DSIJ Mindshare

PMS - Advising the right way

A recent report released by Kotak Wealth Management estimates that by 2015-16, the net worth of India’s ultra HNHs (Ultra High Net Worth Households) is likely to grow five times to Rs 235 trillion. In fact, if you dissect the report further, it says that there would be 219000 ultra wealthy households in India by 2015-16, moving sharply upwards from the current figure of around 62000. Another interesting piece of data from the same report says that the number of Indian billionaires on the Forbes list has gone up from just three in the year 1996, to 55 in the year 2011.

Now, why are we discussing these statistics? Well, it is because this set of statistics leads us to an interesting topic – wealth. This, in turn, takes us to something even more interesting to many people today – professional wealth management.

The growing number of wealthy Indians threw open an opportunity for the so-called ‘professional wealth managers’. As is always a trend, a whole lot of intermediaries were spawned, who have jumped on to the bandwagon offering professional wealth management services to clients. The changing face of the Indian economy over the past decade or so, has spurred a demand for services like these. But, have service providers managed to stay true to their word? Have investors really gained from their services? Have these services led to any meaningful wealth creation in the truest sense of the term?

If you look at the indications floating around, you would be surprised to see that the wealth management industry and, specifically portfolio managers, have not been doing a great job. This is more evident in the statistics of assets under management with portfolio managers over the past six months. In fact, between December 2010 and May 2011, client additions in the portfolio management sphere have not been impressive in the least. The number of clients availing themselves of these services in the discretionary category has gone up by a mere three per cent, though the number of clients opting for non-discretionary portfolio management services has gone up by 24 per cent during the same period. The number of clients using only advisory services has, in fact, gone down by four per cent during the relevant period. All of this hints at the disillusionment of clients towards the results that have come their way from these services.

From the total of Rs 267433 crore that were being managed under the discretionary category, only Rs 142702 crore is still with portfolio managers. This translates into a huge 47 per cent decline in the AUM in the past seven months. The non-discretionary category has seen a smart jump of 57 per cent in AUM during the same period. However, in view of the overall quantum of funds that are being man-aged under this category, the picture is far from rosy. From Rs 6902 crore that were being managed in this segment during December 2010, the number has moved up to Rs 10819 crore. This is hardly an amount to write home about, considering the volume of opportunity that lies in this business. Assets under management on the equity side have declined by 13 per cent between December 2010 and May 2011, from Rs 19272 crore to Rs 16824 crore. Notably, the AUM on the advisory side of the business has come down by only 2 per cent, from Rs 88611 crore to Rs 86521 crore.[PAGE BREAK]
So, why have investors been so disenchanted with these services? The answer is quite simple. As long as the market was having a good up-side ride, investors had nothing to worry about in terms of results that were being provided by their fund managers. However, the moment the tide turned on its head, the results proved to be disastrous. This is also evident in some of the complaints that have been filed by investors against large financial intermediaries that have been providing these services.

What has really afflicted investors availing themselves of these services is the fact that real control is more often with the fund managers. While decisions absolutely rest with them in case of the discretionary category, even for non-discretionary services, investment decisions tend to get biased following the fund managers’ advice. This has ultimately led to mass wealth destruction, rather than creation.

Undoubtedly, portfolio management is a professional’s job. But you must remember that it is your hard earned money that goes down the drain if the fund managers go wrong in their judgement. This is where advisory services score a point. While the service provider gives you his/her advice, you are free to accept or reject it. This leads to investment decisions being deferred, which may sometimes help in preserving your capital. While preserving capital is necessary, what is even more important is to generate a fair and decent rate of return on your portfolio. In fact, heeding expert advice is a lot more useful than reposing a blanket belief in your portfolio manager. Not to forget that portfolio management services come at a fee. The SEBI Portfolio Manager Regulations have not prescribed any scale of fee that portfolio managers can charge. However, the regulations provide that the portfolio manager shall charge a fee as per the agreement with the client for rendering portfolio management services. The fee so charged, may be a fixed amount, or a return-based fee, or a combination of both. The whole point, however, is that one should be able to earn a decent return after paying such hefty fees.

While one could argue that advisory services too come at a fee, it is important to note that advisory services are more of a non-discretionary nature. Overall, when compared, advisory services seem to score higher than portfolio management services for the obvious benefits that they bring to investors. It is only selecting the strongest of advisors with a good background and long term track record of understanding the Indian investment scene that matters most. There are a host of financial intermediaries like Kotak, Avendus, Axis Bank, Geojit BNP Paribas and Dalal Street Investment Journal which provide these services. As we said earlier, an advisor with a solid back-ground coupled with a long-term understanding of the Indian investment scene is what will help you get better returns.

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DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

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Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

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