77 / 88
INDIAN WEALTH MANAGEMENT - ISSUE 2, 2017 69
investors about rampant profit-booking
at these higher levels?”
More than a bull-run, he says the role
of wealth managers becomes critical
during bear phases. “During downturns,
when there is panic in the markets,
manywealth managers tend to shy away
from looking at the brighter side of the
economy,” he adds. “The brave ones
also do not fare particularly well. Their
new investment proposals invariably
get turned down by clients due to a fear
of potential losses.”
In such a scenario, many advisers rec-
ommend clients to pull out as quickly
as they can under the belief that markets
can crack further. Their missive to the
clients usually ends with the sentence:
‘Let us enter when markets bottom out.’
Truth be told, no wealth manager can
always accurately predict the market’s
future, says Rastogi, adding that, in
the meantime, heavy churning in the
stocks and wrong timings of entry/
exit ensure that the client loses pre-
cious time and money.
LOW EMOTIONAL QUOTIENT OF
WEALTH MANAGERS
With the rise in savings and digitisa-
tion, more money is finding its way into
the financial markets. As a result, there
is a need for more financial wizards.
Inline with this, more IIT-ians, engi-
neers, chartered accountants and
MBAs are getting attracted to the
wealth management industry.
“These folks spend approximately
USD50,000 to USD60,000 in top busi-
ness schools and other similar educa-
tional institutions to complete their
studies,’ says Rastogi. “To pay back the
loans or recover the money spent, they
get carried away to sell (or, is it mis-sell?)
productswithout understanding the suit-
ability of the product for the customers.”
Their zeal to ‘make big’ in life forces them
to thrive on customers’ greed, he adds,
completely ignoring the risk appetite of
the customers. “And, yes, this is how
complex and high-cost instruments find
way into the portfolios of clients.”
CONFLICT OF INTEREST
The other predicament that he believes
wealth managers face is how they can
avoid recommending a product that is
ultimately paying for their salary.
For example, until recently, asset man-
agers were paying upfront commissions
of as high as 6% to 8% to their biggest
distributors on close-ended equity
funds that were locked in for 3 to 5
years. Similar incentive structures were
offered by fund houses on their capital
protected products, until SEBI cracked
down on upfront revenues.
“There are enough statistics to prove
that close-ended funds have paid lumpy
fees to wealth advisers with the singu-
lar objective to induce retail customers
to lock in equity money,” explains
Rastogi. “It is embarrassing to note how
many of these funds have delivered
absolutely horrendous returns.”
NEXUS OF MANUFACTURER,
ADVISER AND INTERMEDIARY
At the same time, there are many clients
who chase high yields and have no un-
derstanding about the concept of
default or junk bonds and risks associ-
ated with it.
“Such highly-resourceful wealth manag-
ers use various intermediaries to move
the money and pay off the money so
that all parties are satiated,” says
Rastogi. “At the time of default, the
client is the only one who loses money
with no accountability on the manufac-
turer or wealth manager.”
TOO MUCH PRESSURE TO
DELIVER QUARTERLY NUMBERS
Inwealthmanagement, both adviser and
client need to have an immense amount
of patience. Without it, Rastogi says
money can evaporate like it never existed.
“Unfortunately, listed entities – that need
to deliver quarterlynumbers to the street
– come under the pressure to deliver
quick returns on their investment.”
For these entities, the investment is
really the wealth manager’s salary, he
explains. “Trying to get quick returns
puts undue pressure on the manager.
This, in turn, leads to the manager
earning more and more revenues by
mis-selling high-cost insurance and
close-ended products.”
REDUCED ECONOMIC CYCLES
At the same time, economic cycles have
become more severe – and even shorter.
During good times, therefore, both
wealth managers and fund managers
juice up undue risk and chase returns
over consistency as they are aware –
during downturns – that not only their
fund, but also their jobs, will be in danger.
“They tend to move up the risk curve,
chase momentum, form cartels and
deliver returns,” explains Rastogi.
“There are examples galore when
during a particular economic cycle,
wealth managers have issued similar
advice to their clients.”
But, ultimately, neither the fund
manager nor the wealth manager is
able to time and exit the market, he
adds. And the poor client becomes
even poorer.