It’s imperative for working professionals and businesspersons to appoint a professional financial adviser to manage their wealth
Managing wealth doesn’t really require devoting time on a daily basis. But to ensure that the long-term portfolio objectives are met, it is essential to devote enough time at the start to identify investment goals and select suitable investments to meet those goals. Working professionals and businesspersons who are actively involved in their businesses might not have time to structurally plan for their investment goals and to monitor them as well. Hence, it becomes imperative for them to appoint a professional financial adviser to manage their wealth.
To structure an investment plan for their wealth, investors should start by giving details of all the expected sources of income and expenses, which will help the financial adviser plan for the portfolio cash flows. All the long-term goals such as education, expenses relating to marriage or repayment of any outstanding liabilities should also be laid out. Based on the cash flow plan, investment goals and the socioeconomic profile of the investor, the financial advisor can get a holistic view to understand the risk profile of the investor. Advisors might also use a psychometric questionnaire to understand the investor’s risk taking ability.
After basic discussions with the financial advisor, an investor can then define a suitable strategic asset allocation among various asset classes such as equity, fixed income, alternate investments and real estate for their portfolio, which is in line with their risk profile and investment goals. It is highly recommended to lay out a detailed investment policy statement (IPS), which clearly defines investment goals, expected returns and the risk guidelines in terms of exposure to various asset classes and products. The risk guidelines can go further in detail to include restrictions to certain product categories, prudential exposure to large-caps within equities, minimum exposure to AAA or sovereign-rated instruments and maximum modified duration for the portfolio. The IPS should also define a suitable benchmark against which the portfolio performance will be monitored. This then serves as the comprehensive reference document based on which the advisor will advise the client. A well-defined IPS ensures that monitoring of investment goals becomes easier and less time consuming.
Once the IPS is laid out, the next step is to identify the best investment options. There is a large gamut of investment products available across various asset classes, which range from simple products like fixed deposits and mutual funds to complex ones like private equity funds and portfolio management services. Due to paucity of time, it might not be possible for investors to identify the best investment options themselves. Therefore, it is important for the investor to identify a financial adviser who is well-informed and will be able to recommend the best available investment options across various asset classes. It is important for the investor to understand the basis on which the recommended options have been selected and also understand the expected returns and all the risks associated with each investment.
It is also important to understand the taxation aspect for each investment to gauge post-tax expected returns. Thus, knowing about all these factors might require one to devote more time for his/her portfolio during the initial stage.
Once it is fully constructed in a systematic way, the time needed to manage the portfolio can reduce significantly. The investor should pre-define the frequency at which the portfolio needs to be reviewed with the financial advisor. Initially, till the investor gets suitably comfortable with the portfolio, a monthly review is usually recommended. Once trust with the financial advisor is built, the review frequency can gradually be reduced to quarterly or even half-yearly.
The advisor is expected to update the investor on adherence to the guidelines laid down in the IPS and the status of achievement of investment goals. It is the responsibility of the advisor to review the portfolio investments on a regular basis and inform the client of any changes that need to be made. In case there is any breach of the IPS guidelines, the advisor should also recommend the client to rebalance the portfolio.
Also, while one must stick to the strategic asset allocation, it is the responsibility of the adviser to inform the investor of any appealing opportunities to tactically increase or reduce the allocation to a particular asset class. Such tactical allocations within the prudential limits can help boost the returns of the portfolio.
A systematic approach to managing wealth by appointing a financial advisor and laying down the investment policy statement clearly helps reduce the involvement required from an investor to a great extent.
Those who follow a systematic approach to investing are less likely to be influenced by emotional factors and hence, are not only able to achieve their investment goals better but also weather the crisis better during turbulent times.