Wealth Management: 6 things to remember for a smooth financial journey
Uma Shashikant, Economic Times 30/1/2012
Wealth management, as practised today, tends to focus a lot on investing in the right products, and in a limited manner, on asset allocation. While asset allocation should be the strategic core, we cannot neglect the importance of good housekeeping. The surge in financial products and advisory services has meant that investors hold a range of investment and insurance products. Documentation, preservation, operational issues and consolidation of holdings need suitable attention from wealth managers.
First, investing has moved from the scarcity-based rush of the earlier times. The number of good quality issuers of equity shares and bonds is high and investors need not panic about missing the boat. Several products like mutual funds are available on tap and can be bought when needed. Secondary markets are liquid and investors can buy after listing, when the noise has settled down and more information about the stock is available.
Bonds, hopefully, are also moving towards a better retail market. So, it no longer makes sense to have multiple demat accounts in multiple combinations, several mutual fund folios for the same set of investors, or multiple trading and investing accounts. The investors who are not hiding from the taxman should, instead, consolidate their investments so that these are easy to monitor and manage.
Second, several processes are automated and streamlined now. Financial service providers have agreed to accept PAN as the identifier and use common KYC norms. This means that banks, mutual funds, insurance companies, depositories and brokers can easily link up transactions based on common identifiers like PAN. Therefore, it is easier to standardise details, such as address, e-mail, phone numbers, bank account details and similar information, which help operate the accounts. Given the stringent requirement for PAN, multiple accounts may not help hide information, only make them cumbersome to manage.
Three, investments are held in multiple formats and need streamlining. The first holder, second holder and mode of operation may be different for different accounts, which can create problems. If the investor doesn’t choose the manner in which the account has to be operated, the default option-usually ‘operate jointly’ for a joint account-is chosen by the service provider. This can be operationally cumbersome and any subsequent change in the mode of operation may not be allowed.
Some accounts may have minors as first holders, wherein the accounts are frozen when the child is no longer a minor. The children could be unavailable to register their claim as the rightful owner of the investment. Worse, the money may be inaccessible when needed as operational procedures to convert a minor account to major have not been completed. Demat accounts require a fresh account to be opened if a minor turns major. It is important to standardise the holding patterns and ensure that they are updated.
Four, nominations are optional in several older investment formats. In the case of an investment held in a single name, without a nominee, it would be tough to access the money if the holder dies. It is now compulsory for such accounts to have a nominee. Nominations can be created or modified at any time. Older investments with parents as nominees may need a change after wedding.
Similarly, nominations in favour of children or siblings may need change over time. Those in the name of spouses may require an alteration if the marital status changes. Nominations are used by service providers to pay the proceeds after the death of the account holder and their liability ceases once they do this. If investors had identified a different nominee, but failed to make the modification, their heirs may face legal and procedural delays in accessing the accounts. Streamline the nominations to make it easier for loved ones to access the wealth of the deceased.
Fifth, it is important to carry out estate planning. Several investors have moved from frugality to prosperity, holding several assets, such as more than one house, a sizeable investment portfolio and other securities. The traditional approach of giving gold to the daughter and the house to the son has long gone. Estate planning may be a simple process of writing a will, and registering it if the assets include immovable property.
Today, professional services are available for creating trusts that serve specific purposes. These help provide for special needs, including beneficiaries who may not necessarily be heirs, or ensure that the assets are preserved while the income is made available to identified beneficiaries. If investors hold immovable assets, gold and securities, and have children in other countries, it is critical that a succession plan is drawn using good advice. Leaving assets without a documented bequest can lead to disputes and tedious legal procedures.
Sixth, several investment processes are driven by tax consideration. This is similar to the inefficient financial strategies that firms pursued in the pre-liberalisation era. Many profitable companies diversified just to reduce the tax burden. In a new, liberal world, several of these have shut down for lack of viability. We see a similar approach in personal finance, where tax planning drives investment decisions, holding patterns and paperwork.
These may lead to inefficient solutions that make consolidation, bequest and preservation of wealth, difficult. An unscrupulous person with an undisclosed income could hold benami property, but its inheritance and looting by unknown hangers-on can be the price he pays. To most others who earn from professional expertise and pay taxes, the effort should focus on protecting, consolidating, preserving and bequeathing assets.