chapter-1(wealth mgt.)

8/7/2019 CHAPTER-1(Wealth Mgt.)

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CHAPTER-1

OVERVIEW OF WEALTHMANAGEMENT


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Meaning of Wealth The word Wealth comes from the old English word

Weal meaning Well Being and Th meaning

condition; taken together, means the condition ofwell being.


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Defining Wealth Wealth is defined as the present value of all future cash

flows that are expected to flow in from ones assets- be it

financial asset or a real asset. Limitations of this approach:

Accuracy in estimating the future cash flows,

Appropriateness of the discount rate used to find thepresent value of theses cash flows.


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Defining Wealth

Management Wealth Management is defined as an all inclusive service

to optimize, protect, and manage the financial goal of an

individual, household or corporate.


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Features of Wealth

Managementi. It ensures an enduring and committed relationship for

a long tenure by taking care of the entire clients needs.

ii. It is best conceptualized as a platform, where a valid setofservices and products are provided.

iii. It is a comprehensive model, which can offer guidance

on investment management, tax planning, asset

protection, cash flow management, debt

management, retirement solutions, and real estate

investment.


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Other Terms Defined Investment Management:

An art of selecting investments- such as stocks, bondsand derivatives- and combining them in a way thatcompliments a clients specific risk to rewardrequirements.

Often called as money management and assetmanagement.

Money Manager:

Is a product centric professional.

Specializes in a certain financial product.

Goal is to provide a risk-adjusted return superior to anindex (say BSE-SENSEX).


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Contd Asset Manager:

Specializes not in a single asset but a portfolio of

assets. Also has certain portfolio (say an equity fund or a

debt fund) to offer his clients irrespective of theirspecific requirements.

Wealth Manager: Focus is client.

Efforts are devoted to assisting clients to achieve lifegoals through the proper management of their

financial resources.


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Contd


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Clients Needs w.r.t

Wealth Managementi. Current Lifestyle needs:

Income for meeting their living expenses.

Needs of their children. Short term and long term financial/ personal goals.

ii. Income tax considerations:

Tax planning.

Timing of stock or bonds purchase and sales.iii. Inheritance goals:

Whom to entrust the money

How much control to confer upon probablesuccessors.


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Contdiv. Humanitarian pursuits:

For charitable clients.

When and how to donate their money or assets.

Determining tax advantages


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Phases in Wealth

Management Process

Understanding

Opportunities &

Issues

Planning Wealth

Management

Strategy

Implementing theWealth

Management Plan

Supervising andMonitoring

Wealth Management Process


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I. Understanding

Opportunities and Issues Investors Know Thyself: Try to define their comfort

zone clearly and without ambiguity.

Understanding Values, Goals, and Needs: How thesevalues determine and interact with the familys goals.

Where am I (in financial terms) ?

Where do I want to go ?

How do I get there ?

Developing Rational Investment Expectations: What isreasonable for them to expect.


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II. Planning a Wealth

Management Strategy1. Impact of Taxes:

Tax policy changes in terms of incentives for investing incertain financial instruments.

Changes in capital gain tax.

2. Developing an Investment Policy: Wealth Manager should:

Help clients in determining their specific goals includinghidden goals.

Evaluate the existing portfolio.

Determine the cash flow needs.

Determine the constraints.

Determine the risk-tolerance level.

Develop an asset allocation plan.


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Contd3. Importance ofAsset Allocation:

Asset allocationDecision

Security SelectionDecision

Market Timing Decision

4. Integrated Wealth Planning: Deals with three

different disciplines:

i. Estate Planning

ii. Financial Planning

iii. Investment Planning


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Contd

i. Estate Planning: deals with the transfer of wealth

across generations in the most tax- efficient manner.

ii. Financial Planning: concerned with meeting cashflows needs in the present and in the future.

iii. Investment Planning: deals with the selection of the

investment strategies.


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III. Implementing the

Wealth Management Plan Concerned with manager selection and management.

Market timing, tactical portfolio rebalancing, use of

derivative instruments, and initial portfolio funding.


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IV. Supervising and

Monitoring Process Ongoing process to see if the initial plan is producing the

desired results or not.

Any deviations from the the desired result needs to bealtered.

Exploring investment opportunities with better returns.


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WEALTH PYRAMID

Affluent$1,00,000

HNWI$1 Million

Very HNWI

$5 Million

Ultra HNWI

$50 Million


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Major Product Offerings Portfolio Management Services

Mutual funds

Insurance Products

Equity

Fixed Income Securities

Mortgage lending Real estate

Art funds

Derivatives and Structured Products


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Key trends Rapidly Growing market.

Clients becoming increasingly sophisticated.

Open product architecture approach adopted by wealthmanagers.

Wealth managers are being looked upon as trusted

advisors rather than money managers for their clients.


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Key Limitations Market is in its nascent stage.

Most of the Financial assets in India are still in

the form of Bank deposits.

Low usage of technology tools by Wealth

Managers.

Shortage of skilled and experienced Wealth

Managers.


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PLAYERS Bank ofAmerica Corporation

Barclays PLC

Citibank

Credit Suisse Group

Deutsche Bank

HDFC Bank Limited

State Bank of India

HSBCHolding PLC

ICICI Bank Limited

ING Group

JP Morgan Chase & Co.

Standard Chartered PLC

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