Wealth Management & Financial Planning: Concepts & Practices

Copyright © 2015 by Balaji Rao DG.

ISBN:       eBook        978-1-4828-5654-5

All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the author except in the case of brief quotations embodied in critical articles and reviews.

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CONTENTS INDEX

Author’s Note

Acknowledgements

References

Disclaimer

CHAPTER – 1

CUSTOMER 360 DEGREE

• Introduction

• PPAIMS Model

• Profiling

• Profiling Illustration 1 – Return Possibilities

• Profiling Illustration 2 – Investor Categorization

• Profiling Illustration 3 – Time Horizon

• Profiling Illustration 4: Asset Attributes

• Profiling Illustration 5: Debt & Equity Instruments

• Customer Management

CHAPTER – 2

ASSET ALLOCATION

• Introduction

• Asset Performance Table

• Importance Of Asset Allocation

• Graphical Illustration Of Risk, Return Linked To Volatality Of Assets

• Real Time Illustration Of Returns From Important Assets In Comparison With Inflation Since 2005 Till 2014 (Jan To Dec)

• Table Of Opportunities To Invest In Financial Markets:

• Product Notes On Each Of The Aforementioned Opportunities

• Traditional Fixed Income Instruments (Assured Products)

• Non-Traditional Fixed Income Products - Debt Mutual Funds

• Equity (Stocks & Mutual Funds)

• Equity (Portfolio Management Services Or Pms)

• Equity (Private Equity Opportunities)

• Metal (Gold)

• Real Estate

• Art Funds

• Speculative

• Structured Products

• Classifying Customers & Indicative Asset Allocation

• 8. Simulation – 1 (Moderately Conservative Investor Profile): Asset Allocation Simulation For An Investor Expecting Around 12% P.a. Returns On Annualized Basis / Base Investment Amount Considered As Rs.100

• 9. Simulation – 2 (Moderately Aggressive Investor Profile): Asset Allocation Simulation For An Investor Expecting Around 15% P.a. Returns On Annualized Basis / Base Investment Amount Considered As Rs.100

• 10. Simulation – 3 (Aggressive Investor Profile): Asset Allocation Simulation For An Investor Expecting Around 18% P.a. Returns On Annualized Basis / Base Investment Amount Considered As Rs.100

• Beating The Index Or Outperforming The Index

• Treating Speculative Opportunities

• More Insights On Asset Allocation

CHAPTER 3

FINANCIAL PLANNING

• Introduction

• Threats:

• The Usual Trivia:

• Current Trend Of The World:

• Fundamentals Of Planning

• Classification Of Life Events & Product Suitability

• Definition Of Financial Planning

• The Perils Of Lack Of Planning

• The Monster Called Inflation

• Past V/S Present V/S Future

• Lifestyle Related Changes In The Last 25 Years

• Steps To Begin A Financial Plan

• Life-Stages & Goals

• Pre-Planning Questions

• Mandatory & Lifestyle Needs

• Nomination Or Inheritance Or Successor Considerations

• Philanthropy Goals

• Taxation

• Gifts

• Preparation Before Beginning The Process Of Financial Planning

• Expenses & Declining Purchasing Power Of Money

• New / Unplanned Goals

• Future Expenses Based On Inflation

• Future Of Risk-Free Interest Rates (Bank Fixed Deposit Rates)

• Safety V/S Risk

• Income V/S Expenses V/S Savings V/S Investments

• Beginning Of Financial Planning Process

• Debt Related Planning

• Equity Related Planning

• Gold Related Planning

• Real Estate Related Planning

• Insurance Related Planning

• Term Assurance (To Cover Pure Risk Such As Death Of The Main Earning Member Of A Family)

• Pension Plan

• Money Back Policy

• Health Insurances / Medi-Claim Policies

• Insurance For Aged Family Members

• Contingency Funds

• Goals – Reality V/S Fantasy

• Case Study - 1:   Young, Salaried, Unmarried, No-Dependents

• Assessment:

• Priorities:

• Case Study – 2:   Married / Middle Aged / With Dependents

• Recommendations:

• Retirement Planning

• Summing Up

• Other Aspects Of Financial Planning & Customer Management:

• Managing Loans (Early Repayment Possibilities)

• Start Early, Invest Wisely, Retire Young

• When To Retire?

• The Business Of Financial Advising

• Advisory Fee

• Role & Obligation Of A Responsible Financial Planner

CHAPTER 4

WEALTH MANAGEMENT

• Introduction

• Nuances Of Managing Wealth

• Financial Planning V/S Wealth Management

• Financial Planning & Wealth Management - Differentiators

• Target Customer

• Defining A High Net-Worth Customer

• Identifying A Wealthy Person

• Tenure Of Investing (Holding Period After Investing)

• Returns Expectation

• Asset Allocation

• Asset Allocation Within An Asset Allocation

• Managing The Portfolio

• Important Components Of Wealth Management

• The Process Of Wealth Management

• Profiling

• Assessing The Risk Profile

• What, Where And How

• Understanding Opportunities

• Planning Strategy In Structuring / Developing An Investment Policy

• Plan Implementation Process

• Understanding Investment Objectives

• Asset Allocation

• Asset Allocation Illustration

• Cashflow Based Investment Management

• The Flaws With Savings Account & Fixed Deposits

• Engaging The Investment Funds (Beginning Of Managing Funds)

• Monitoring The Process

• Evaluating Results Of Plans & Budgets And Revising / Redefining Goals

• Rebalancing

• Aged-Based Rebalancing

• Scaling Up

• Some Myths, Traits And Misconception About A Few Assets/Investments

• Risk & Return Trade-Off

• Diversification Of Investments

• Wealth Management In India – A New Fad Or Is It For Real

• Advantages & Shortcomings

• Pms V/S Wealth Management

• Summing-Up

• Notes On Tax Planning

• Notes On Risk Management

• Notes On Estate Planning

• Notes On Charity Planning

• A Typical Wealth Management Case Study

CHAPTER – 5

PORTFOLIO CONSTRUCTION - STOCKS

• Introduction

• Defining Investment Management

• Good Companies V/S Bad Companies

• Passive V/S Active Management

• Portfolio Evaluation

• Portfolio Management Styles

• Momentum Style

• Growth Style

• Value Style

• Contra Style

• Blend Style

• Framework Of Investment Process

• Economic Analysis

• Business Analysis

• Financial Statement Analysis

• Constructing A Portfolio

• Step 1: Sector Classification

• Important Sectors Of The Equity Market

• Beta Rationale Of Stocks

• Step 2: Classification Of Market Capitalization

• Step 3 – Stocks Selection

• How To Define A Stock For Investment Purposes?

• Top Down Approach & Bottom Up Approach

• Benchmarking

• Important Sector Performance For 10 Years / Indices & Gold Performance For 10 Years:

• 10. Ideal Portfolio Management

• Constructing A Conservative Portfolio

• Picking Stocks & Allocation Methods

• How Does The Buying Work

• Constructing A Moderately Aggressive Portfolio

• Constructing An Aggressive Portfolio

• Monitoring A Portfolio

• Power Portfolio / Mini Portfolio

• Portfolio Restructuring

• Step 1: Extract The Data From The Demat Account

• Step 2: Identify The Sector & The Market Cap These Stocks Belong To

• Step 3: Segregating The Sectors Along With Stock Exposure

• Step 4: Sector Weightage & Recommendations

• Assessment & Recommendations

CHAPTER 5A

PORTFOLIO CONSTRUCTION – MUTUAL FUNDS

• Introduction

• Themes & Schemes Classification Table

• Importance Of Allocation Of Themes & Schemes

• Classification Of Equity Mf Schemes With Its Themes

• Insights On Mf Portfolio Construction

• Core & Tactical Portfolios

• Classification Of Portfolios Based On Customer Types (Risk & Return Based)

• Model Portfolio - 1

• Model Portfolio - 2

• Model Portfolio - 3

• Model Portfolio - 4

• Model Portfolio - 5

• 6 More Insights On Portfolio Construction

• 7 Managing A Portfolio

• 8 Restructuring An Existing Portfolio

CHAPTER – 5 B

SIP PORTFOLIOS

• Introduction

• Advantages Of Maintaining A Portfolio

CHAPTER – 5 C

DEBT PORTFOLIO CONSTRUCTION

• Introduction

• Case Study:

CHAPTER – 6

MANAGING CLIENT & SELF: THE 5 KYS

• Introduction

• Know Your Client

• Know Your Company

• Know Your Competitor

• Real Time Example Of Knowing Your Competitor

• Work On Customer Psychology

• Know Your Product

• Know Yourself

• A Real-Life Case

Author’s Note

W hat fascinates, intrigues and amuses me is that human beings know the art of making money, but they lack the art of managing the same money that they earn the hard way. Mostly man is under the impression and assumption that he is good at managing his wealth, in reality that is just an illusion. He may be wealthy when it comes to his assets, but when it comes to the health of his wealth it would be poor or rather ill-managed. Somewhere there is a disconnect which I am linking it to lack of financial literacy among the people and this fascination has led me to go deeper into understanding the dynamics of human psychology and how I can simplify their learning. The best way is to teach a young student who may be the carrier or messenger of knowledge to the clients he or she would meet as financial advisors and this book is a humble effort towards that endeavor.

I was told that on Google the maximum searches are for how to make money and how to lose weight. Honestly I cannot be of any help to those who want to lose weight, that is not my area of expertise, but surely I can offer my experience as to how to create wealth. Yes, man want to make money, want to get rich, want to be wealthy, will calculate by converting dollars into Indian rupee when he reads an article that Dhoni made $30 million and his eyebrows raises when he realizes that it leads to approx. Rs.200 crore. He wonders what Dhoni could do with that kind of money!

India is on the precipice of growth. The number of wealthy people are on the rise. An amount of Rs.1.00 crore has become the norm and people don’t find this amount too huge these days. The apartments that are sold today by some of the marquee builders say apartments at just Rs.1.00 crore or Rs.4.31 crore onwards, and they are doing brisk business. The gold & jewelry shops are crowded throughout the year and not only on the Akshaya Thritiya day. The shopping malls are swarming with people and multiplexes are running full houses. Most movies are raking-in Rs.100 crore within days of its release. Cars like Benz, Audi, BMW, Jaguar, Porsche, Land Rovers; up-market bikes like Hayabusa, Ducati and KTMs are burning their tires on Indian roads. Number of people taking foreign holidays has grown multifold……. Need more reason to believe about the trajectory of India’s growth story? India. It is hot!!

People are able to afford much better than before and it is music to ears for wealth managers because while people are busy making money they are not sure how to manage it which is the crux for a successful advisory business. Let’s be rest assured that managing wealth requires the assistance of an expert because it encompasses wide variety of management skills, tools and shrewdness. Having worked in the industry for two decades I, perhaps, have imbibed the nuances of understanding the intricacies of managing wealth which through this book I have tried to articulate, interpret and offered a comprehensive learning material for students and practitioners.

This book has plenty of case studies, real-time references, illustrations, workings, calculations, compilations and interpretations which I am confident will be of immense help for applied learning. At the same time I am assuming that the readers (students & practitioners) would be well-versed with the Financial Markets & Instruments (FMI) subject because this book is an extension of FMI. Moreover, wealth management & financial planning is usually a subject that is part of the final semester for students and for practitioners they would be fluent with the general concepts of financial markets. Nevertheless, I have given as much information possible in the simplest of language making this book an engaging reading and learning material.

As always I seek the readers’ feedback on the quality, depth and relevance of the content of this book. I will continue to strive to offer the best of knowledge.

BALAJI RAO DG

Acknowledgements

My sincere thanks to these individuals & organizations:

Mr. K Ramesh & Gayathri Ramesh – Gayathri & Co.

M/s Apple Credit Corp. Ltd. & Karvy Stock Broking Ltd. (all my former colleagues at these companies)

Dr. Ashok Agarwal – M/s Escorts Securities Ltd.

Mr. Ramapriyan PB – M/s Karvy Stock Broking Ltd.

Mr. L Sridharan – M/s Ultimate Wealth Managers (P) Ltd.

Mr. Srikanth G – M/s HDFC Asset Management Co. Ltd.

Mr. Vinod H – M/s ICICI Prudential Life Insurance Co. Ltd.

Mr. J Venkatesh – M/s Ascendant Wealth Advisors (P) Ltd.

Mrs. Malini Poonacha – M/s Aditya Birla Money Mart Ltd.

Mr. Srinivasa Giri, Arogyasiri Ayurveda Trust, Mysuru

Mr. Shank Vasudev, G Events Unlimited

Mr. Anand Jaju, BNR Securities (P) Ltd., Pune

Dr. Chenraj Roychand, Chairman, Jain Group of Institutions

Dr. Easwaran Iyer, Dean & Director, Jain Group of Institutions

Dr. Dhimant Ganatra, Associate Dean, Jain College

Prof. Krishnan NVH, Registrar, Jain University

Prof. Hemanth Kumar, Prof. Alok Chhajer, Ms. Sanjana Deshpande, Ms. Hema J – Jain College

Mr. Nishanth B, Professor

M/s Partridge Publishing Co. USA

My wife Mamatha and son Aditya

To all my clients because of whom I was able to learn about money management

And above all the God Almighty

References

www.moneycontrol.com

www.valueresearchonline.com

www.nseindia.com

www.bseindia.com

www.rbi.org.in

www.sebi.gov.in

www.gold.org

Disclaimer

T his book is presented as a working knowledge learning material and is in any manner not an investment advice nor is an intention towards soliciting any kind of business. The name of the stocks, prices of the stocks, name of mutual fund schemes, NAVs thereon, percentages, weightages etc. are only indicative and have been quoted only as examples for illustration purposes. Only in certain circumstances real time stock names, prices, mutual fund scheme names and NAVs have been mentioned and the intention is for easy understanding for the readers of real time situations. The interpretation in this book is not to misguide any person, which is only written as an effort towards making them learn investment related concepts. The writer or publisher of this material specifically disclaims any liability that is incurred from the use, application or recommendation. The writer or publisher shall no way be held liable for any loss or other damages, including but not limited to special, incidental, consequential, accidental or other damages. Legal, professional, tax, accounting and any other form of advice should be sought from a professional and is no way implied in this material. The content accuracy and reliability is not guaranteed. Readers are advised to use their discretion.

CHAPTER – 1

CUSTOMER 360 DEGREE

E very product is conceived, designed and marketed to meet the requirement of a customer and invariably is for his or her consumption. While products are tangible by nature, services are intangible which can only be provided to meet different requirements and satisfaction levels. Financial Products & Services such as Debt, Equity, Commodities, Real Estate, Structured Products, Art Funds and other such opportunities are conceived, designed, marketed and advised for the consumption of investors for investment purposes. While all the products and services are not suitable for everyone, the challenge is to offer right products for right customers and that is where the importance of " understanding the customer " will be of paramount importance. Let’s remember that the foundation of a successful relationship is built on a strong profiling process taking us to the fact that we need to create a 360 degree understanding of a customer.

Stage 1: Profiling is to understand the customer: demographical information such as age, income, expenses, dependents etc.; needs & wants; foreseen & unforeseen events; risk attributes; return expectations; predicting the future requirements based on current cash-flow; inflation and related aspects. Based on such understanding the suitability of the products will emerge.

Stage 2: Products here are investment products classified under various asset classes such as Debt (both traditional and non-traditional); stocks; mutual funds (debt & equity); insurance plans (both life and general); gold/silver; real estate and such other investment opportunities. It has to be importantly noted that investment products offered are all third party products whose ownerships are transferred to a customer as an investment through profiling and finally by way of advisory, implementation & service.

Stage 3: Advisory involves understanding the products as well as the customer by offering right product to right customer including its suitability and necessity leading to designing asset allocation simulations. This is the stage where the customer is advised to invest in certain select financial/investment products based on the outcome of the profiling. This also is the sales stage because products would be positioned based on the advisory outcome that eventually would offer the advisor some commissions and fees. Such earnings could come from the product manufacturers and also from the customer.

Stage 4: Implementation stage is to engage the investment funds as per the asset allocation based on the weightages allocated to each of the assets. For example, for a customer expecting 15% returns the asset allocation could have been: 20% into debt, 20% into gold, 30% into stocks and 30% into mutual funds; subsequent to this advice the funds would have to be invested in respective assets which is actually implementing the plan. Besides this the rest of the goals of the customer as per the discussion will commence.

Stage 5: Once the implementation starts, the respective portfolios have to be monitored and managed actively so as to ensure that the purpose of the investment management is being met. After investing in debt, stocks, mutual funds, gold, real estate etc. the results have to be monitored continuously and keep evaluating the outcome in comparison with the objectives set.

Stage 6: Service is an integral part of investment management which involves pre-sales service and post-sales service; in fact, post-sales service is a continuous investment management stage that includes active management and tracking of the portfolio, tracking the performance of the products in line with the established goals, rebalancing based on various situations (market conditions and age), revising and revisiting goals if necessary, scaling-up the customer by offering new products from time to time (which again involves all the four stages), tax planning and retirement planning.

Typically a customer, who in this case will be known as an investor, is unique in many ways that involves different degrees of risk tolerance, returns expectations, demography, time horizon, events and affordability. Since seeking return on investment is the basic expectation, how much one would expect depends upon specific profiles and that is precisely what we would be learning in this chapter.

The first step of investment management is PROFILING process that involves understanding the customer from various perspectives. That’s the reason why the process of profiling is called as Customer 360 Degree. Here understanding has to be complete in nature which should lead to offering right kind of advice that meets right kind of needs. There would be several meetings, discussions, deliberations with the customer which might take more than one interaction before the entire profiling process takes shape and leads to investment management stage. The process is as good as buying a television or a saree that invariably consumes so much of time before the actual purchase happens. The same principle applies here as well.

Further, the profiling process can be quite elaborate that takes us to five different possibilities of understanding the customer which are discussed in detail hereunder.

Each asset offers various possibilities of returns due to its inherent nature of being low, moderate, high and very high risk. The return on investment possibilities has to be discussed during the initial stages to understand the risk taking ability of the customer. The below illustration indicates such possibilities