WEALTH MANAGEMENT

WLMT- Term 6

Course learning outcomes

Understand the role and objective of Financial Planning
and products therein (PLO 3A)
Appreciate the ethics and regulatory framework
governing Wealth Management (PLO 4A)
Apply tax related concepts to investments and business
decisions (PLO 3B)

Course Contents
Wealth Management
Financial Planning Role and Objectives, Establish and define relationship
with the client, Risk assessment
Investment Products - Equities, Fixed Income, Insurance, Real Estate,
Commodities, and Derivatives, Insurance Planning, Retirement Planning
Regulatory Perspective to Wealth Management- independence of Financial
Advisor in India, professional and ethical responsibilities of an advisor

Tax Management
Introduction to direct taxes and heads of income- Salary, House Property,
Capital Gains, Business Income, Other Sources
Tax saving avenues for investment in different products
Taxability and exemptions on transfer of various financial instruments and
other assets
Tax management for other business decisions

Financial Planning
Envisages:
Making decisions about current and future money and use it in
the best possible manner
Identify needs and study options to achieve needs
Ensure future security- providing for expected and unexpected
outflows of cash

Financial planning is an approach to assess the

adequacy of income and assets of a person to meet the
financial requirements to fulfil his needs and
aspirations.

Importance of Financial Planning

Income- efficiently manage and utilize income
Cash Flow-Maintain adequate cash flows to meet regular
and unforeseen expenses and investment outflows
Capital and Investment
Family security- risk coverage
Financial understanding- when measureable financial goals
are set and achieved
Standard of living
Savings
Assets
Financial security and stability

Need for Financial planning

Needs and aspirations of people are ever-increasing. This
increases the financial challenge that people face. Clients
need to be counselled on the difference between needs
(essentials) and wants (desires). Prioritisation of expenses is
critical for people who are struggling to make both ends meet.
Joint families are giving way to nuclear families. The nuclear
family stays in a separate house. The rentals or the acquisition
cost of a house, are an important financial need to plan for.
In a nuclear family, the individual is responsible for his
immediate family. The extended family, staying under a
different roof, cannot be expected to support the regular
financial needs of the individual.

Need for Financial Planning

The period of earning for individuals is reducing, while the
longevity (life span) of people is increasing. This means
that incomes earned over a shorter time period need to
finance the needs over a longer period of time. Hence the
need for retirement planning.
Income levels are going up. Higher investible surplus
needs to be invested prudently for the future. Hence the
need for professional financial planning advice.
The financial assets and liabilities that are available in the
market for various needs are getting more and more
complex. It is difficult for a layman to have a
comprehensive understanding of these financial products.

Need for Financial Planning

The role of 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. Global uncertainties lead to
market fluctuations that individuals find difficult to
handle.
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 vagaries of
the market.

Objectives of Financial Planning

Protection of self and family-medical exp, educational
exp, earnings risk coverage
Asset protection-financial as well as physical
Contingencies
Planning for family and retirement

The financial planning process

Where am I?
Where do I want to go?
How do I get there?
When should I start planning?

Financial Adviser
Who helps individuals achieve their long term financial
goals through investments, tax planning, asset
allocation, risk management, retirement planning and
estate planning
In addition, helps businesses with cash flow
management and business succession planning
Role is to find techniques to increase the clients net
worth to achieve financial goals

Some meanings
Advisors who limit their help to investment choices are often
calledInvestment AdvisorsorAsset Managers. Their task
is to put the money you have in long term savings to work in
an appropriate investment strategy.
Advisors who help you with lifestyle spending, cash flow,
saving, investment management, retirement planning,
education planning, etc. are often calledFinancial Advisors.
Their task is to make sure that your finances are structured so
that you will be able to meet your spending goals at the
appropriate time in the future.

And
Perhaps you have sufficient wealth, but you need help
managing that wealth. Advisors who help you with
estate planning, risk management, tax planning, Capital
Gains Planning etc. are often calledWealth Managers.
Their task is to watch over your wealth and do whatever
you would do if you had their time and expertise. They
act as a steward on your behalf.

David John Marotta

Steps in financial advising

Establish relationship
Gather data and set goals
Identify financial hurdles
Analysis of alternatives and recommend
Implementation
Monitoring

1. Establish relationship- contracts and

documentation
It is a good practice to set out the terms of the relationship in a suitable contract.
The financial planning contract will include:

The parties involved

Key deliverables and other services to be rendered, and by whom
The data to be provided, and by whom
Assurances, if any
Limitations, if any. For instance, unpredictability of the markets and the consequent
fluctuations in investment performance
Remuneration for the planner, and how these will be collected.

Proper documentation of the data collected, discussions held and recommendations

made will help the planner manage the client relationship well.
Since the results of financial planning are affected by the market, the planner has to
establish robust systems and documentation to protect against any legal claims that
can come up in the business.

2. Gather data
In order to provide appropriate financial advice, it is important to understand the
client and the family. This is facilitated through data collection, for which planners
develop standard forms / questionnaires. Internationally, this data collection is often
performed by para financial planners, who are not qualified to offer complete
financial planning advice.
The data that is collected includes the following:
Client name, family status
Family structure i.e. age of dependents and independents who stay with the client
or for whom the client is responsible
Residence ownership / rented
Bank accounts, depository accounts, Permanent Account Number (PAN)
Various investment related advisers that the client deals with, their contact
information and the nature of advice / services rendered
Income of each independent member of the family and the nature of such income
and its stability / annual growth
Life-style including expense breakup and how they are expected to grow over time

Data gathering (contd)

Major financial goals, like childs education or marriage, the likely fund requirement
and timing of such outflow
Assets owned, ownership details (held in whose name and when they were purchased),
any specific purpose for which they are held, market value and how it fluctuates, any
covenants that limit the re-sale of the assets or their realisable value for the client
Purpose, amount outstanding, interest rate, tenor and monthly outflow for various
loans that may have been taken
Life expectancy based on mortality history of ancestors, and details of life insurance
coverage for each earning member of the family
Medical history of the family, medical expense policy of employers and details of
medical insurance coverage taken
Other risks that the client is exposed to, for example, fire or theft in family shop, and
details of general insurance coverage taken
Details of key man insurance policies that may have been taken by the family business
Clients psyche, especially with respect to risk and market fluctuations.

3. Client Data Analysis- Life cycle

People go through various stages in the life cycle, such as:

Young and unmarried

Young and married, with no children
Married and having young children
Married and having older children
Retirement

Position on the life cycle determines the kinds of challenges the

client is likely to face and therefore the approach to financial
planning.
For instance, younger clients have the entire earning cycle ahead
of them. Their insurance needs will be high. Those with
dependents need to have adequate life insurance to protect the
family against untimely demise.

 At a young age, saving and spending habits are formed- Eg.

Systematic Investment Plans (SIPs)
Need to be educated on how starting saving early ensures a
comfortable future.
Need to be advised to invest in a house, not only as an asset but
also as security for the future. Depending on family structure and
the family home, need for a house, can become critical after
marriage.
While standard of living is a factor to consider, clients should not
stretch themselves to an unsustainable financial position. They
need to be advised on the kind of budget they should consider for
the house, the type of loans that are possible etc.

 Parents with older children need to prepare for sudden

significant outflow, for education or marriage or such other
requirement of children.
They also need to plan for their retirement, not only in
terms of financial assets, but also corporate perks that may
not be available in future, such as medical re-imbursement,
accommodation, car, club facilities etc.
On retirement, if salary or business earnings were to stop,
then clients need to be cautious in taking risks. At a
younger age, the client can take greater risk. Asset
Allocation is a key decision across the life cycle of the client.

3. Client Data Analysis- Wealth cycle

As with life cycle, the position of the client on the wealth-cycle
changes over time. The key stages are:
Accumulation- client is in the early stages of employment,
and major expenses are not imminent.
Good scope to save money and accumulate wealth. Can take more
risk because future earnings can help recover from losses.

Distribution- During retirement, when not much of scope to

accumulate wealth.
wealth needs to be protected, and used to meet expenses. The
client may not be so concerned about growing the wealth, as in
ensuring that the income is adequate.

 Transition- when a major financial goal is approaching.

Plan the liquidity for meeting the goal.
Windfall Gain- acquisition of sudden wealth. Eg.
inheritance, winnings from lottery, one-time settlements
or stock options. The planner seeks to ensure that the
client uses the windfall prudently, to build a sound
portfolio of assets.
Inter-generation Transfer- start planning the transfer of
wealth to the next generation. Older clients may have
to plan the transfer for more than one generation

Client Data Analysis-Risk Profiling

Client data analysis including positioning on the Life Cycle and Wealth
Cycle will suggest the clients risk profile. Planners classify their clients into
groups, such as:

Extremely Risk Averse

Moderately Risk Averse
Risk Neutral
Moderately Risk Oriented
Extremely Risk Oriented

The more oriented a client is to risk, greater the exposure that can be
suggested to risky assets.
In general, equity is viewed as the risky asset, while debt is considered
the safer asset. Gold protects the portfolio in extremely adverse
situations, where both debt and equity under-perform. Real estate is an
illiquid asset that can grow over time, and also give rental income.

Systematic Approach to Investing

1. Systematic Investment Plan (SIP)
Though an SIP, an investor commits to invest a constant amount
periodically. For instance, Rs. 10,000 per month. The investment
is normally made in an open-ended equity-oriented mutual fund
scheme or a gold fund of fund.
As the market fluctuates, the schemes Net Asset Value (NAV)
too will fluctuate. For the same investment of Rs. 10,000, when
the NAV is higher, investor will receive fewer units; more units
will be allotted when the NAV is lower.
It is important to note that SIP offers some downside protection,
by averaging the cost at which the units are acquired. But SIP
cannot prevent losses, if the market keeps falling.
This investment approach is also called Rupee Cost Averaging

Example of SIP
Month

Investment (Rs.)

1 10,000

12.00 833.333

2 10.000

12.05 829.876

3 10,000

12.20 819.672

4 10.000

12.15 823.045

5 10,000

12.25 816.327

6 10.000

12.30 813.008

Total

60,000

NAV (Rs.)

4,935.261

Average Acquisition Cost= 12.16 per unit

Number of Units

2. Systematic Withdrawal Plan (SWP)

An investor desirous of receiving a constant amount every
month to meet expenses (say, Rs. 5,000), can structure this
through an SWP. Based on the SWP instruction of the investor,
the mutual fund will redeem units that would yield the
requisite amount on the scheduled dates.
The redemption would be at the prevailing NAV. Thus the units
redeemed would vary inversely with the NAV
As in the case of SIP, the investors transactions happen at an
average NAV during the period.
Both SIP and SWP are alternatives to timing the market. While
SIP removes the element of timing the market while investing,
SWP eliminates it while withdrawing from the market.

Example of SWP
Month

Redemption (Rs.) NAV(Rs.)

5,000

12.00 416.667

5,000

12.05 414.938

5,000

12.20 409.836

5,000

12.15 411.523

5,000

12.25 408.163

5,000

12.30 406.504

Units Redeemed

Total 30,000 2,467.631

Average Redemption price= 12.16 per unit

3. Systematic Transfer Plan (STP)

SIP makes sense when an investor has a regular income e.g.
monthly salary. Some incomes are occasional receipts e.g.
annual bonus or other windfall instances
In windfall situations, clients are normally advised to invest the
moneys in a safer debt scheme, such as a liquid fund. The
benefit of liquid funds is not only easier liquidity, but also
negligible transaction costs in the form of entry load, exit load
and expense ratio.
The money parked in the liquid fund can be systematically
transferred to the target equity or gold scheme. Thus, the
investor gets the benefits associated with SIP.
STP is a combination of SIP (into the target, equity scheme) and
SWP (from the source, liquid scheme).

Example of STP
Mont Redempti NAV
h
on (Rs.)
(Rs.)

Units
Redeem
ed

Investment
(Rs.)

NAV
(Rs.)

Units
Acquired

5,000

10.10

495.05

5,000

12.00

416.667

5,000

10.15

492.611

5,000

12.05

414.938

5,000

10.18

491.159

5,000

12.20

409.836

5,000

10.20

490.196

5,000

12.15

411.523

5,000

10.25

487.805

5,000

12.25

408.163

5,000

10.30

485.437

5,000

12.30

406.504

Total

30,000

2942.258

30,000

Average Redemption Price= Rs.

10.20 per unit

2467.631

Average Acquisition Cost= Rs. 12.16

per unit

Biases-Meaning
Biases are human tendencies that lead us to follow a
particular quasi-logical path, or form a certain
perspective based on predetermined mental notions
and beliefs.
When investors act on a bias, they do not explore the
full issue and can be ignorant to evidence that
contradicts their initial opinions.
Avoiding cognitive biases allows investors to reach
impartial decision based solely on available data.
-Investopedia

Behavioral Investor Types- Michael

Pompian
Identified 20 behavioral biases that private client advisers

encounter in their daily work (grouped into 4 major categories/

themes)
Each type has a central theme and the biases support each of
these key themes. It is important to keep in mind that just
because a person is oriented toward or identified as one BIT
versus another, it does not mean that they wont have attributes
of other types. For example, you might have a person that has a
Preserver orientation but has Independent characteristics as well.
BITs are not meant to be taken as absolutes; they are meant to
help diagnose key behavioral tendencies that can hopefully be
corrected with information and advice for the purpose of
attaining positive long-term financial results

BIT-1: Preserver
A Preserver is an investor who places a great deal of emphasis on
financial security and preserving wealth rather than taking risks to
grow wealth.
These investors are guardians of their assets and take losses very
seriously. Preservers are often deliberate in their decisions and
sometimes have difficulty taking action with their investments, out
of concern that they may make the wrong decision.
They may instead prefer to avoid risk and stick to the status quo.
Preservers often obsess over short-term performance (in both up
and down markets, but mostly down markets) and losses and also
tend to worry about losing what they had previously gained.
This behavior is consistent with how Preservers have approached
their work and personal livesin a deliberate and cautious way

BIT-1: Preserver
Name of Behavioral Investor Type: Preserver
Basic Orientation: Loss averse and deliberate in decision
making
Dominant Bias Types: Emotional, relating to fear of
losses and inability to make decisions/take action
Impactful Biases: Loss aversion and status quo
Investing Style: Wealth preservation first, growth second
Level of Risk
Tolerance: Generally lower than average

BIT-2: Follower
A Follower is an investor who is passive and often lacks interest in and/or has
little aptitude for money or investing.
Follower investors typically do not have their own ideas about investing.
Rather, they may follow the lead of their friends and colleagues, or whatever
general investing fad is occurring, to make their investment decisions.
Often their decision-making process does not involve a long-term plan. They
sometimes trick themselves into thinking they are smart or talented in the
investment realm when an investment decision works out, which can lead to
unwarranted risk-seeking behavior.
Since Followers dont tend to have their own ideas about investing, they may
also react differently when presented more than once with the same
investment proposal; that is, the way something is presented (framed) can
make them think and act differently. They may also regret not being in the
latest investment fad and end up investing at exactly the wrong time, when
valuations are the highest.

BIT-2: Follower
Name of Behavioral Investor Type: Follower
Basic Orientation: General lack of interest in money and
investing and typically desires direction when making
financial decisions
Dominant Bias Type: Cognitive, relating to following
behavior
Impactful Biases: Recency and framing
Investing Style: Passive
Level of Risk Tolerance: Generally lower than average
but often thinks risk tolerance level is higher than it
actually is

BIT-3: Independent
An Independent is an investor who has original ideas about investing
and likes to get involved in the investment process.
Unlike Followers, they are not disinterested in investing, are quite
engaged in the financial markets, and may have unconventional views
on investing. This contrarian mindset, however, may cause
Independents to not believe in following a long-term investment plan.
With that said, many Independents can and do stick to an investment
plan to accomplish their financial goals. In essence, Independents are
analytical, critical thinkers who make many of their decisions based on
logic and their own gut instinct.
They are willing to take risks and act decisively when called upon to
do so. Independents can accomplish tasks when they put their minds
to it; they tend to be thinkers and doers as opposed to followers and
dreamers.

BIT-3: Independent
Name of Behavioral Investor Type: Independent
Basic Orientation: Engaged in the investment process
and opinionated on investment decisions
Dominant Bias Type: Cognitive, relating to the pitfalls of
doing ones own research
Impactful Biases: Confirmation and availability
Investing Style: Active
Level of Risk Tolerance: Generally above average but
not as high as aggressive investors

BIT-4: Accumulator
An Accumulator is an investor who is interested in accumulating wealth
and is confident he can do so.
They have typically been successful in some business pursuit and are
confident that they will be successful investors. As such, they often like to
adjust their portfolio allocations and holdings to market conditions and
may not wish to follow a structured plan.
Moreover, they want to influence decision making or even control the
decision-making process, which can potentially diminish an advisers role.
At their core, Accumulators are risk takers and are firm believers that
whatever path they choose is the correct one.
Unlike Preservers, they are in the race to winand win big. Unlike
Followers, they rely on themselves and want to be the ones steering the
ship. And unlike some Independents, they usually dig down to the details
rather than forge a course with too little information.

BIT-4: Accumulator
Name of Behavioral Investor Type: Accumulator
Basic Orientation: Interested and engaged in wealth
accumulation and confident in investing ability
Dominant Bias Types: Emotional, relating to
overconfidence and desire for influence over investment
process
Impactful Biases: Overconfidence and illusion of control
Investing Style: Actively engaged in decision making
Level of Risk Tolerance: High to very high

BUILDING BETTER
CLIENT
RELATIONSHIPS
Building proper
expectations around
performance should help
you to also build better
relationships with clients.
More broadly, knowing the
behavioral profile of your
client, and applying the
wealth management
process with that client
profile in mind, will be a
win-win situation.

Strategy for FP
Cash flow and debt management
Risk management and insurance planning
Investment planning
Tax planning
Retirement and estate planning