expand the operations or to procure new resources (either in terms of people, technology, another business or other assets like land, building, etc.) for the purpose of increasing the overall value of the company. The private equity investors can be another company, high net-worth individuals or a hedge fund, mutual fund, etc.

Often wealth managers recommend private equity deals to their wealthy clients. Since the investment horizon of wealthy clients is long and the amounts involved are substantial, private equity investments become possible. Wealth managers in big wealth management firms have the knowledge and know-how about private equity opportunities. Often they come to know about these opportunities from their in-house private equity investment teams or from the interactions with other wealthy individuals about their businesses. Unlike the regular financial investments into stocks, private equity investments can be made into un-listed or privately held companies. Since such investments do not have an easy exit route and the performance of investment highly correlates to the performance of the company, the deal has to be made only after extensive analysis of all the factors affecting the performance of the company. In many cases the only way to get the money out of such investments is by selling the stake to another wealthy individual, to another company, to the same company or selling in the stock exchange after the stocks are listed.

Private equity investments have gained prominence in the last few decades. They are now the preferred form of financing adopted by companies and wealth managers. Private equity investments are also known as Private Placements.

Venture Capital Investments are very similar to Private Equity Investments. The main difference between them is that venture capital investments are more risky than private equity investments. Venture Capital investments are made into companies that have the potential but have do not have the resources to prove themselves in the market place. Venture capital firms usually take ownership in the business and also claim a stake in the management. They would bring their management, operation and marketing expertise to increase the value of the company over a period of time. They usually do not intend to make any immediate financial gains out of their investments. Their model is long-term in nature and if implemented successfully then would give superior returns than any other form of investments.

Usually venture capital firms are separately registered and are operated by big banks and other financial institutions. The venture capital firms raise money for their business model from high-net worth individuals. The wealth managers in big wealth management firms deal with clients who have money to spare for such investments. The wealth mangers usually are in interaction with the venture capital firms (usually in-house venture capital firms) and hence suggest opportunities for investments into venture capital firms. The client (wealthy individual) makes the investment into a venture capital firm which in turn makes investments into promising companies. So the clients hold investment stake in venture capital companies rather than the targeted companies directly.

The wealth manager monitors such investments and performance of the venture capital firms. Periodic reporting to client is done with regard to any good or bad news regarding the underlying targeted companies and portfolio.
One of the key things about private equity and venture capital investments is the need for the presence of strong management in the underlying companies. In fact, the entire money is basically bet on the ability of the management of such companies rather than the underlying product or service. Hence, the wealth manager has to do thorough evaluation of the management credentials and their abilities apart from all other routine things. In case of investment into venture capital firms, the wealth manager has to perform thorough evaluation of the management capabilities of both the venture capital firm and the targeted companies that they are investing in.

(viii) Real-estate Investments: –

Investment into real estate properties (both commercial and residential) forms a good chunk of any wealthy investor’s portfolio. Real estate provides a fixed rental income and also provides for appreciation in property value. Due to continuous increase in demand for good real estate properties all around the world, real-estate has become a preferred investment option.

Wealth manager are required to have adequate knowledge on the dynamics of the real estate markets. Just like stocks and bonds, real estate markets also witness fluctuation in prices. The prices of real estates are also widely influenced due to trends and preference for location. In fact, location is the most important factor determining the price of a real-estate asset.

Wealth managers regularly consult their in-house real-estate experts for advice on real estate trends and investments.