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Evaluating Wealth Managers and their services

Evaluating wealth mangers & financial intermediaries and following these tips for your mutual fund holdings for great investment returns.

Wealth management, being amongst the highest level in the domain of financial planning services, involves comprehensive investment experience, advice, and guidance on taxes, estate planning, legal frameworks, etc. The role of wealth managers or investment advisors is a very important one in the ecosystem they inhabit. Ask the right questions to get the best out of your investment advisor.

How to get the best out of your wealth manager

Needless to say, wealth managers or investment advisors possess more insights and experience on investments than the average investor. They go through qualification tests from the NISM (National Institute of Securities Markets); are continuously trained by product providers; interact with experts in their industries through common industry platforms, and are in constant touch with the developments in financial markets. The average investor, who may not have the attitude, aptitude, or time to manage their investment, is almost certainly better off taking assistance from investment advisors to achieve their financial goals.

Having said that, once you have decided to engage with an investment advisor, it does not mean that you should completely let go of any efforts to learn and monitor your investments.

Active participation improves outcomes in many areas. It also helps our financial service providers understand how to provide the most suitable service to their clients. To simplify things, consider a fairly straightforward example. In school, a student who prepares in advance for a particular topic is more likely to grasp the subject better than someone who has come without preparation.

To help prepare the average investor, here are a few pointers investors can use to get the best out of their investment advisors by asking the right questions.

#1 Spend more time discussing asset allocation with your Wealth Manager

Asset allocation refers to allocating your investible surplus in a manner that is distributed among different asset classes. Assets like equity, fixed income, gold, cash, real estate, etc.

Broadly speaking, there are two approaches to asset allocation:

  • One is strategic asset allocation, wherein allocation to various asset classes is chosen based on the investor’s risk-bearing capacity.
  • The second is tactical asset allocation, where assets are overweight or underweight based on perceived bullishness or bearishness of an asset class’s future performance.

Very often, both approaches are clubbed by way of having strategic allocation with an upper and lower range, while allocation within range is decided by tactical factors.

All major investment experts have concluded that asset allocation explains most of our returns. It is a very critical aspect, even from a risk management perspective. But conversely, it has been generally observed that specific funds or products end up taking the lion’s share of discussion while discussion on asset allocation is done in a very abrupt or cursory manner.

As an investor, you should ensure that most of an investment advisor’s expertise is leveraged for asset allocation based on your personal goals, available amount, and cash flow. In contrast, a relatively lower amount of time is deserving of a discussion on individual funds.

#2 Ask the right questions for diversification to your wealth manager

Investors generally understand that more number of mutual funds means more diversification. But this is far from the truth. Sometimes it so happens that more than 50% of the portfolio is common between various funds. You, as investors, should ask the following questions to your wealth managers or investment advisors:

  1. Is my equity portfolio diversified enough to cover all the varied segments of the market?

The equity market is often divided based on market capitalization like large-cap, mid-cap, and small-cap. Long-term investors should have exposure in all segments of the market in proportion to the market capitalization.

  1. Is my equity portfolio diversified enough to cover the global equity market as well?

Most investors have traditionally invested in Indian equity markets exclusively. Even though they know about the companies like Google (Alphabet), Facebook, Microsoft, Amazon, or Apple, the majority have never considered an investment in international equity due to the lack of easy availability of such funds that can give international exposure. Today, there are many funds available to invest in global markets to attain true diversification.

  1. Is my equity portfolio diversified enough for different investment styles?

Equity investment styles are broadly divided between active and passive (index funds being a popular option). Most sophisticated investors engage in both these styles, and for good reason. . Furthermore, there are many complexities within the active investment style, such as Value Investment, Growth or Momentum, Quant, Bottom Up, or Top Down Investment.

#3 Minimize the Number of Holdings

It is also important to enforce strict discipline for minimizing the number of holdings. Many investors' portfolios appear like a directory of the mutual fund industry with small holdings across many different funds and at the same time not achieving the diversification objectives as mentioned previously.

As an investor, you need to compel your advisor to create a portfolio to achieve the objectives mentioned above with a minimum number of funds for the following reasons:

  1. Difficulty in monitoring:
    A vigilant investor should monitor their holdings for performance-related parameters as well as other parameters like change in fundamental attributes, a merger of schemes, closure of schemes, etc. Fewer holdings are always better for monitoring as one can go into greater depth while analyzing these metrics.
  2. Difficulty in rebalancing: As one starts following a certain discipline for asset allocation, there will often be a need to rebalance the portfolio when the allocation becomes skewed due to market action.Rebalancing can become complicated with too many funds. It is difficult to decide which fund to redeem or which fund to put additional subscriptions in.
  3. Difficulty to implement changes related to changes in cash flow: Investors have different cash flow requirements. They may require some funds for whatever reasons, or they may have surplus funds to be deployed. In such cases, multiple holdings can often pose problems, and even SIPs and SWPs can complicate decision making.
  4. Difficulty in Administration: Many long-term investors may come across occasions where administrative changes are required.  Changes such as a change in address, phone number, bank account mandate, nominee, residential, transmission, etc. Too many holdings can create an administrative nightmare.

#4 Ask the right questions on annual costs to your wealth manager

Mutual Funds charge a certain fee - what we measure using the Total Expense Ratio. It typically ranges from 2.5% to 0.05% per annum. This annual cost can have a huge compounding effect on the long term portfolio value. Therefore, ask for investment products or mutual funds which achieve the same objectives at a lower cost. Ask about this too to your investment advisor or wealth manager.

#5 Discuss the compensation for investment advisor upfront

Investment advisors are professionals. They spend their time and expertise into tailoring the right strategy for you. Naturally, such services come at a cost. The cost is even higher for wealth managers since they deal with a wider range of financial guidance and not just investment. Therefore, it is always best to discuss the compensation upfront.

Good luck!

Any investment plan requires careful planning, even if there is a professional to guide you. Every investor’s financial situation and goals are distinct. Therefore, asking the right questions is one of the most critical aspects when you’re evaluating wealth managers or advisors. You can check out the Glide Invest app to invest in assets for your financial goals at the tip of a button.

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