WEALTH MANAGEMENT

Module 1 Contents:

Introduction to Wealth Management

Wealth management is a service offered by high-level professional financial institutions that

takes care of the financial investment, tax/accounting, retirement planning, estate planning, and
philanthropic endeavors. Wealth managers combine inputs from financial experts with advice
from the client’s attorney, accountants, and insurance agent for the sole purpose of laying down
a feasible and risk-mitigated financial roadmap for their clients.

A wealth manager is a qualified professional employed with a wealth-management firm, with

access to in-house financial experts and services. He often starts managing wealth by
formulating a plan that not just maintains, but also increases the client’s wealth based on the
latter’s financial well-being, life goals and risk appetite

Wealth Management in India: Where it stands today

Wealth management in India has gained importance amongst local and global players in the
last couple of years. With a GDP growth rate inching towards the 9% mark and a reliable future
outlook, India’s growth story is making it an increasingly attractive market for wealth
management firms. This is likely to continue as India is touted to be the third-largest global
economy by 2030. India’s wealthy are relatively young compared with their international
contemporaries. Which is why, wealth management in India is altogether a different ballgame.

Meaning of Wealth Management

• Wealth Management, technically speaking, is defined as the present value of all the
future cash flows that are expected to flow in from one’s assets – be it a financial
asset (like equity shares) or a real asset(like real estate or a piece of an art).
• – Limitations – Accuracy in estimating the future and using an appropriate discount
rate.
• Wealth Management in a most important and secondary sense may be defined as the
passive income that one should be able to generate to maintain a desired lifestyle.
• This simply means generating an adequate amount of income, without actively
working, which ensures that one need not worry about meeting the various living or
leisure expenses.

Investment Management vs Wealth Management - Differences

Investment Management Wealth Management

Art of selecting investments-stocks, Art of assisting clients to achieve life
bonds, derivatives and combining goals through the proper management
them to meet client-specific risk- of their financial resources.
reward requirements.
 Investment or Money Manager is Wealth Manager is client-centric.
product-centric.
Investment Manager has a certain Wealth Manager’s efforts are devoted to
portfolio (ex:- an equity fund or a debt assisting clients to achieve life goals.
fund) to offer his clients

Founded on the characteristics of the Founded on the values of a client?

product/portfolio. What is important to them? What
goals do they have and how do they
want to accomplish them? Timeline
for the goals? etc.,

An investment Manager is like an agent Wealth Manager is more like a family

who gets clients on board on a portfolio physician.

Scope of Wealth Management

• A Wealth Manager first scrutinizes a client’s financial condition and then proposes a
combination of banking and investment services that best addresses their unique
wealth management issues. These include the following important ones among
others:
• Current lifestyle needs.(Living expenses, children’s needs, S/T and L/T goals).

• Income tax considerations. (Very imp since the timing of stock purchases and sales
may have an impact on tax liability).

• Inheritance goals(to whom does the client wants to entrust his money-how much
control to confer upon probable successor(s)).
• Humanitarian pursuits: Charitable clients would like to support as well as when and
how they wish to donate their money or assets(a decision that determines tax
advantages to the client).

Wealth Management Process

• Understanding the wealth management process is the most important element of a

successful relationship between an individual investor and the wealth manager. It is
multi-phased and iterative:
• Wealth Manager needs to take time to go through the whole process so that all
appropriate targets and expectations are set
• Wealth Manager needs to understand that “one size fits all” will not work as different
investors have different constraints.

Wealth Management Process – Four Stages

• 1) Understanding Opportunities and Issues: Frequently this step is missed out by
both the professional wealth manager and also the clients
• INVESTORS KNOW THYSELF
• Where am I? (in financial terms)
 • Where do I want to go? (life goals measured in financial terms).
• How do I get there?
• Developing rational investment expectations is important.
2) Planning a Wealth Management Strategy:
• It is not a tactical game, it is a strategic game.(lot more to do than picking a few
selective stocks or mutual funds).
• Considerations in Wealth Management Strategy:
• Impact of taxes
• Developing an Investment Policy:
• Help clients in determining their specific goals including their hidden goals.
• Evaluate the existing portfolio of the client.
• Determine the cashflow needs of the client.
• Determine the constraints.

• Develop an asset-allocation plan.

• COMPONENTS OF AN INVESTMENT POLICY:
• Preface – recommendations based on assumptions and not a guarantee.
• Overview – customized to reflect client’s needs, diversified based on needs.
• Investment objectives: specifically describing the client’s goals
• Investment time horizon: typically more than 5 years
• Risk tolerance: continues to educate the client regarding risk, risk-free
investing is not advised.
• 2) Planning a Wealth Management Strategy: - contd.,
• COMPONENTS OF AN INVESTMENT POLICY: - contd.,
• Expected return – portfolio performance in terms of the real rate of
return – the client should consider underlying assumptions about
financial markets and not expect a smooth pattern.
• Investment recommendations – description of the client’s existing
portfolio and wealth manager’s recommended allocation.
• IMPORTANCE OF ASSET ALLOCATION
• Asset Allocation decision: Done by the wealth manager which is in turn based on the
assumptions about the financial markets, client’s goals, and constraints and, to a
certain extent, on the wealth manager’s personal choices.
• B) Security selection decisions: These are based on the risk profile, for instance,
growth stocks will give higher returns with higher risks.
• C) Market timing decisions – Technical analysis tools are used by professional wealth
managers to decide the timing of entry into and exit from different securities/stocks.
• Integrated Wealth Planning: has three different yet related disciplines
1. Estate Planning Transfer of wealth across generations
2. Financial Planning (most important) is concerned with meeting the cash flow
needs of the present and the future;
3. Investment Planning Selection of investment strategies
Thus, Integrated wealth planning means selecting investment strategies that most
appropriately meet the cash flow, estate planning and emotional needs of an investor. Often
a complex exercise, but this integration is an absolute must.

• 3) Implementing the Wealth Management Plan:

• It is concerned with the manager selection and management. In addition, it also
involves important issues like market timing, tactical portfolio rebalancing, use of
derivative instruments and initial portfolio funding
 • 4) Supervising and Monitoring Process:
• To see if the initial plan is producing the desired results or not. If there are any
deviations from the desired result, the financial plan needs to be altered to achieve the
client’s goals. It also involves exploring investment opportunities with better returns.

Who are HNIs in India?

• Types of HNIs
• High-net-worth individuals (HNWIs): Investors who own liquid assets valued
between Rs 5 lakh and Rs 5 crore

• Very-high-net-worth individuals (VHNWIs): Investors who possess liquid assets

valued between Rs 5 crore and Rs 25 crore

• Ultra-high-net-worth individuals (UHNWIs): Investors who own more than Rs 25

crore in liquid assets

• (Source: https://www.business-standard.com/about/who-is-high-net-worth-
individuals#collapse )

Knight Frank’s report also indicates a significant growth trajectory for India’s high-net-worth
individuals (HNIs). The HNI segment, encompassing individuals with assets valued at $1
million and above, is expected to witness a staggering 107% increase over the next five years.
The HNI population, which stood at 797,714 in 2022, is projected to reach 1.65 million by
2027. This robust growth demonstrates the expanding affluence and economic opportunities
within India.

The UHNWI (Ultra High Net Worth Individuals) segment, comprising individuals with a net
worth of over $30 million, is projected to increase from 12,069 in 2022 to an impressive
19,119 by 2027.

Wealth Management as an Industry/Career?

• The HNI segment, encompassing individuals with assets valued at $1 million and
above, is expected to witness a staggering 107% increase over the next five years. The
HNI population, which stood at 797,714 in 2022, is projected to reach 1.65 million by
2027. This robust growth demonstrates the expanding affluence and economic
opportunities within India. There is also an increase in the demand for competent
wealth managers who can offer holistic and integrated wealth management services.

Caselet for group discussion

• Smitha has just graduated from college and is starting her career. She has heard about
the importance of financial planning in one of the guest lectures organized at her
college. She wants to make sure that she develops a plan for financial success. Her
goals are to be able to retire at 45 years and live comfortably on her savings. Smita is
22 years old and believes that if she makes the right financial decisions now, she will
be more likely to meet her financial goals. Smita has seen many people retire without
enough savings to support themselves and does not want this to happen to her.
 Q 1) What are some of the financial decisions Smita will probably have to make as a
fresh graduate?
Q 2) What are the advantages of starting early on her financial plans?
Q 3) Smita is thinking about using a savings strategy based on paying all of her
expenses and saving whatever is left at the end of the month. Do you think this is a
good strategy for wealth creation?

• Client Profiling:
• Relationship Clients: These people want to form a bond with someone whom they
trust. While they may defer to the recommendations of financial advisor, it is the
responsibility of financial advisor to keep them involved in the process.
• Fear-based clients: These people tend to have very little financial experience or
have had bad financial experiences. They have to be helped in gaining confidence in
the money arena.?
• Curious Clients: They are knowledgeable clients who work with financial advisers
due to time constraints. They take great interest in what financial advisor does.
These clients would have formed their opinions through what they have read or heard.
They often will continue to focus on items that validate their thinking.
• Greedy Clients: Such clients are only interested in some in-articulated and ever-
changing objectives usually measured by short-term results. They may appear to be
charming initially because they are often marked by high energy and a quick mind.

Wealth Management – Types of Goals of investors

• Hidden Goals: Investors generally have a vague idea about their investment goals,
i.e., they fail to provide specificity. However, very often investors neglect many
issues critical to the return-generating process. These issues are so obvious that
investors rarely consider them explicitly. For example, consider the issues related to
risk. When asked about their investment goals, investors more often than not specify
the expected return from investment without specifying the corresponding risk level
they are trying to assume.

• Explicit Goals: These on the other hand are the goals that are specified in terms of
time and money. For example, when an investor tells the wealth manager that he/she
requires a return of 18% per annum over a period of next three months, it is an
explicit goal.

• Time-Bound Goals: Time is the most powerful variable in investment return

expectations. According to the dominant theory of portfolio design, the more time
one has, the more predictable is the investment outcome. Consequently, having a
clear understanding of a client’s time frame permits the wealth manager to select the
strategy to accomplish the client’s goals

• Intermediate Goals: These would include college education, weddings, homes,

second homes, and trips round the world.
• Although these goals are explicitly known to the client, here again the client may not
give any time specificity, amount specificity, and priority. For example, in order to
plan for funding the cost of college education for a child, we need to determine the
 number of years before the funding starts, the time period in which the funding will
continue and the amount of funding required periodically.

• Lifetime(Retirement) Goals: Lifetime goals or retirement goals deal with the goal
of financial independence postretirement. These differ from individual to individual.
In determining lifetime goals, an additional dimension of specificity that assumes
great importance is estimation of mortality.
• There are fair chances that the client may outlive the plan prepared by the wealth
manager.

Code of Ethics for a Wealth Manager:

• To act with integrity in fulfilling the responsibilities of one’s appointment and seek to
avoid any acts, omissions or business practices that damage the regulation of the
representing firm and the Wealth Management Industry.
• To act honestly and fairly at all times when dealing with clients and to act in the best
interests of each client and treat them fairly.
• To treat people fairly regardless of age, disability, gender reassignment, pregnancy
and maternity, marriage and civil partnership, race, religion and belief, sex, and
sexual orientation.
• To observe applicable laws, regulations, and professional conduct standards when
carrying out financial services activities.
• To observe the standards of market integrity, good practice, and conduct required or
expected of participants in markets when engaging in any form of market dealings.
• To only make recommendations that are suitable, appropriate and that puts the
interests of the client first.
• To attain and actively manage a level of professional competence appropriate to your
responsibilities and commit to continued learning to ensure the currency of your
knowledge, skills and expertise.
• To decline any enagement for which one is not competent unless one has access to
such advice and assistance as will enable you to carry out the work competently, and
in the client’s best interests.
• To uphold the highest personal and professional standards.
• To act with fairness, integrity and courtesy in all business activities.

.
Financial Planning
▪ Introduction
Planning
Planning means looking ahead and chalking out future courses of action to be followed
Examples:
- Preparation for competitive exams
- Planning a vacation
Financial Planning is the process of meeting your life goals through the proper management
of your finances.
A short video on Financial Plan
https://www.youtube.com/watch?v=yOmYc4Ewdas
Examples of goals:
 - Buying a house
- Higher Education for Children
- Retirement
• Poll 1
a) Cash Flow Analysis (Current status)
b) Current Asset Allocation & Networth (Current Status)
c) Risk Profiling
d) Emergency Fund Analysis
e) Protection Planning
f) Investment Planning for Goals
g) Estate Planning
h) Tax Planning
i) Monitoring, Portfolio Rebalancing & Review
Financial Planning Concepts
d) Emergency Fund Analysis
Maintain a Fund with 3 to 6 times of your monthly expenses in cash or near cash investments.
Suggested Products:
• Cash
• Short term Fixed Deposits
• Sweep-in accounts
• Savings A/c
• Short term Debt MF
Make sure you have -
• Medical Insurance
• Property Insurance
• Motor Insurance
• Keyman Insurance
• Professional Liability Insurance etc.,
Financial Planning Concepts
• “Time in the market is more of value than the timing in the market”
Estate planning involves making plans for the transfer of your estate after death. Your estate
is all the property that you own. It can include cash, jewelry, cars, houses, land,
retirement, investment and savings accounts, etc.
Nominations
Wills
Trust
Nothing is certain but death and taxes
Tax Saving Products :
Sec 80C: ELSS, Life Insurance, NSC,PPF,EPF,5 year FD,
Home loan Principal repayment, NPS
Sec 80 D: Mediclaim
Sec 24 (b): Home loan Interest
Why they are required?
⮚ Financial goals keep changing
⮚ Changes in your economic profile
⮚ Financial Market Conditions
- Financial Planning is for the Rich
- Insurance Planning is Financial Planning
- Tax Planning is Financial Planning
- I am young to think about Financial Planning
- Confuse Financial Planning with investing
Client Profiling
Client Profile Example
FINANCIAL PLAN
• Financial Plan
• An important document created by the planner is the Financial Plan. It sets out how
the financial goal is proposed to be realised. There are two approaches to the financial
plan:
• Goal-based Financial Plan
• Here, every financial goal is considered separately. One such goal is shown in Table
1.4.
• The goal-based financial plan can get more complex, when we provide for multiple
goals, with a different asset allocation for each goal, and different projected returns
for each asset class.

CASE STUDY ABOUT NET WORTH CALCULATION:

Mr. Kishan, aged 38, is a senior Manager in an FMCG Company and earns Rs. 12,00,000
annually. Fifteen years ago, Kishan married Vandana and they currently have one child aged
10. Vandana, aged 35 is a surgeon and still owes Rs.175,000 in student loans. The annual
student loan payment totals Rs. 96000. Vandana earns Rs.10,00,000 annually. Kishan and
Vandana purchased a home for Rs.40,00,000 twelve years ago that has a current fair market
value of Rs.65,00,000. Kishan and Vandana signed a 30-year fixed-rate mortgage with an
interest rate of 7.25% and 2% origination fees. The insurance on the house and cars total
Rs.48000 annually. Health and Life insurance cost them Rs.24000 annually. Kishan has
saved Rs.7,25,000 in his savings account and has another Rs.7,00,000 in a money market
mutual fund. Vandana has a PPF to which she contributed Rs.5,00,000. The current market
value of the PPF is Rs.8,35,000. Vandana drives a two-year-old Honda Accord for which
she paid Rs.12,00,000. The Car is currently worth Rs.16,00,000. Vandana still owes
Rs.6,00,000 on her car. The monthly payment for Honda Accord is Rs 20000. Kishan drives
a six-year-old Ford Fiesta worth Rs.6,00,000 that is completely paid off. Auto insurance
Expenses equal Rs.15,000 annually. Kishan and Vandana have Rs. 6,00,000 in a joint
checking account plus Rs.10,00,000 in a savings account. Personal property owned by
Kishan and Vandana, primarily jewelry and furniture totals Rs.45,00,000.

A) What are their total assets and liabilities?

B) What is their net worth?
C) What is the average payment on their mortgage? How can this be leveraged?
D) Determine the monthly payment on the total loans.

NET WORTH OF KISHAN AND VANDANA

•
CASH FLOW CALCULATIONS OF KISHAN AND VANDANA
• CASH INFLOWS:(Figures p.a. based on certain assumptions where data is
inadequate): Rs.
• Kishan’s Salary 12,00,000
• Vandana’s Salary 10,00,000
• TOTAL CASH INFLOWS(A) 22,00,000

• CASH OUTFLOWS:
 • Vandana’s Student Loan repayment(annual outflow)
96,000
• Insurance on House and Cars 48,000
• Health and Life Insurance 24,000
• Honda Accord’s EMI payments(Rs.20000 * 12m)
2,40,000
• Auto Insurance
15,000
• Living Expenses(assumed Rs. 30000 per month per person)
10,80,000
• Home Loan payment p.a(Rs.27833 *12)
3,33,996
• TOTAL CASH OUTFLOWS(B) 18,36,996

CASH FLOW CALCULATIONS OF KISHAN AND VANDANA – CONTD.,

• TOTAL NET CASH INFLOWS(A-B) 3,63,004.
• Net Worth/Total Assets Ratio = 1,02,73,147/1,70,60,000 = 0.602 or 60.2%
• Surplus/Total Income = 3,63,000/ 22,00,000 = 0.165 or 16.5%

• Debt Service Coverage Ratio = Net Operating Income/Total Debt Service

• Where Net Operating Income = Revenue - Certain Operating Exps
• Total Debt Service = Current Debt Obligations p.a. = 240000(Honda Accord Loan
outgo p.a) + 333996(Home Loan outgo p.a) + Vandana’s Student Debt repayment
(96000) = Rs. 6,69,996
• Net Operating Income of Kishan and Vandana
• Total revenues (total Income p.a) = Rs.22,00,000
• Certain Operating Expenses = (Total Expenses less their debt obligations) =
18.36,996 – 669996= Rs.11,67,000
• Net Operating Income = Revenue – Certain Operating Expenses
• = 22,00,000 – 11,67,000
• = 10,33,000
• DSCR = Net Operating Income/Total Debt Service = 10,33,000/669996 = 1.542
• DSCR=Net Operating Income/Total Debt Service
• where:
• Net Operating Income =Revenue− COE,
• COE = Certain operating expenses
• Total Debt Service=Current debt obligations

Working Notes: 1) Calculation of EMI:

Assumptions
• 1) Since the date of valuation of assets and liabilities is not given, we are assuming
that the valuation is as on the last date of the present Financial Year.
• 2) Hence, based on the above assumption, the annual expenses of the present year are
assumed to have been paid off and annual earnings are not considered while valuing
assets and liabilities.
• 3) It is assumed that no down payment is made against the home loan.
• 4) Their living expenses are assumed to be Rs.30000 per person per month.
•
REASONS FOR INCREASING DEMAND FOR WEALTH MAXIMIZATION (WHY
WEALTH MANAGEMENT)
• Needs and aspirations of people are ever-increasing. Clients need to be counseled on
the difference between needs(essentials) and wants (desires). Prioritization of
expenses is critical for people who are struggling to make ends meet.
• Joint families are giving way to nuclear families. The nuclear family stays in a
separate house.
• In a nuclear family, the individual is responsible for his immediate family.
• The period of earning for individuals is reducing, while the longevity (life span) of
people is increasing.
• Income levels are going up. A higher investible surplus needs to be invested prudently
for the future.
• The financial assets and liabilities are becoming more complex. It is difficult for a
layman to have a comprehensive understanding of these financial products.
• The role of the “market” in the life of people is increasing. The rate of interest at
which they can place money in a bank is also not certain.
• Tax provisions keep changing. People need to plan their taxes and ensure that they
take full benefit of the concessions available.
• The government has its own financial pressures, because of which it is challenged in
offering social security to people or protecting them from the vagaries of the market.
• Increasing complexities in family structure can create problems while bequeathing
wealth to the next generation. Therefore, estate planning is important.
• A professional financial planner helping individuals navigate these challenges is an
important member of our society. The role and influence of financial planners is
bound to grow in India.
•
ROLE OF A FINANCIAL PLANNER
• Preparing a financial blue print for the client’s future
• Advice on investment in share market
• Advice on investment in small savings schemes and other debt instruments
• Advice on investment in mutual funds and other investment products
• Suggesting a suitable asset allocation based on risk profile of the client
• Management of loans and other liabilities
• Insurance planning and risk management
• Tax planning
• Planning for smooth bequest of wealth to the next generation.

FINANCIAL BLOOD TEST REPORT

One knows what is a blood test. The doctor decides on the need for a blood test, based on
the reading of the patient’s health. The pathology lab does the test and gives the results to
the patient, who shows it to the doctor. Accordingly, the doctor advises on corrective steps,
and the need for any further tests.
THE FINANCIAL BLOOD TEST REPORT
Just as flow of blood in the body is key to life, financial flow is key to a comfortable living.
A Financial Blood Test report will look something like this.

Current Annual Income Rs12,00,000

Savings Ratio 35%
Tax Ratio 25%
Asset Allocation:
Equity in portfolio 20%
Speculative Component in Portfolio 15%
Market-linked Debt Assets in Debt Portfolio 30%
Fixed Return Asset Exposure in non-liquid Market-linked Debt 45%
Assets
Illiquid Assets Distribution [Equity : Debt : Gold : Real Estate : 10% : 0% : 0% :
Other] 90%
Expected dip in expenses on retirement 30%
As you will appreciate, your blood test report does not make projections of what your
report will look like, yearwise into the future, given your life-style and environment.

The economy and financial markets are a lot less predictable than your life-style and
environment. Therefore, in this framework, all kinds of questionable
projections/predictions of the future have been kept aside

Benefits of the Financial Blood Test report:

 You can understand the profile of Mr. Investor-Client from

his Financial Blood Test report. He is a middle-aged person,
probably working in the organized sector. He has given
importance to savings and investment.
 The Financial Blood Test report shows the current financial
snapshot of the person, devoid of assumptions. (Yet, when
you dwell deep into the framework, you will realize that the
results are a lot more conservative than those suggested by
the traditional financial roadmap.)
 There is a clear demarcation of what has already been saved, and what is likely
to come in future.
 The Financial Blood Test report clearly categorizes assets,
based on their liquidity, in both - the market and the mind.
Asset allocation too has been X- rayed.
 The Financial Blood Test report tracks under-insurance / over-insurance.
 The Financial Blood Test report can be generated using paper
and pen. No need for MS Excel or other financial tools. An
adviser, who is not comfortable with addition and subtraction,
might need to use a calculator (basic calculator – no need for
a financial calculator).
 The proposed strategy glares back at you, without the need for any major
analysis of the Financial Blood Test report. For instance, from
the above Financial Blood Test report, it is clear that:
o Mr. Investor-Client is reasonably comfortable,
assuming a normalearning cycle up to retirement.
o What would be a comfortable time frame for him to
switch full time into spiritualism? About 6 years
down the line.
o Mr. Investor-Client can switch some of his contingency provisions
(bank deposits, liquid funds) to better yielding assets.
o Mr. Investor-Client appears to be under-insured.
o There is scope to increase the equity exposure.
o Debt portfolio can be risky in increasing interest rate scenario.
 The above results, and the strategy, are easily comprehensible by Mr. Investor-
Client.