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Wealth Management, for the Managers

Wealth management seem to benefit the managers more than the investors, says Dhirendra Kumar

Last week, I wrote an article on the so-called 'wealth management' services provided by many banks and brokers. I pointed out that these services appear to be falling far short of what they are promising. They are sold with slick advertising that implies that highly skilled, committed and experienced people will be planning your financial needs. In reality, one generally gets a callow youth who knows almost nothing about financial planning. All he is able to do is to read out bulleted points in the presentation given to him by his employer.

The response I got to that article amazed me. I received a flood of email messages, all strongly agreeing with the opinions I'd expressed. In fact, many of them offered fresh stories about how their wealth had been mismanaged. One person who wrote to me had gone some way into interrogating the so-called 'relationship manager' that his bank had foisted on him to plan his investments. This fellow confessed to being a fresh college graduate who knew nothing about investing. All he had done was to sit through two short workshops that his employer had organised.

Interestingly, there doesn't seem to be any bank, small or large, Indian or foreign, whose wealth management customers aren't complaining. In fact, what struck me was the intensity of the negativity that these services appear to be generating among banks' customers. I'm sure that either these organisations are not measuring customer satisfaction (if satisfaction is the word I'm looking for) or they don't actually care. Perhaps in a growing economy, it's more profitable to hunt for new murgas rather than bother to provide good service to the ones you've already caught.

However, I'm sure that one day, this ill-treatment of customers will catch up with them. In fact, I have a hunch that that day may have arrived. What has probably been happening is that for the last few years, booming stock markets have allowed this wealth management racket to thrive. People got taken in by the sweet talk and tall promises and they did get good returns. What they never realised was that the good returns were what could anyway be generated without much effort in a booming stock market. There was no special magic that the wealth management was adding.

Now, the going has gotten tougher and the chickens are coming home to roost. When the markets have turned jittery, customers are realising that they are losing as much money as anyone else and there's no actual management that's being done for their wealth. In fact, the banks have all along focused on selling new, untried mutual funds because the commissions are the highest in such funds. Since many of these funds have done especially badly in recent months, it is possible that wealth management customers (or perhaps victims is a better word) have lost more than what the general markets have.

I believe the root cause of this sorry situation is the severe mismatch between the financial goals of investor and the service provider. The wealth managers have no way of making money except as commissions earned when the investor makes a transaction. Therefore, their entire focus is to maximise transactions in those investments where the commissions are the highest. Make the investor buy, and then make him sell to make him buy again. That's the mantra for profitable wealth management. As long as this business model exists, don't expect them to manage anything but the creation of wealth for their employers.