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Wealth Management India
Investment Gurus: A Roadmap To Wealth Management From India's Financial Advisor's
Chapter 1
Introduction
1.1 Background
With the graying of baby boomer generation, private wealth management has become one of the fastest growing opportunities for financial services firms. Wealth managers build relationships with clients to help them establish investment goals and objectives that are consistent with their risk tolerances, unique circumstances and needs.
While maintaining high ethical standards and adhering to the fiduciary duty due to the client, wealth managers use a holistic framework to consider a client’s extended portfolio, which includes both financial and non-financial assets. Key components in the wealth management process include investment, an appreciation of the client’s tax situation, asset protection needs and wealth transfer goals.
The Private Wealth Management Body of Knowledge TM describes the challenges facing wealth managers and their clients, and the knowledge of expertise needed to address them.
It is still rather boutique in nature, but is still getting bigger by the day: the business of banking for the wealthy. For wealth managers, this can be the time of opportunity, with demographics, continued market volatility and the increased sophistication of financial products and services.
At the same time defining these services is harder than ever, as more demands are placed on the role of the advisor, and competition for high-net-worth clients grows ever stronger. The wealth management industry appears to be at a critical juncture.
A confluence of changing investor’s demands, an aging population, and an evolving industry dynamic is generating demand for the all – encompassing advisor – one who can provide expertise in financial planning and estate management services, in addition to savvy investment management. The successful advisors of tomorrow may need to alter or expand their expertise if they are to meet these shifting demands and profitably grow their business.
‘‘Demographics, industry consolidation, and the increasing complexity and interdependence of different types of financial services are creating a growing demand for wealth managers – those advisors who can offer a broad spectrum of estate planning and wealth management in addition to sophisticated investment management services.’’ (Gallagher, 2004, p.87)
The Indian wealth management market is in many respects very competitive. New age and top-line multinational banks are wooing India’s nouveau-rich with private wealth management services, a suite that covers onshore and offshore investment advisory, philanthropy services, real estate planning and portfolio management.
The majority of wealth management interests are in the hands of large banking groups, such as State Bank of India (SBI), ICICI and HDFC. However, other competitors vying for a share of this market include second tier domestic players such as Bajaj Capital, Edelweiss and Reliance Wealth. Traditional private banks such as Oriental Bank of Commerce, as well as some asset managers and stockbrokers not belonging to the major domestic and international banking concerns, are becoming increasingly involved, as are foreign players such as Citigroup, HSBC and Standard Chartered (Stan Chart).
Foreign firms, too, are growing their share of the market despite the dominance of the large universal banks. The greater foreign presence reflects a gradual softening of the Indian government’s stance towards foreign ownership, which it has had traditionally opposed. The recent example in this context that can be sighted here is Barclays Capital’s venture in India and other investment banking giants such as UBS and DSP Merrill Lynch who are leading foreign players that offer wealth management services in the country.
During the course of my own interactions with practicing wealth managers, in order to understand the scope of wealth management business specifically in a booming economy such as India, I have found that many advisors/managers have lot to say about what it is that works for them and what does not. In my experience many people appear to be unaware that they can get professional advice on managing as well as building or preserving one’s wealth based on the risk appetite and the circumstances of the investor.
The above scenario delivers few gains both from the investors’ and from a wealth managers’ perspective but it raises questions on the ‘trust factor’. On one hand one wonders if a private wealth manager is fundamentally different from a traditional financial advisor.
On the other hand, it appears that there must be persuasive benefits of contacting and hiring a wealth manager that prompts such initiatives. More provocatively, one argues, do wealthy individuals’ and families really need the services of a private wealth manager? My reflections on the above questions guided my preliminary review of related literature to shape the rationale of this study, which is summarised below.
1.2 Rationale of The Study
Uncertainty is a central tenet of finance. The wealth management industry is one of the most dynamic industries today within the finance sector. Investors’ often do not have the perfect knowledge of the fundamentals and the decision-making processes associated with investments. But due to the internet, investors’ have more access than ever to investment information and choices.
As a result, individual investors and families – especially high-net- worth individuals (HNWIs*) – are increasingly acting like institutional investors and have come to expect sophisticated service such as portfolio risk management, dynamic asset allocation, tax savings and objective investment advice. In response, wealth managers need to provide more advanced and holistic service to grow their practices.
Financial Service Institutions (FSIs) of all varieties are keenly interested in developing and delivering wealth management services to broader groups of clients. Is their interest, merely an extension of the traditional private banking model? Or is it all about a new strategy for cross-selling? I don’t think either is the case. The researcher views FSIs interest in the ‘‘new wealth management’’ as a natural evolutionary response of institutions seeking to regain and renew their competitive advantage.
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STATEMENT OF PROBLEM
‘‘Individuals who have built fortunes through their own efforts need private bankers who share their entrepreneurial flair.’’ (Sharma, 2007) He points out that, holistic wealth management with an investment banking touch – that is what is expected by today’s high-net-worth clients’ expect from their private bankers.
Rightly so, high-net-worth clients, especially those classified as mega wealthy, with $100 million in assets or more, are usually entrepreneurs who have built successful, multi-million dollar businesses, yet are seeking more opportunities to grow their businesses well as their personal wealth. Their assets are usually in the form of equity in their own companies, commercial and residential real estate, and in various form of investments ranging from equities and bonds, to hedge funds and private equity.
Many of the assets are globally diversified, which has ramifications in terms of wealth and tax. At the same time, such clients may have trusts and private investment companies established to preserve their wealth and distribute it to future generations of their families.
*Note: High-net-worth individuals (HNWIs) are those individuals having an investible surplus of over $1 million. (World wealth Report, 2007)
‘‘It’s about helping these essentially simple people on what to do with their money; about the when, where and how of going about it’’ (business world. in, 2008). Such is the tapestry of wealth among today’s ultra high net worth, demanding a whole new approach in how private professional wealth managers’ deal with them.
RESEARCH QUESTIONS
What are the current wealth management preferences and needs of wealthy Indians as well as generally?
According to you, what factors do affluent investors consider that leads to switching advisors voluntarily? Please tick (√) the following –
a. Dissatisfaction with the advisor’s financial services
b. Poor portfolio performance
c. Low fees from other institutions
d. Conflict in personality with advisor
What is the primary objective of investors with > $1m in investible assets?
Is there any specific approach or a strategy that you follow while consulting and building a rapport with your clients’?
‘‘Talent shortage hampers private wealth management services.’’ Do you agree with this statement? If yes, could you please let us know any specific strategies you’ve taken to deal with this? Please comment….
A complete list of questions is specified in appendix B.
1.5 Research of Obejctive of The Study
The main objective of the research is to explore the wealthy investor’s attitudes, preferences and expectations related to investment decision-making; and the analysis of the strategies adopted by a group of chosen professionals while engaging into a ‘consultative dialogue’ with their client. I’d like to add that the target audience chosen for the purpose of my research are professional individuals, to whom I know personally from school days.
This would then in turn help the researcher in understanding the impact of investment advice and strategies adopted by them (wealth managers) to cater to the wealthy clients. The paper will attempt to provide insights gathered from interviews conducted with three registered investment advisors/wealth managers in order to study the above mentioned objective.
In addition, it will also seek to address the investment concerns of affluent individuals or families by obtaining feedback from the chosen target audience. In particular, it explores what ‘‘wealth management’’ means to be established, as well as aspiring wealth managers, and the challenges advisors have faced or are facing into the wealth management space. This would be attempted by reviewing the key concepts relating to the industry and by using a ‘interview method’ to the chosen target audience.
The purpose of this research is a modest attempt to find out the main influential factors that affect the preferences, expectations and investment patterns of the rich class and how private wealth management concept is applied to those factors to obtain a positive and a satisfied client. In addition to this it tries to focus on the key strategies that they adopt while engaging into a ‘consultative dialogue’ with their client that have made them so successful.
Analysis is supported by using the interview methodology to gain insight into the structure of the leading wealth managers. The study will be helpful to me in understanding the significance and benefits of wealth management and its impact on the investment attitudes and behaviour of the high-net-worth individuals (HNWIs).
Personal Aims
To extend my knowledge of the subject and gain skills in conducting effective market research;
Completion of the compulsory component for the award of Masters Degree of Business Administration;
Furthermore and most importantly, this study is motivated by my personal interest in preparation for employment as an expert wealth manager/financial advisor professionally.
1.6 The Structure of The Research
This dissertation is divided into five chapters wherein each chapter contains several subsections. In the introduction chapter, the study will give an overview of the current situation of the wealth management industry and its characteristics.
This will be followed by a brief description of the rationale and the research problem to undertake this study. It then covers the research objectives, the motivation for my personal professional development, research questions and the overall structure of this project are specified.
Thereafter, I comprehensively explore the Literature in the field that first clarifies and then defines the concept of ‘private wealth management’ and then highlights briefly on the rise of high-net-worth individuals (HNWIs) with an attempt to particularly focus on the Indian market and in general.
It then provides a review that attempts to make the researcher familiarise with the theoretical perspectives and concepts such as the investment strategies, investment attitudes and behaviour patterns which is summarised under ‘Behavioural Finance’, its benefits to other affluent investors, private market segmentation and ‘integrated wealth management.’ This will provide information that will justify the behavioural patterns of investors’ towards finance alternatives such as tax management, philanthropy and estate planning.
The choice of the appropriate methodology to carry out this research is discussed in chapter 3. It will discuss the research philosophy/paradigm, the research design (justifying the paradigm and the design I chose,) tools for data collection, sources of data collection and analysis. Different approaches to data collection will be studied and the most appropriate one will be selected. Sampling techniques and sample size will be discussed based on the rationale and the context of the research.
In chapter 4, which is the major part where the data collected will be analysed in the data analysis chapter (subject to the methodology chosen). There will be an attempt to tabulate and interpret the data in the form of tables and the ‘content analysis’ will be applied to analyse the data. It then presents the research results and the findings from the data collected through the chosen sample size.
Finally, chapter 5 presents a conclusion about the research findings, the contribution this study makes to the field and the limitations faced during the conduct of this research. The recommendations for further research as well as how the entire research process develops the researcher personally and professionally are mentioned. The references and appendices follow chapter 5 to complete this dissertation. 2116
Chapter 2
Literature Review
The study is to explore the theme of ‘private wealth management’ in the finance industry; measurement of this element will be facilitated with linkage and focus on investment preferences and attitudes of high-net-worth individuals (HNWIs) in India and in general.
The review of the literature is required to gain a clearer understanding of the key concepts and the related theory of private wealth management. This amounts to showing that you have understood the main theories in the subject area and how they have been applied and developed, as well as the main criticisms that have been made on your work.
‘‘The review is therefore a part of your academic development – of becoming an expert in the field.’’ (Hart, 2006, p.1) The aim of this review is to examine the literature regarding the various theoretical concepts, dimensions and strategies involved in private wealth management in order to understand the ‘consultancy dialogue’ between a private wealth manager and its client and how can one build its current wealth?
The first section discusses a few academic books and quotes that provide an overview of the ‘private wealth management’ landscape. The second section includes readings about some newspaper articles that directly apply to the rise of wealth management services with an attempt to focus on the Indian market and in general.
The next several sections include readings that indirectly apply to the issue of behavioural finance, investment psychology and investment strategy for the long-term. The author follows this with brief sections that directly apply to the central issues like tax-management, tax-wise portfolio implementation, philanthropy and estate planning. In private wealth management, maximising pre-tax returns is insufficient; rather, after-tax returns matter crucially.
The next section considers private market segmentation of wealth management and a short section on ‘integrated’ wealth management and the chapter is concluded by citing the shortage of talent and skilled advisors’ that are affecting the wealth management business.
Before proceeding, I first attempt to clarify what we mean by ‘‘private wealth management.’’ Private wealth management encompasses both taxable investment management and personal financial planning concerns (Jennings et al., 2006). Wealth management represents a specialisation within investment management that addresses the particular concerns of high-net-worth individuals (HNWIs).
Wealth management also represents an increase in professionalism and technical acumen over 1980’s- era classical financial planning. The word ‘‘private,’’ although not strictly necessary, connotes the intensely personal and consultative relationship of private bankers – something private wealth managers aspire to have with their clients.
Private wealth management, although centered on investment management, considers the complete financial picture of individuals and families and does so in a well-integrated fashion. However, it is important to mention here that because private wealth management is an integrated perspective, it is sometimes necessary to draw connections between different finance related topics. A complete list of references is included at the end of this paper.
According to Jennings et al., (2006), investment professionals who switch from managing institutional portfolios to managing individuals’ portfolios quickly learn about the peculiarities of private wealth management.
Portfolio design and investment policy development are affected by individuals’ views and circumstances with respect to (1) return and spending requirements, (2) risk, (3) taxation, (4) investment horizon, (5) liquidity needs, (6) legal structures and requirements, as well as (7) individual circumstances. Accordingly, the researcher will study the practitioner and academic literature on a range of private wealth management topics relating to these factors.
2.0 Defining Wealth Management
The term ‘‘wealth management’’ has been bandied upon the financial advisory industry for most of the past decade with no universally accepted definition. Some advisors view it as nothing more than an industry buzzword or a jargon while others have embraced it as the way they manage their business.
Brunel, (2002), in his book ‘‘The New Direction for Portfolio Managers’’, which is a benchmark reference for private wealth managers and who is also the editor of the Journal of Wealth Management is responsible for providing important insights into wealth management.
He has focused on how private wealth management differs from traditional investment management. Brunel’s three most important observations were (1) managing the relationship and the transition from the current portfolio to the optimal portfolio is important, (2) taxable investors should focus on wealth accumulation and asset allocation rather than periodic returns, (3) individuals must focus on the total portfolio, not its components. He also underscored the importance of getting the strategic asset allocation right in the first place.
Evensky, (1997), a former practitioner said in his book, ‘‘wealth management had become a new profession, although it can also be seen as a speciality within financial planning.’’
Jennings et al., (2006), encourages professionals to manage an individual’s extended portfolio that includes the values of ‘‘off-balance-sheet’’ assets such Social Security Payments and defined- benefit plans. The extended portfolio – not simply the financial portfolio is the focus of the private wealth manager.
When the wealth grows larger, not always, but frequently, family needs become more complex as regards their estates, their entrepreneurial businesses, their fiscal and succession position. In fact, family business services designed for families owning large-sized enterprises are also provided by law and taxation firms capable of tackling issues of governance, legal structure, tax rationalisation and succession planning.
The supply of integrated services leads to the adoption of a planning approach within the family dynamic. For example, Standard Chartered Bank India, propose their clients the service of wealth planning, that is ‘‘a detailed analysis of all the components of the family and personal wealth: real assets, financial assets, business assets’’ (standardchartered.co.in. 2007).
‘‘Investment managers now entice investors with the lure of ‘‘privately managed’’ separate accounts that will be faithfully watched as they grow and prosper.’’ The ‘‘new wealth management’’ is personal financial planning and management across individual life-cycle events, provided by a trusted advisor to willing and eager clients (Ceru, 2004, p.87).
It is done through the integration of the client’s investment. Companies began to compete within their supply, value and demand chains as well as across them. The result is reinvigorated interest in the basics of goal-oriented financial planning and management – over the course of the individual’s life cycle.
‘‘We find out where you are now and where you want to be in the future. Then we put together a plan to help you get there’’ (holden-partners.com, 2008). The way you plan your journey, it’s the same with wealth management.
In July, 2008, Andy Briscoe, chief executive of Life Trust Insurance pointed out that ‘‘people are living longer and healthier lives, which is great news – but only if they have their finances in place to enjoy their post-career lives.’’ (Metro newspaper: Article, p.30)
‘‘Wealth Management –this space has always advocated a need-based approach to individual money, rather than a product-centric approach’’ (quoted in the Sunday Express, 2005, p.16).
2.1 The Rise of Wealth Management Services
‘‘Research indicates that up to 85% of high-net-worth investors’ demand comprehensive financial planning and advisory capabilities from their providers, a notable increase from previous years’’ (Gallagher, 2004, p.89).
‘‘India: The affluence factory, with the rise of an aggressive new generation of Indian entrepreneurs and professionals, the country has become a millionaire factory’’ (December: 2006, accessed through ft.com, 2008).
The wealth management market will have a target size of 42 million households by 2012, as against just about 13 million in 2007, noted the report in (Jan, 2008) titled ‘Overview of the Wealth Management Market in India’.
According to Celent, an international consultancy firm, India is set to become a huge hunting ground for wealth managers with the number of their potential clients and size of manageable wealth both expected to grow four-times by 2012 (livemint.com, 2008).
Private individual and family wealth is growing at an amazing rate. The growth between the year 2005 and 2006 was 20.5% and between 2006 and 2007 was 22.7% respectively. In 2007, India led the world in high-net-worth individuals (HNWIs) population growth. In Asia, India ranked second in terms of growth at 20.5% in the year 2006, second only to Singapore.
In terms of real numbers, there were 83,000, 100,000 and 123,000 millionaires in India in the last there years respectively (World Wealth Report, 2007). Boosted by market capitalisation growth of 118% and real GDP growth hovering around 8-9%, HNWI sector gains reached all-time highs.
Market capitalisation growth more than doubled from roughly 50%, accounting for greater HNWI gains (World Federation of Exchanges, January, 2008). The growth rate of the Indian service sector in 2007 was 11.18% and contributed 53% of GDP (economy watch.com).
As the economy continues to oblige, the healthy growth in the number of millionaires is expected to sustain. Thus, there is a huge pool of individuals who are ready targets for wealth managers. In 2007 and 2008 Forbes Billionaires Report, India has the most number of billionaires in the region, outranking China and Japan in both years. This is unprecedented and indicative of India’s rising affluence.
Shameen, 2007, (p.20) suggests that the boom shows little signs of slowing down. He thinks that there are many reasons why foreign companies have entered and there are more who are planning to enter into the Indian market to provide their private wealth management services.
He cites those reasons to be as a large pool of assets, a more sustained pace of growth, better infrastructure, and a friendlier regulatory environment. The boom in Indian stock market and asset prices has created a breed of millionaires eager to park assets outside India (ft.com, 2008).
In July, 2008, Deepa Venkatraghvan pointed that ‘‘whatever you choose to call them – advisors, planners and managers – they remain a trustworthy guide to our finances.’’ (Money control.com)
Wealth managers emphasise the uniqueness of their client relationships – relationships that are broad in terms of encompassing all areas of a client’s financial life and deep with respect to the advisor’s intimate knowledge of a client’s values and priorities.
‘‘Private wealth management’’ relies upon a client-centric, consultative approach to delivering financial services. It incorporates traditional operational competencies in a new way of doing business. That new way is a consultative approach supported by knowledge management, decision management and customer relationship management IT capabilities. Consumers of all means are now pondering questions ranging from the philosophical ‘‘what good is any amount of wealth if you have no certainty about when, where and how to spend it?’’ to the practical ‘‘How do I allocate my resources today to ensure I will meet my needs tomorrow?’’(Ceru, 2004, p.82)
‘‘Investing is not a game where one individual with the 160 IQ beats the individual with 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.’’ (Warren Buffett, 2007)
This prompts the questions: to what extent are investor portfolios optimally balanced in terms of risk and return, and are they aligned with the latest market views? Investment science has long provided the industry with concepts to cater to this need. Research has shown that asset allocation alone is at the core of about 90% of portfolio returns. (Ibbotson and Kaplan, 2000)
‘‘Harry M. Markowitz Modern Portfolio theory as first published in 1952 allows for diversification of client’s investments by looking at an optimal risk-return balance on a portfolio basis. To work effectively, this purely technical model requires solid judgement – particularly in determining expected returns and the behaviour of correlation between asset classes.’’ (Chhabra, 2005)
Practising wealth managers provide their clients with tools to benefit from. For instance, ABN AMRO’s, private wealth management division in India offers a team of 40 research analysts in eight locations around the world, who are dedicated to providing research to clients. ‘‘Our investment experts regularly determine what they believe to be the optimal asset allocation, which is aligned with the most recent market insights.
This is reflected in modern portfolios that are aimed to outperform market benchmarks (abnamro.com, 2007). However, despite these sophisticated means, some of the clients do not fully benefit from the investment services available to them. One important reason for this is the influence of clients own behaviour and psychology, which can affect their investment decisions and ultimately, their wealth. This is referred as behavioural finance’’.
2.2 Investor Behaviour Is Not Always Rational
The emergent field of behavioural finance lies at the intersection of psychology and finance. As such, it is an important concept for private wealth managers. Although individuals who manage institutional investments are subject to the same behavioural biases as private wealth managers’ clients, institutions are more likely to have systems and processes that help limit the negative consequences of behavioural issues.
‘‘Behavioural Finance – the behaviour and psychology of investors – can affect investment decisions and thus the level of wealth accumulated by investors’. Behavioural Finance seeks to explain how and why the social cognitive and emotional biases of investors’ are involved in investing.’’ (Warren Buffet, 2007) Practitioners are prone to committing specific errors.
Some are minor and some are fatal. Behavioural finance can help practitioners recognise their own errors as well as errors of others. Behavioural finance is the study of how psychology affects finance. (Shefrin, 2002, p.9)
The theory of behavioural finance attempts to explain how and why investors’ social cognitive and emotional biases – often called non-rational factors – are involved in investing. There are many psychological factors that affect behaviour. An example is the familiarity bias that reflects the influence of situations and things familiar to people. People prefer things they know and to which they are emotionally attached, which become references to them.
This non-rational behaviour is part of human nature. It also applies to investments. (Nofsinger, 2005) A look at any random investment portfolio shows that it will often include securities the investor is familiar with. Many investors prefer the securities of the country they live in or of the company they work for. The acknowledgement that non-rational factors influence investment decisions – and therefore wealth – raises the question of how banks can best manage and support clients’ investment behaviours?
The field of behavioural finance provides several overarching constructs that elucidate investment performance: it describes the behaviour of investors and managers; it describes the outcomes of interactions among investors and managers in financial and capital markets; and it prescribes more effective behaviour for investors and managers. (Statman, 2005)
2.2.1 Taking Investment Psychology Into Consideration
‘‘HNWIs are becoming increasingly hands-on and sophisticated in their financial needs and investment behaviours’’ (World Wealth Report, 2007). Wealth managers who understand investment psychology can make a critical difference by helping investors in making better-informed decisions.
Interactions can minimise the outfalls revealed by behavioural finance by avoiding the biases that can lead to sub-optimal decisions. Listening to our clients have always been the cornerstone of ABN AMRO’s services, matching client needs and aspirations with the latest research views on asset allocation and stock selection. Investor protection and the impact of investor psychology will specifically be taken into account by:
Positioning four separate investment advisory models in acknowledgement of the fact that clients’ investment advisory needs differ. Two key criteria are the relative frequency of the investment activities and the extent to which a client wishes to follow a structured, diversified portfolio approaches opposed to a predominantly product opportunity – and momentum-driven approach. The investment advisory models is supported by dedicated fundamental research, asset allocation and research recommendations; and,
Implementing sophisticated risk measurement and monitoring to keep a close eye on investment portfolio performance. If a measure falls outside a certain threshold, triggers will be set off and will result in discussions with the client (abnamro.com, 2007).
2.2.2 Risk and Return Dialogue Optimises Portfolio Performance
‘‘Traditional finance assumes that we are rational, while behavioural finance simply assumes we are normal’’ (Brunel and Statman, 2003, p.10). Sophisticated risk measurement and monitoring ensure that both the bank and the client can engage in a truly informative dialogue about risk and return within a client’s given portfolio.
A distinction between absolute risk measures, which compare such as shortfall, volatility and value- at-risk, which calculate the total risk on an investment and portfolio basis, and relative risk measures that compare the tracking error of a client’s investment portfolio against a model portfolio.
These risk measures will lead to an insight into a client’s investment portfolio, which will form the basis for the risk and return dialogue. This dialogue has the goal of minimising the pitfalls revealed by behavioural finance and should lead to optimised performance of a clients’ portfolio. For instance, if a client’s current portfolio shows sub-optimal performance, the client will be advised to take certain actions to reduce risk or increase return in a portfolio.
2.2.3 A Trusted Advisor
In Investment Advisory, as opposed to Discretionary Portfolio Management, the client is the decision-maker on his own portfolio. However, the fact that non-rational factors, among others, can materially influence investment portfolio performances places responsibility on wealth manager to support the client in a well-informed decision making process (Warren Buffet, 2007).
ABN AMRO’S upcoming investment advisory service will provide the basis for a structured and intelligence-based advisory process that is tailored to investor behaviour (abnamro.com). The focus on optimising the relative risk and return balance, supported by ongoing risk monitoring, should provide clients with confidence when investing their wealth.
2.3 Investment Strategy For The Long Term
‘‘Investment is about risk and expected return.’’ Textbook descriptions of the investment process use these observations to divide investment strategies into two types. Inefficient strategies incur risk that is not rewarded sufficiently with higher expected return. Efficient strategies provide the highest possible expected return for a given level of risk (Sharpe, 2004).
A key job for the wealth manager is to avoid inefficient strategies. However, this requires estimates of correlations, which indicate the extent to which such investments are likely to move together or separately. Expected return and risk are typically measured using short horizons.
But most investors’ are concerned with longer-term outcomes. In order to make a meaningful choice among sensible investment strategies, an investor needs to see the implications of each one for his or her needs and desires. Summaries such as these can help the investors’ make the difficult choices that lie at the heart of investment decision-making.
Projections can also help an investor determine the most appropriate level of saving (while accumulating) or spending from accumulated wealth. A skilled wealth manager/advisor can use projections to help a client make saving and spending decisions. For instance, if a client is less tolerant of risk, then the advisor should tilt the portfolio towards more conservative investments (Sharpe, 2004).
In an efficient market, high-risk efficient portfolios tend to have higher expected returns than low-risk efficient portfolios. However, this need not be the case for individual securities or even broad classes of assets. This is primarily because some kinds of risk can be reduced or eliminated by diversification.
Almost by definition, an investment strategy is crafted for medium – to long-term investment. It is not an approach for short-term trading. It is, instead, the key element of a plan designed to take into account the needs and circumstances of an investor (Sharpe, 2004). Together a wealth manager and an investor can use the tools of financial economics to craft an investment strategy that will be both efficient and suitable for the investor in question.
2.4 Tax Management
Virtually all companies and individuals are faced with the management of taxable assets. To manage the clients’ assets efficiently, investors and subsequently practising wealth managers and asset managers need to be aware of the impact of taxes on investment returns (Berkin, 2003, p.91).
Taxable assets are such as personal high-net-worth assets, mutual funds, insurance reserves and voluntary employees’ beneficiary trusts, etc. Not until the past couple of years have the effect of taxes received the attention it deserves. More and more investors’ realise that when they take profits after the market appreciates, taxes take a big bite out of their wealth. Furthermore, the recent increase in ‘‘new wealth’’ individuals (who have not used the family offices of ‘‘old wealth’’ families) that resulted from the boom years especially from the year 1999 onwards, particularly in the Indian market, has created a new class of tax-conscious investor.
A recent development that has occurred is the increased focus on the after-tax performance measurement (Brunel, 2000). ‘‘The presence of taxes, shorter time-horizons, and higher trading costs are just some of the important factors that both institutional and individual investors’ need to consider before investing their wealth’’ (Quisenberry Jr., 2003, p.18). Over the last decade, the capital-gains tax rates have been reduced by nearly half – strengthening the case for diversification soon rather than later.
It seems that most investors’ would be wise to divest at least a portion of their concentrated positions. But how much is enough? The advice has to be customised. For each wealthy investor, the characteristics of his concentrated stock and his portfolio as a whole, the tax bill he’ll face, his tolerance for risk, and his long-term goals are unique (Boyle et al., 2004, p. 34).
They highlighted two alternatives for the investor to consider; a minimum amount of single stock to sell, designed to help ensure that his core needs will be met; an optimal solution driven by his circumstances and risk tolerance. Below presented are two representative examples of investors’ facing the single-stock dilemma:
A proprietary wealth-forecasting model has been developed that integrates client’s circumstances with capital-markets forecasts to arrive at a tailored solution.
Exhibit 3: Case-Study Profiles
Investor A Investor B
Age 70 55
Investment Time Horizon 5 yrs. 20 yrs.
Total Net worth $20 million $12.5 million
% of Net Worth in XYZ Stock 50% 80%
Annual Spending Needs* $400,000 $375,000
Asset Allocation excl. XYZ 60%stock/40%bonds 80%stock/20%bonds
Self-described Risk Profile Moderate Aggressive
Critical Goals Preserve nominal wealth Grow nominal wealth
Limit volatility Maintain Lifestyle
Maintain Lifestyle
*In first year, growing with inflation
Source: The Enviable Dilemma: Hold, Sell or Hedge Highly Concentrated Stock? (Boyle et. al., 2004, p.35)
With the increased attention devoted to tax-efficient investing, various ways have been proposed to improve after-tax returns (Dickson and Shoven, 1994; Jeffrey and Arnott; cited by Berkin et.al., 2003, p.92).
Among them are loss harvesting (taxable wealthy clients should harvest losses to generate tax credits that can be used to offset capital gains), HIFO (highest in, first out), accounting procedures (wealth managers or asset managers should use HIFO accounting whenever a security holding is sold on behalf of their taxable clients) and yield management (whereas corporate taxable portfolios should tilt toward high-yield stocks to take advantage of dividend exclusion, taxable clients’ or investors’ should hold mostly low-yield assets to avoid income taxes on the yield).
Although the rationale behind all these strategies are generally straight-forward, the investment literature contains little documentation quantifying the benefit of each strategy in terms of tax-savings. The tax-efficient manager uses HIFO accounting and harvests all losses, whereas, the naïve manager uses cost averaging and simply holds positions at a loss.
Clients who knock on the doors of private wealth advisors for tax-advisory services are not necessarily tax dodgers; but there is a limit to the norms a lay man may know (businessworld.in, 2008). No matter what the environment, managing a client’s portfolio in a tax-efficient manner provides substantially better after-tax performance than a simple index fund, both before and after the liquidation of the portfolio (Berkin et al., 2003, p.101).
Taxes matter –a lot. This is one aspect of asset management, known with certainty in advance, and therefore, a wealthy clients’ portfolio can be managed effectively to minimise the tax impact.
2.4.1 Tax-wise Portfolio Implementation
Rebalancing is almost universally recommended as a method to control risk and to orient the investment portfolio to its appropriate risk/return point. The literature on rebalancing is effusive as to the benefits, but there is little commentary about the costs (such as trading and tax costs) and practical problems of implementation.
In practice, many institutional and even individual investors’ do not rigorously rebalance (Horvitz, 2002, p.49). As the proportions of wealth allocated to individual assets change due to performance differences, changes in investor objectives, or risk aversion, or the introduction of new capital, investors must reallocate portfolio funds to bring asset allocations back to given target ratios (Donohue et al., 2004). Determining when and how to rebalance a clients’ portfolio is a common and complex problem in practice.
As soon as the wealth manager and his client has agreed and implemented the asset split in the clients’ investment portfolio, the wealth manager will have to start work to maintain it, as it will quickly go out of date. From day one, the movement of the markets will begin to alter the carefully balanced allocated assets; hence, it is essential to have periodic reviews to rebalance the portfolio and to bring it back in line with the agreed asset allocation (holden-partners.com, 2008).
Value can be added in the clients’ portfolio by effectively managing the tax-returns. It is widely held throughout the literature that taxes can certainly be minimised and returns enhanced by tax management (Winkel, 2005).
Rebalancing is easiest with portfolios consisting of all liquid securities, which is the case with conventional mix of stocks, bonds, and cash. Most affluent investors’ include in their portfolio a substantial amount of illiquid investments such as private equity, venture capital, and real estate.
These cannot be so easily rebalanced and there may be little point in rebalancing only those portions of a portfolio that are liquid, leaving the illiquid portfolios untouched. Without a clear-cut and rigorous set of rules for rebalancing, one of the greatest risks investors’ face is simply human nature (Masters, 2003, p.52).
Who wants to take money from an asset class that has performed extremely well and re-invest it in something that has lagged behind? When markets turn, as we know they always do, rebalancing delivers substantial benefits, particularly when the reversal is sudden and dramatic.
With the benefits of rebalancing are really acknowledged, there is little agreement on the right rebalancing strategy. ‘‘A more promising approach is to set bands around the target allocations and rebalance whenever those limits are exceeded.’’ (Masters, 2003, p.52)
This prompts additional questions such as how wide should the bands be? Should they be the same for all portfolios and all asset classes? However, at times investors’ do often rebalance when they get easily influenced by economically irrational factors, such as unsubstantiated opinions of others (including those published daily in the financial press); a sense of potential regret in selling off a position that might appreciate and patterns in essentially random and the illusionary confidence that they get in financial predictions.
In general, managers have a target asset allocation that they seek to maintain. When a portfolio’s actual allocation deviates from its target allocation, the result will be tracking error compared to the target allocation. The key benefit of rebalancing a clients’ portfolio to wealth or asset manager is to reduce this tracking error.
2.4.2 Philanthropy
The word ‘‘philanthropy’’ comes from two Greek words: The word ‘‘philos’’ means ‘‘love of’’ and the word ‘‘anthropos’’ means ‘‘mankind.’’ When we give in the best sense we give from a love of mankind (Hauser, 2004). Charitable giving is a big business. But what really motivates wealthy families to give to charities at all? A number of motivations are possible.
Is the motivation a sense of obligation that comes with wealth? Is it a belief that too much of ‘‘almighty dollar’’ will ruin the children? Is it a wish to ‘‘give back’’ to the community (Bill Gates motive)? Is it an effort to lead a ‘‘good’’ life (the religious motive)? Is it a tool to bring the family together and educate the younger generation (the family foundation motive)? Or for the entrepreneurs who have sold their business, it is something to make it happen again?
The researcher thinks that the true motivation for most family giving programs is instinctive and sympathetic. Or you may say that the instinct is simply part of being human. The expression of this primeval urge to help others is a wonderful legacy in wealthy families, indeed in any families – as it ties humanity together. Today nearly every family wealth program and family office* (explained below under section 2.7, p.28) conference includes a session on ‘‘responsible giving’’ for wealthy families. The more money you have personally, the more responsibility you have to the society (Hauser, 2004).
Entire industries exist to invest endowments, to solicit endowments, and to help families formulate strategic philanthropy. So why do families give to charity? Yes, admittedly there are lot of motivations – my list could be even longer. However, the researcher do think that at the heart of foundation of charitable giving or donations are done to help others to whom we can relate – whether in the neighbourhood or around the globe.
2.4.3 Estate Planning
Many wealth management clients will not consume all of their wealth in their lifetimes and thus will leave an estate. Estate planning is a complex area that involves the law of wills, trusts, power of attorney, and tax. ‘‘The principal objective of estate planning is to arrange for your assets to be transferred upon once you’re gone to your heirs as quickly and tax-efficiently as possible’’ (Hisey, 2008). She points out further that every individual or family’s objectives and circumstances are unique and what is important is to identify them so that steps can be taken to achieve them.
Intergenerational planning requires an understanding of estate tax consequences. Although there is a large literature on estate planning in the legal and insurance traditions, the private wealth management professional must properly be concerned with investment considerations of estate planning.
That is, the traditional thinking on estate planning must be integrated with an investment perspective to be useful to the private wealth manager. There has been little writing that provides such integration. Not surprisingly, much of estate planning concerns itself with navigating the shoals of the estate and the gift tax systems to bring assets safely home to the client’s desired beneficiaries (Meyers, 2005, p.25).
2.5 The Target Market For Private Wealth Management
As for the nature of recipients, in private wealth management segmentation is made by ‘‘family nuclei’’. The approach to client analysis starts from the ‘‘family’’ as an entity and not from the single individual.
That being stated, it should be underlined that wealth management target market may be re-organised into very large groups of clients on the basis of:
presence of manageable assets or wealth size;
customisation degree of service demand and complexity degree of requirements.
As for manageable assets, a model proposed at international level in the report by World Wealth, 2002, identifies the following segments:
Affluent over US$100,000;
High Net Worth Individuals (HNWIs) from US$500,000;
Very-High Net Worth Individuals over US$5million;
Ultra-High Net Worth Individuals over US$50million (see exhibit 4)
Segmentation depending on manageable assets is extremely limited and it may help to understand the need for further market segmentation. Moreover, the same segmentation criteria are subject to variations; an international estimate of the number of HNWIs by Merrill Lynch uses different segmentation criteria by indicating US$50m instead of $30m net assets for ultra-high net worth individuals.
With regard to the degree of customisation of the demanded service, some considerations should be made about the meaning and the consequences of highly customised services. The term ‘‘customisation’’ is often opposed to the expression ‘‘standardisation’’, where the former is usually assigned a positive meaning and latter a negative one.
It is worth mentioning that different studies divide the wealth pie differently – some by dollar level of assets, others by type of wealth, and still others by investors’ appetite for risk – all split up the wealthy into different tiers, each with its own needs and demands (Gallagher, 2004, p.88).
The difficulty in quality control is to be attributed to the fact that higher levels of customisation enable clients to tailor their own services to their specific requirements. Customer contribution to the production process makes it more complicated and slower and leads to the formulation of unique solutions.
The possibility of service standardisation decreases as client complexity needs grows and professional competencies involved in the offering process increases. When wealth management services are positioned in the Affluent and HNWI segments, task specialisation criteria prevail in organisation units.
In other words, goal achievement is divided into sub-processes assigned to different managers. In this perspective, the wealth/relationship manager is usually assigned the responsibility of the relationship with the client, while the asset management unit is responsible for the clients’ portfolio performance.
When wealth management services are positioned in the Very-HNWI and Ultra-HNWI segments, personal specialisation criteria prevail in the organisation units. In other words, units are composed by professionals, capable of controlling the entire process they are assigned, from distribution to production. This does not mean the service is actually produced by the team of professionals, but that they control the whole process thanks to their competencies and expertise.
For this reason, in the design of functions within the organisation unit dedicated to the Ultra-HNWI segment, the wealth/relationship manager is supported or even substituted by the portfolio manager. The latter is directly responsible for the portfolio performances as to financial investments. As for the other services, necessary competencies and professionals are sought inside and outside the bank (unicredit.com, 2008).
2.6 The Financial Offer For Wealth Management
The implementation of this fully comprehensive approach is facilitated by the adoption of some typical activities of personal financial planning. Since the seventies, personal financial planning has been proposed by a number of independent professional firms to Ultra-HNW families.
This methodology is an ideal integrating mechanism in the production process of solutions for private clients. This has induced banks to arrange a team of professionals dedicated to this activity.
This model is characterised by elements of unquestionable appeal both to the bank and the client but remarkable organisational efforts have to be made to guarantee high-standard quality. What appeals to the client is the availability of a sole interlocutor upon analysis of needs and the offering of a wide range of solutions.
On the other hand, this business model appeals to the bank because it allows to achieve client fidelity, diversifying income sources, being judged not only on the basis of performances and becoming the client partner in areas where performance evaluation is by definition in medium-long term, for example in real estate, succession planning, philanthropy, strategic asset allocation mix and tax-management.
The possibility of receiving comprehensive solutions and the need for a customised design are high among Very-HNW and Ultra-HNW clients. For this reason, there are roles, services and structures specifically dedicated to these segments within private wealth management. The complexity of the service reaches its maximum degree when the target market is represented by clients characterised by family business sharing.
Families who have achieved a substantial level of prosperity have very unique needs. Given the complex and multi-faceted nature of their financial situation, growing managing and preserving their assets presents a challenge in itself. The greater challenge in many successful families lies in creating a lasting legacy through the business enterprises they have built, the charitable causes they have supported, and their ability to impart to future generations, the lesson that with wealth comes opportunity as well as responsibility. (Tanzi et al., 2002, p.33)
To tackle the complexity and multiplicity of the needs expressed by this typology of families, Bank of New York offers multi-disciplinary competencies of professionals, with long-dated experience: ‘‘established exclusively to meet the needs of wealthy families, our Family Wealth Management group provides a multi-disciplinary resource.
We have assembled a specialised team comprised of seasoned professionals with backgrounds in financial, tax and estate planning, investment consulting, asset management, trusts, accounting, banking and customised lending. Responsible for a limited number of relationships, the team devotes time and expertise to understand the uniqueness of each client and provide comprehensive solutions that are distinct and individualised. Through this personalised approach, we can guide you with insight to help you achieve your objective.’’ (Tanzi et al., 2002, p.33)
To these clients, there are banks that provide services of:
Wealth Transition, i.e. solutions relating to specific moments that may create temporary needs of liquidity connected with changes in the structure or the management of the family business;
Wealth Management, custody and reporting, investment consulting, asset management, risk management and customised lending and banking and;
Wealth Preservation, fiduciary services, succession planning, charitable gifting, tax and estate and insurance planning, assistance in the education process of future generations.
2.7 Family Offices As An Organisational Solution For Family Business
The family office represents a center of influence and stability to help families with exceptional wealth to ensure the preservation and growth of their financial assets and family heritage (foxexchange.com, 2008).
Most Multi-Family Offices (MFOs) evolved from these family offices. They are made up of exclusive groups that have opened access to their services to more than one family of exceptional wealth.
MFOs are structured to offer integrated, interdisciplinary services to ultra-high-net-worth individuals and families. MFOs have historically provided customised service levels and confidentiality not available from larger product-driven financial institutions. The offer of Signature Financial Management emphasises the wide range of needs the company undertakes to solve in the best possible way (see exhibit 5).
Irrespective of the above matrix, the common features that can be sighted hereare –
competencies integration;
client focus and;
independence
According to the data of Family Office Exchange (2003), in the USA over 3,500 families own a dedicated family office, about 50 institutions or families have set-up a multi-family office. In Europe about 200 families have structured family offices and even more have informal structures (foxexchange.com, 2008).
One of the leading London newspaper quoted last month, ‘‘Hundreds of super-rich families, with assets of more than £100m, are setting up private offices to guard their investments.’’ (An article quoted in Evening Standard, 2008)
On the basis of the evidence relating to the above experience, some common patterns can be identified in relation to the contents, in particular:
growing integration of services and adoption of risk management approach to the family wealth;
management of financial assets through ‘‘ funds of funds’’ and growing attention to indexed funds or alternative investments;
stress on family members education, family continuity and philanthropic services.
2.8 The ‘Integrated’ Wealth Adviser
‘‘Not all advisers want to practice integrated wealth management’’ (Miles and Louisa, 2005, p.19). Some are interested in simply being specialists and focusing on their respective areas of expertise. Others are initially intrigued by practicing integrated wealth management but soon lose interest after they understand the time and commitment required to do so effectively. To be what we have referred to as an integrated wealth management adviser requires both a number on innate characteristics and a commitment to acquiring and maintaining an extremely broad knowledge base and skill set.
Those who have become successful integrated advisers tend to exhibit certain common characteristics. These advisers possess –
a fundamental drive to solve problems
a healthy dose of natural curiosity, so that fresh ideas are continually generated
a broad range of interest, many in the areas of commonly touching client families
superior listening skills and empathy– integrated wealth management is about the client and doing what is best for him or her
a good measure of jaundice and a lack of contentment with the status quo
a willingness to make hard, thoughtful decisions
a strong sense of self, so that when working as a team member, the adviser can admit to being off-base if necessary and give others credit before himself or herself.
In addition to these innate characteristics, successful integrated wealth advisers develop and maintain a wide range of managerial and professional skills. Foremost, these advisers possess superior organisational skills and are detail oriented, because advising wealthy client families requires managing voluminous amounts of deadlines and data produced by their structures, as well as keeping track of the activities of individual family members.
The key word is ‘‘integration’’ –
Integration of solutions provided to clients;
Integration of competencies serving client needs and;
Integration of outside (clients) and inside (corporate processes) communication. (www.bcg.com, Global Wealth, 2002)
Wealth Management Practice Orientation – Categorical Differentiation
Transactors –
Product Expert: Handles high-volume transactions involving sophisticated products or asset classes, such as foreign exchange derivatives.
Investment Broker: Handles transactions involving basic asset classes, such as equities, fixed income and options.
Investment Managers –
Investment Advisor: Offers strategic investment planning, as well as playing a hands-on role in constructing, reviewing and rebalancing client portfolios.
Relationship Manager: Establishes and nurtures client relationships, delegating portfolio management to internal and external managers
Wealth Planners –
Wealth Planner: Offers holistic advice in accordance with client’s finances and short/long-term goals, such as real estate, retirement, and generational wealth transfer.
Personal CFO: Aspires to provide quasi family-office services, often acting in a lead discretionary role coordinating with the client’s other trusted advisors.
The transactors are more prevalent in Europe and Latin America and historically product based wealth managers whereas, the investment managers and wealth planners are most prevalent in North America and Asia and historically advice-based wealth managers (World Wealth Report, 2008).
The significance of these practice-model categories is that each reflects a different advisory approach, borne of a different perspective. While some firms claim to have a single practice orientation, many actually use multiple models in and across regions – and often leverage different models within their core markets to capitalise on the strengths of individual advisors.
2.9 The War for Talent Intensifies
The ‘‘trusted advisor ’’ relationship is the cornerstone to long-term relationships between clients and advisors, as well as wealth management firms. While most clients have relationships with multiple wealth management firms (World Wealth Report, 2008), many clients seek long-term ‘‘trusted advisors’’ who can help them navigate complex topics and strategies.
As a result, these wealthy individuals seek advisors they can trust for comprehensive wealth management services, and not just guide them on investments. Clients expect advisors to understand them in the context of a larger relationship that encompasses personal and family finances as well as business partnerships or estate planning.
According to World Wealth Report, 2008, as the HNWI population and wealth continues to climb, so does the number of clients seeking private bankers and wealth managers. Since 2002, the number of HNWIs worldwide has increased by three million individuals. This has compounded the demand for talented advisors from wealth management firms.
Yet, the expectations of advisors may differ from one market to another. In many mature markets, for example, large retiree populations seek advice on how to draw steady income from their retirement assets. But in several emerging markets such as India, clients seek advisors who understand both the global financial markets and the nuances of the local culture, as they desire to capture more sophisticated products as their wealth grows.
Wealth management firms have adapted in response to the changes in their client base, shifting the industry from a transaction-driven business to an advice-oriented and fee-based business.
The industry is already feeling the pinch on this count as developing and attracting top talent is a major investment. ‘‘The typical number of clients a wealth manager can effectively handle is not more than 25-30. That straightaway translates to a requirement of more than 3000-4000 wealth managers, in growing economies such as India.’’ says Ian Gore, Head of Human Resources, Citi India Cluster (businesstoday.com, 2008).
This further justifies the researcher’s peek into the burgeoning demand for wealth managers. According to World Wealth Report 2007, the number of high-net-worth individuals (HNWIs) – those having an investible surplus of over $1m (Rs. 4 crore) – rose by 20.5% in India from 83,000 in 2005 to 100,000 in the year 2006.
Many in the industry believe these are extremely conservative numbers. Actual consumption data indicates much higher numbers. A few reckon these could easily be in the range of a million millionaires. And a healthy growth of 18-20 per cent in the number of such millionaires is expected to sustain in the coming years as the economy obliges.
Sharad Sharma, Country Head (Private Banking), BNP Paribas, India, agrees, ‘‘there is already a discernible gap between the demand and the supply of client-facing professionals. As we expect a surge in demand in the next few years, there may be an acute shortage of the right talent over time.’’ Bagchi from ICICI Bank adds that the bank plans to add 200-250 managers a year in the coming years in line with the bank’s ambition of targeting the entire mass affluent space.
The bank has partnered with 40-odd business schools which have private banking as elective courses (businesstoday.com, 2007). The bank also provides basic training to the deans and professors of these schools. These B-schools then have the potential to provide somewhat trained hires.
Summary of literature review
In conclusion, from the above literature review it was noted that ‘Behavioural Finance’ covers a lot of ground. Investor Behaviour plays a key role in investment-related decisions for investing one’s wealth. The theory relating to tax management, portfolio implementation, philanthropy, estate planning and integrated wealth management have given an understanding of the role, a private wealth manager plays in the context of investment decision-making.
It was essential to cover the target market for private wealth managers in the preceding review so that they can accordingly, formulate strategies and a business model to either target all tiers or concentrate on the elite group of high-net-worth investors’. In particular, the literature review explored the issues around a wealth manager’s role in understanding the expectations and behaviours’ of a wealthy client and focuses on the following question:
How do practicing wealth managers view their engagement while building a ‘consultancy dialogue’ with affluent investors’?
The next chapter outlines the methodology adopted for the study. 7717
Chapter 3
Methods and Methodology
The way the data will be collected depends on the research objectives and, of course, on the way the research will be processed. The starting point in all research undertakings is to focus clearly on the fact that the ultimate purpose is to add something of value to the body of accumulated knowledge. (Remenyi et. al, 2005, p.23)
Before suggesting some guidelines available to those wishing to engage in research it is useful to define research methodology and to put the issue of research and its methodologies into perspective. ‘‘Methodology refers to the overall approach to the research process, from the theoretical underpinning to the collection and analysis of data.’’ (Collins, 2003, p.55)
‘‘A system of methods and rules to facilitate the collection and analysis of data.’’ It provides the starting point for choosing an approach made up of theories, ideas, concepts and definitions of the topic; therefore the basis of a critical activity consisting of making choices about the nature and character of the social world (assumptions). This should not be confused with techniques of research, the application of methodology. (Hart, 2006, p.28)
The objective of this research is to explore the wealthy investors’ attitudes, preferences and expectations relating to investment-decision making; and the analysis of the strategies adopted by professionals who are practicing wealth management. The enquiry focuses on the ways in which practicing wealth managers engage into a consultative dialogue with their clients’, the benefits they see in such involvement and how it could be strengthened.
An experience survey (explained under section 3.2.1, p.37) was conducted based on the research objective and tries to answer the research questions as outlined briefly in Chapter 1 and mainly in Appendix B.
In this chapter the author will discuss the methodology of the research which includes the research philosophy, the research design justifying my choice of philosophy (paradigm), sources of data, sampling techniques, selection of sample, questionnaire design including pilot testing, data collection and analysis and the ethical considerations.
3.1 Research Philosophy
A philosophical perspective to the research is imperative to clarify the research design, type of data to be gathered, sources of data acquisition and data analysis. ‘‘The particular philosophy or paradigm you adopt for your research will be partly determined by the nature of the research problem you are investigating, but it will also be shaped by your assumptions.’’ (Collins, 2003, p.52)
There are two main research philosophies or paradigms. The term paradigm refers to the progress of scientific practice based on people’s philosophies and assumptions about the world and the nature of knowledge, in this context, about how research should be conducted.
They offer a framework comprising an accepted set of theories, methods and ways of defining data (Collins, 2003, p.46-47). Although there is considerable blurring, the two philosophies can be labelled as positivist and phenomenologist.
The positivist paradigm seeks the facts or causes of social phenomena, with little regard to the subjective state of the individual. And the phenomenological paradigm is concerned with understanding human behaviour from the participant’s frame of reference (Collins, 2003, p.52-53).
A positivist may use large samples and a phenomenologist on the other hand, goes for a much smaller samples. A phenomenologist tends to obtain different perceptions of the phenomena and in the analysis the researcher seeks to understand what is happening in a situation and looking for patterns which may be repeated in their similar situations (Collins, 2003, p.50-51). The approach used in this literature would be the phenomenological approach.
The researcher’s methodological, epistemological, ontological and axiological foundations act as a framework for interpretation that comprises a set of beliefs which direct the research action. Methodology refers to the procedural framework within which the research is conducted.
It describes an approach to a problem that can be put into practice in a research programme or process, which Leedy (1989) formally defines ‘as an operational framework within which the facts are placed so that their meaning may be seen more clearly’ (cited Remenyi et al., 2005, p.28). Epistemology concerns what constitutes acceptable knowledge in a field of study (Saunders et al., 2007, p.102).
Methodology and Epistemology are closely related: the former involves practice while the latter involves the philosophy of how we come to know the world. Ontology on the other hand, is concerned with nature of reality. To a greater extent than epistemological considerations, this raises questions of the assumptions, researcher has about the way the world operates and the commitment held to particular views. There are two aspects to ontology – objectivism and subjectivism (Saunders et al., 2007, p.108).
With the ontological assumption you must decide whether you consider the world is objective and external to the researcher, or socially constructed and only understood by examining the perceptions of human actors (Collins, 2003, p.48).
Axiology is a branch of philosophy that studies judgements about value. Although this may include values we possess in the field of aesthetics and ethics, it is the process of social enquiry within which we are concerned here (Saunders et al., 2007. p.110). The axiological assumption is concerned with values (Collins, 2003, p.48).
There are two major perspectives: quantitative and qualitative. The quantitative perspective derives from a positivist epistemology, which holds that there is an objective reality that can be expressed numerically (Glathorn and Joyner, 1998, p.40). On the other hand, a qualitative perspective emphasises a phenomenological view in which reality inheres in the perceptions of individuals.
Studies deriving from this perspective focus on meaning and understanding, and take place in naturally occurring situations (McMillan, 1996, cited by Glathorn and Joyner, 1998, p.40). There is also multi method which refers to those combinations where more than one method of data collection technique is used with associated analysis techniques but it is restricted within either a quantitative or qualitative world view (Tashakori and Teddie, 2003, cited by Saunders et al., 2007, p.145).
Whether you are following positivist or phenomenological philosophy or paradigm, at times, the researcher may use a combination of quantitative or qualitative inputs into his or her data generating activities. The balance depends on the analytical requirements and the overall purpose of the research. Quantitative and qualitative approaches present a mixture of advantages and disadvantages (Collins, 2003, p.162).
3.2 Research Design
‘‘The research design refers to the way in which you will conduct your research’’ (Cottrell, 2003, p.204). Research design is one of the most important pillars that hold all the elements in the research project together. ‘‘Research design is the science’ (and art) of planning procedures for conducting studies so as to get the most valid findings’’ (Vogt 1993, p.196 cited by Collins, 2003, p.113).
Determining a research design gives a detailed plan to the researcher, which is then used to focus and guide the research. Data can be described as qualitative or quantitative. As the name suggests qualitative data is concerned with qualities and non-numerical characteristics, whilst quantitative data is all data that is collected in a numerical form. It can be described as discrete or continuous (Collins, 2003, p.161).
3.2.1 Types of research design
a) An exploratory research is a valuable means of finding out ‘‘what is happening, to seek new insights, to ask questions and to assess phenomena in a new light’’ (Robson, 2000, p.59 cited by Saunders et al., 2007). It is particularly useful if you wish to clarify your understanding of a concept such as if you are unsure of the precise nature of the problem. It may well be that time is well spent on exploratory research, as it may show that the research is not worth pursing further.
Exploratory research contains a number of techniques designed for investigating a problem. The type of technique adopted by the researcher depends on the nature of the problem and the expected results from the proposed project. In an Experience Surveys, the researcher can get insights on a particular problem from knowledgeable individuals.
Secondary Data Analysis requires an extensive review of the literature and provides the researcher with the basic theoretical understanding. Case Studies examine one or a few situations similar to the problem situation. In-depth interviews are non directive interviews in which the respondent is encouraged to talk about the subject rather than answering a yes or no to a specific question.
There are three principle ways to conduct exploratory research –
Search of the literature;
Interviewing ‘experts’ in the subject;
Conducting focus group interviews (Saunders et al., 2007, p.133)
The project has been researched using exploratory studies to explore a wealthy investor’s attitudes and preferences while making investment-related decisions; and subsequently evaluates and analyses the strategies adopted by practising wealth managers. The advantage of this type of research is that it is flexible and adaptable to change.
If you are conducting exploratory research, you must will to change your direction, as a result of new data that appears and new insights that occur to you. It suffers from the drawback of being judgemental of the findings to an extent due to the qualitative nature of the research.
b) Descriptive and explanatory research
‘‘The object of descriptive research is ‘to portray an accurate profile of persons, events or situations’’ (Robson, 2002, p.59 cited by Saunders et al., 2007, p.134). This may be an extension of or a forerunner to a piece of exploratory research. It determines the regularity with which something takes place on the relationship between two variables. Casual relationships between variables may be termed as explanatory research (Saunders et al., 2007, p.134). The emphasis here is on studying a situation or a problem in order to explain the relationship between variables.
3.2.2 Selection of the Research Method
The research is aimed to explore a wealthy investor’s attitudes, preferences and expectations while making investment-related decisions; and the analysis of the strategies adopted by the professionals who practice wealth management. A Qualitative Method is adopted to arrive at the conclusions on the objective set for the research.
Qualitative research is not subject to quantification, numerical or mathematical analysis, instead, it relies more on the analysis and the evaluation by the researcher from the data he or she collects. A qualitative method was also adopted as the technique and the design to conduct this research are exploratory studies. A researcher which has a phenomenological approach to its research inclines on having a qualitative method when the sample size is small.
The researcher limited its sample size to three practitioners who are wealth managers professionally. A phenomenologist tend to obtain different perceptions of the phenomena and in the analysis the researcher seeks to understand what is happening in a situation and looking for patterns which may be repeated in their similar situations (Collins, 2003, p.50-51, quoted again). The researcher attempts to explore the attitudes and preferences and analytically evaluates the strategies that these respondents adopt in a situation when having a ‘consultative’ dialogue with the investors’.
3.2.3 Research Framework
For the purpose of secondary data assessment, the ‘private wealth management’ concepts, the rise of these services within the financial world, the private market segmentation, and other related theories such as behavioural finance, investor behaviour and psychology, tax management, philanthropy, and estate planning will be studied in the precedent literature.
The primary data will be gathered by emailing the survey comprising of questions in order to understand the strategies adopted by practising and experienced wealth managers with their clients’ for the purpose of qualitative analysis. The design of the study was guided by two basic considerations.
First, it was critical to gain access to the individual experience of practising wealth managers as they negotiated and consulted with the investors’ to find out what their strategies and opinions about wealthy investors’. And secondly, the usefulness of the study would be determined by how well it captured the voice of the target audience.
3.3 Sampling Technique
‘‘Sampling techniques provides a range of methods that enables you to reduce the amount of data you need to collect by considering data only from a subgroup rather than all possible cases or elements’’(Saunders et al., 2007, p.204). They pointed out that there are two main techniques of sampling – probability or representative and non-probability or judgemental sampling.
3.3.1 Probability sampling can be defined as ‘‘a representative sample of any population should be so drawn that every member of that population has a specified non-zero probability of being included in the sample.
Usually this means that every member of the population has a statistically equal chance of being selected’’ (Oppenheim, 2004, p.39). The best way of ensuring this is by means of a completely random sampling method. There are many techniques under random sampling, such as simple random sampling, stratified and cluster sampling.
3.3.2 Non-probability sampling (or non-random sampling) provides ‘‘a range of alternative techniques to select samples based on your subjective judgement’’ (Saunders et al., 2007, p.226). In the exploratory stages of some research projects such as pilot surveys, a non-probability sample may be the most practical, although it will not allow the extent of the problem to be determined.
To answer your research questions and to meet your objectives you may need to undertake an in-depth study that focuses on a small perhaps one case, selected for a particular purpose. This sample would provide you with an information-rich case study in which you explore your research objectives. There are many techniques under non-probability sampling which are illustrated below:
Quota sampling divides the relevant population up into categories (perhaps male/female, or country of origin for students) and then selection continues until a sample of specific size is achieved within each category. Quota sampling is entirely non-random and is normally used for interview surveys. It is based on the premise that your sample will represent the population as the variability in your sample for various quota variables is the same as that in the population (Saunders et al., 2007 p.227).
Quota sampling involves giving interviewers quotas of different types of people to question. For instance, 25 men under the age of 21; 30 women over 50, etc. it is widely used in marketing research. Convenience sampling (or haphazard sampling) – This method of sampling involves selecting sample units on the basis of how easily accessible they are, hence the term convenience sampling (Easterby-Smith, 2008, p.217).
A student who uses an MSN Messenger contact list for his or her dissertation uses convenience sampling technique. Such sample may well be representative of the individual’s social network, but is clearly not representative of students as whole or of the population of the UK. Convenience or haphazard involves selecting haphazardly those cases that are easiest to obtain for your sample, such as the person interviewed at random in a shopping centre for a television programme (Saunders et al., 2007, p.234).
Purposive sampling enables the researcher to use his judgement to select cases that will best enable you to answer your research question(s) and to meet your objectives. In this method, the researcher has a clear idea of what sample units are needed, and then approaches potential sample members to check whether they meet eligibility criteria. ‘‘Snowball sampling or networking is associated with phenomenological studies where it is essential to include people with experience of the phenomena being studied in the sample. In this way you could extend your sample of participants.
By asking do you know anybody with the same experience and can you put me in touch with them’’ (Collins, 2003, p.158). Snowball sampling starts with someone who meets the criteria for inclusion in a study who is then asked to name others who would also be eligible. This method works well for samples where individuals are very rare and it is hard to identify who belongs to the population.
Dissertation students often do this by starting out with people they or their supervisor know personally, and then ask those people to pass them onto others who would also be suitable. It works well too for individuals, groups or companies which are part of networks whose membership is confidential (Easterby-Smith, 2008, p.218).
The researcher decided to use the non-probability (or non-random) sampling technique in this research and utilised the snowball sampling technique for the purpose of primary research.
3.3.3 Selection of The Sample
I originally planned to identify practising wealth managers by contacting them and undertaking face-to-face interviews by visiting them personally. When I did not get any immediate response to my effort, my tutor suggested me to contact the people to whom I know or must have known them in the past.
My first thought was my previous university friends as I knew I will get hold of a substantial number who would be working as professionals into my desired area of research. Furthermore, as some of us aimed in getting into private banking or private wealth management profession after graduation.
I decided to draw upon this group to select the sample for my study. However, the time available to them was very limited, as one of the interviewee was a frequent traveller; in the given circumstances, I felt it was best to send out emails to my sample size.
I specifically chose those individuals who practice private wealth management directly. After initiating contact with whom I could recall; in all there were five members who showed their expression of interest in my study.
I had to chuck two out as although they were related to the finance industry and were linked in some way but I thought it won’t be ideal in order to justify with the objective and the motive I had to undertake this study. I decided not to include them in my sample size. The other three met my primary criteria and I looked up to them as all three of them are working for globally renowned finance organisations and was also academically strong in terms of qualifications.
3.4 Sources of Data
3.4.1 Secondary data
Secondary data is data which already exists, such as books; documents (for example, published statistics, annual reports and accounts of companies, and internal records kept by organisations such as personnel records) and films (Collins, 2003, p.161). ‘‘A secondary source is an article that refers to the primary source’’ (Glathorn and Joyner, 1998, p.36).
In this research the secondary data has been used in order to form the literature and construct the theoretical base for the research framework. The secondary data has also been used to interpret and elaborate on the theories of wealth management with emphasis on defining the term, and the rise of wealth management services with a modest attempt to concentrate on India and in general.
The theory also highlights concepts such as behavioural finance, investment psychology and private market segmentation for this industry. The preceding literature includes the secondary data in the project and this was needed to understand the key dimensions of private wealth management such as tax management and portfolio management, estate planning and philanthropy. This data will then be obtained using:
Academic Books and Journals:
Books written by authors and practitioners on the related subject;
Journal of Wealth Management, Private Portfolio Management, Financial Analysts and Investing. These journals were accessed mainly online through the University database namely ‘Athens’
Articles and Online Market Data:
Articles on daily newspapers and electronic resources from websites such as Business Today, Business World, Value Research, Datamonitor, Money Control, and Financial Times.
3.4.2 Primary data
Original data is known as primary data, which is data collected at source (Collins, 2003, p. 160). Examples include survey data, which is obtained by asking questions or making observations, and experimental data. ‘‘This type of data must be gathered by observing phenomena or surveying respondents.’’ (Saunders et al., 2007, p.231).
The researcher gathered primary data from a questionnaire. This was done in order to understand why wealthy clients use advisory and consultancy services from professionals and also in order to get an in-depth understanding on what factors drive their (investors’) attitudes, preferences and expectations. T
his was gathered in the preliminary stage of this research process and was done taking into consideration the qualitative stance. By considering the qualitative approach, it helped the researcher to get more familiar with the overall rationale of the study.
3.5 Questionnaire (Survey) Design
Questionnaires are a popular method for collecting data. A questionnaire survey is cheaper and less time-consuming than conducting personal interviews. ‘‘A questionnaire is a list of carefully structured questions, chosen after considerable testing, with a view to eliciting reliable responses from a chosen sample’’ (Collins, 2003, p. 173). The aim is to find out what a selected group of participants do, think or feel.
In accordance with the research objectives and sample size, a structured questionnaire has been developed with questions based on wealthy investors’ attitude, expectations when making investment-related decisions and the strategies adopted by practising wealth managers.
‘‘Questionnaires are based on a predetermined and standardised set of questions’’ (Saunders et al. 2007). The structure of the questionnaire was designed that comprised of mainly open-ended questions.
Questionnaires can take many forms especially when psychological aspects are being measured. Well it is beyond the scope of this chapter to review every type of questionnaire accordingly, you should ask yourself ‘am I measuring – knowledge, attitude, priorities, opinions, feelings, perceptions, expectations, etc, (Remenyi et al., 2004, p.75). The mode of communication adopted was by emailing the survey that comprised of questions.
3.5.1 Advantages and Disadvantages of closed-ended questions
Broadly speaking, most questions are open and closed. Closed-ended are those questions where the respondent’s answer is selected from a number of pre-determined alternatives (Collins, 2003, p.179). A closed question is one in which the respondents are offered a choice of alternative replies. They may be asked to tick or underline their chosen answer(s) in a written questionnaire, or the alternatives may be read aloud or shown to them on a prompt card or slide (Oppenheim, 2004, p.112).
There are several advantages of closed-ended questions. One is that the set of alternative answers is uniform and therefore facilitates comparisons among respondents (Rea and Parker, 1997, p.32). For the purpose of data entry, this uniformity permits the direct transferral data from the questionnaire to the computer without intermediate stages.
Another advantage is that the fixed list of response possibilities tends to make the questions clearer to the respondent. A respondent who may otherwise be uncertain about the question can be enlightened as to its intent by answer categories. Furthermore, it will remind the respondent of other alternatives, which would have been forgotten or unconsidered.
The other advantages of closed-ended questions sited by (Oppenheim, 2004, p.115) are that it requires little time, makes group comparisons easy and useful for testing specific hypotheses.
Here is an e.g. of a closed-ended question:
How much education do you have?
Some high school or less
High school graduate
Some college
Four-year college graduate
Postgraduate degree
If instead, the question were open-ended, as shown below, the responses might not be quite so specific.
How much education do you have?
There are however, some disadvantages to closed-ended questions that researchers should consider when developing a questionnaire. For example, there is always a possibility that the respondent is unsure of the best answer and may select one of the fixed responses randomly rather than in a thoughtful fashion (Rea and Parker, 1997, p.34).
The advantage of ease of response, therefore, comes with some potential negative consequences. In a similar vein, a respondent who misunderstands the question may randomly select a response or select an erroneous response.
The other disadvantages of closed-ended questions are loss of spontaneous responses, bias in answer categories that may irritate respondents. (Oppenheim, 2004, p.115)
3.5.2 Advantages and Disadvantages of open-ended questions
‘‘Open-ended questions are questions where each respondent gives a personal response or opinion in his or her own words’’ (Collins, 2003, p.179). Open or free-response question are not followed by any kind of choice, and the answers have to be recorded in full.
In the case of a written questionnaire, the amount of space or the number of lines provided for the answer will partly determine the length and fullness of the responses we obtain (Oppenheim, 2004, p.112).
The chief advantages of open-ended questions are that it gives freedom to the respondent and the spontaneity of answers can be useful for the researcher or the interviewer to test hypotheses about ideas or awareness. The disadvantages are that it is time consuming and demands more effort from respondents (Oppenheim, 2004, p.112 and 115).
Questionnaire Response Formats
Multi-choice answers and opinions are those where the participant is asked a closed-ended question and selects his or her answer from a list of pre-determined responses or categories (Collins, 2003, p.181). Sometimes, a question is phrased so that the respondent is presented with a range of opinions and has to select the one which most resembles their own by marking (X) against his or her answer.
Using rating scales – One way of collecting data is by giving participants a list of statements and asking them to ring the responses they prefer (Cottrell, 2003, p.205). Alternatively, you can also ask participants to rate responses on a scale such as the Likert-type scale. It is often possible to provide participants with some form of rating scale. This allows a numerical value to be given to an opinion. One of the most frequently used types of scale is Likert scale. This turns the question into a statement and asks the respondent to indicate their level of agreement with the statement by ticking a box or circling a response (Collins, 2003, p.184). Another approach is to ask the respondents to rank a list of items in a chronological order. The problem is that in this case the respondent may get irritated with this format and the answers could be ambiguous. That is why; the researcher chose to keep this kind of format to minimum.
3.5.4 Pilot Testing
Piloting involves testing the questions that are included in the survey on a set of individuals in order to ensure that the questions are understandable. Piloting is notably useful in clarifying the effectiveness and relevance of questions in a questionnaire. ‘‘It is always worth piloting a research project if time allows, but consideration must be given to the effort-reward relationship involved’’ (Riley et al., 2000 p.43).
According to them, a pilot study is a simple way of testing whether the articulation of the method(s) selected for use in a research programme is adequate to meet research objectives.
For preliminary investigations and for some parts of the pilot work, researchers sometimes draw a judgemental sample (Oppenheim, 2004, p.43). For this purpose the researcher pre-tested the questions on his friends, colleagues and his line manager at work in order to get feedback from them prior to conducting the actual survey.
There were certain issues while pilot testing the questionnaire such as the questions were phrased grammatically correct, easily understood and they were in a structure.
When being tested, there were certain alterations done such as Question number 6 did not have the option of ‘other’. Also, in order to get a descriptive and elaborative response from the sample size I decided to write ‘please comment’ next to the questions.
3.6 Tools for Data Collection
The research tools were developed around two basic unconditional positive questions, namely, what are the needs, attitudes, preferences and expectations of a wealthy investor who seeks wealth management services’ and what are the strategies adopted by practicing wealth managers while having a consultative ‘dialogue’ with their investors’.
Specific tools included a protocol for conduct of the survey that included questions to analyse the data qualitatively (see appendix B). Beyond that, the practising wealth managers were free to identify any pitfalls in my questionnaire (if any) that they felt were relevant in the context of the discussion with them via initiating contacts with them via emails and telephone and how they engage into a consultative ‘dialogue’ with their investors’.
Since, the respondents were assured of not disclosing their identity; hence I decided not to canvass a personal data form. This protocol of keeping the identity as anonymous was also done in order to reduce reluctance on the part of the respondents to answer certain questions.
3.7 Method: Data Collection and Analysis
The research is based on the study of exploring wealthy investors’ attitudes, preferences and expectations while making investment-related decisions and the strategies adopted to understand this by a group of chosen professionals who are practising private wealth management. In order to analyse this, the author has undertaken both primary and secondary data in order to research the above. The main primary data was collected using a combination of:
Surveys
Data are collected, usually either by interview or by questionnaire, on a constellation of variables (Bryman, 2000, p. 29). ‘‘Surveys are administered to assess opinions, perceptions and attitudes’’ (Glathorn and Joyner, 1998, p.45). The objective then is to examine patterns of relationship between the variables.
Surveys can be a good ways of collecting data about the opinions and behaviour of large numbers of people, as long as they are done well. There is no single best way as the choice depends on many factors. Advances in communications technology have brought a variety of new options within the scope of researcher in business and management.
In-depth interviews
There are two types’ exploratory and standardized interviews. Under exploratory, you have depth interviews or free-style interviews and under standardized e.g. public opinion polls, market research and government surveys (Oppenheim, 2004, p.65). The importance of in depth interview is summarised by Burgess: ‘(the interview) is….‘the opportunity for the researcher to probe deeply to uncover new clues, open up new dimensions of a problem and to secure vivid, accurate inclusive accounts that are based on personal experience’ (1982: 107).
‘‘Interviews are conducted with individuals or groups to ascertain their perceptions’’ (Glathorn and Joyner, 1998, p.44). The main aim of qualitative interviewing is generally seen as attempting to gain an understanding from the respondent’s perspective which includes not only what their viewpoint is but also why they have this particular viewpoint (King, 2004).
As Kvale (1996) notes the aim of qualitative interviews should be to collect information, which captures the meaning and interpretation of phenomenon in relation to the interviewee’s worldview. Hence, researchers must be able to conduct interviews so that the opportunity is present for these insights to be gained.
In order to be able to achieve these insights the researcher will need to be sensitive enough and skilled enough, to ensure that he or she not only understands the other person’s views, but also at times, assists individuals to explore their own beliefs (Easterby-Smith et. al, 2008, p.144).
Originally, I planned to undertake face-to-face personal interviews with all three respondents. However, time and geographical constraints did not permit me to follow this uniformly. Hence, (after consulting with the tutor) I decided to email the questionnaire to the respondents.
Thus, the three primary data sources from whom the data was collected are identified as Interview 1, Interview 2, and Interview 3. All discussions and their answers were email recorded and their transcripts were used as basic data points for analysis. Each answer to the question was then systematically analysed to identify the essence of the message by the respondent. The key insights and the expertise shared by the respondents were reported ‘verbatim’ in the document.
3.8 Ethical Considerations
There were three main ethical considerations that guided the plan and the conduct of this study. The first was that the respondents were confident and powered enough to share their opinions and expectations about wealthy individuals’ attitudes and preferences at the time of investing their wealth.
I addressed this by ensuring that the contributors are well-informed behind the motive of the study and a clear and a brief introduction was given about the reputation of the researcher’s school. Also, the researcher wanted the respondents to seek permission from their line mangers before participating into the survey. This effort was taken so that the respondents can share their views, strategies and knowledge comfortably and by giving them the space they need.
The second concern was to seek voluntary participation in the study. I did not want them to feel that they are being pushed because of social reasons. Hence, it was made clear that all the data sets will be kept confidential and hence there were many adjustments done in collecting and analysing the data while respecting the time available to them.
Finally, the researcher wanted to maintain a transparent understanding between him and the respondents, hence all transcripts was shared with the respondents to get their confirmations that they reflected their views accurately.
Before participating in the study, respondents were assured of the confidentiality of their identities and no personal details that could identify a specific individual were disclosed. This protocol was maintained wherever the need or the discussion took place.
The next chapter will first present the data collected from practising wealth managers and subsequently an analysis has been conducted by the researcher as the data relates to the research questions.
Chapter 4
Data Analysis and Research Findings
4.1 Introduction
This chapter presents the key insights that emerged from the exploration of practising wealth managers’ perspectives and their strategies they adopt in the context of private wealth management business. It primarily focuses on the analysis of data collected from the feedbacks and opinions of the respondents and the findings of the research.
There are many ways in which data can be analysed. What is central, is how well the data is put together to make sense of it. One of the most common issues that qualitative researchers face is how to condense highly complex and context-bound information into a format that tells a story in a way that is fully convincing to others.
It requires both a clear explanation of how the analysis was undertaken and how the conclusions were reached, as well as demonstration of how raw data was transferred into meaningful conclusions. ‘‘Most of the time this does not mean all the data collected has to be displayed, but at least a sample of the data is needed for illustration so that the same logic path can be followed and an independent view drawn.’’ (Easterby-Smith et. al, 2008, p.172)
Basis for collecting primary data was a self-administered questionnaire to three chosen professionals working in the finance industry who are practising as wealth managers/ advisors.
‘‘In a self-administered questionnaire, the purpose of enquiry is explained, and then the respondent is left alone to complete the questionnaire, which will be picked up later’’ (Oppenheim, 2004, p.103).
Information was collected from the selected sampling technique (non probability – snowball sampling technique) and the research was conducted by circulating the survey via email. Analysis is based on the research questions and main objective of the study as outlined in chapter 1.
Analysis and Findings
The research analysis has been divided into four parts. It begins with a brief look on the demographic profile of the respondents who participated in the survey for the purpose of my study. This provides some background information about the three respondents that aided the researcher in obtaining rich data which contextualised the research framework.
Thereafter, it explores some of the factors that influence the attitudes, preferences and expectations of wealthy investors’ relating to investment-decision making. The third part first illustrates and then analyses some of the strategies adopted by the respondents who are actual wealth managers when having a ‘consultative dialogue’ with their clients’. And the chapter is concluded by displaying the key findings after conducting the research.
Part 1: Summary of the Demographic Characteristics of three managers
In this section a summary of the demographic characteristics of the respondents will be analysed. The data of demographics has been gathered partly at the time of initiating contacts with the participants and partly through personal contacts in the past.
‘‘The departure point for the analysis is the provision of a profile of the sample that forms the basis for subsequent deeper analysis and generalisations and this needs to be explicitly stated.’’ (Remenyi et al., 2005, p.257)
The study of demographic profile was essential as the attempt was to gather ‘trustworthy’ data and responses. Several relevant demographic characteristics about the managers are presented in table 1.
Note: * Participant 3 was responsible for his role as a wealth manager but currently; he is an asset manager within the same firm
* The information on the number of portfolios being handled by the managers is correct at the time of conducting the survey
It can be observed that all three participants are private wealth managers working in the finance sector, thereby representing a strong target audience for the researcher to gather primary research. It must be noted that the participants did not wanted their company names to be disclosed for the purpose of confidentiality.
Having access to these managers facilitated the researcher to obtain rich data in order to analyse of what happens practically on the actual shop floor. Although, there were no observations been conducted but the researcher attempts to record the data verbatim and then analyse the same data by matching it with literature and his understanding in part 2 and 3 under this chapter.
Part 2: Investment Attitudes and Preferences of Rich Indians
1. The main objective of the research is to explore the investment attitudes, preferences, and expectations of wealthy individuals and families. This section attempts to explore ‘‘what are the current needs and preferences of the rich class in India and in general.’’
The participants were asked to answer this question chronologically by picking their options. Ranking technique was used to determine the importance of each factor that influences a wealthy investors’ behaviour. The responses have been documented ‘verbatim’ as illustrated in chapter 3 under section 3.7
Researcher’s view: Respondent 1 and 2 considered that investors’ prefer to have ‘investments offshore’ to be the most important factor when it comes to assessing their needs. This could be in the form of real estate planning by investing into the property market. This commensurate with what was reviewed in the literature above under section 2.1, p.14.
On the other hand, Respondent 3 considered this factor to be secondary and emphasised more on ‘high requirements for privacy’ to be the topmost priority of rich people in India. It was interesting to find out that all three Respondents considered ‘tax plans’ to be less important as compared with the other two factors (see appendix B).
The reason for this could be primarily because having a clear-cut plan on income-tax return is coming off age especially in the Indian market unlike in mature markets such as the UK and the US.
2. The next question was again administered to know the investor attitudes and preferences. ‘‘According to you, what could be the reasons that make affluent investors’ switch advisors?’’
Exhibit 2: Summary of Respondents main ranking on investor preferences
Researcher’s view: From the above responses, it is quite evident that poor portfolio performance seems to be the obvious reason for investors’ to switch advisors. An investment portfolio consists of all kinds of investments made by an investor. Expressing this, one manager said,
‘‘Poor returns seems to be the obvious choice, however, from my perspective, most of the HNW clients have big pockets and are more sensitive to personal relationships and the ethics factor of FA’s (financial advisors), so I’d go with both.’’
(Interview 3)
‘‘Clients often expect us to alert them in advance about the market downturns to take the necessary remedies in order to rebalance the portfolio(s) and adjust the asset allocation. As no client wants to lose money, in my opinion, poor portfolio performance seems to be the top reason why clients switch advisors.’’
(Interview 1)
Researcher’s view: Moreover, what he meant was part of the duties involved on part of the wealth manager is to give periodic reviews of the statement of accounts which clearly displays the progress on the client’s portfolio. The importance of rebalancing a client’s portfolio cannot be stressed more. This again commensurate with what was reviewed in the literature which was cited by Jeffrey Horvitz and Seth Masters under section 2.4.1 above on p.22
3. The researcher’s next question to the participants was also on the similar lines which attempted to understand the expectations of investors having more than $1 million in investible assets.
‘‘What is the primary objective of investors with > $1M in investible assets?’’
In addition to the above response, Interview 3 also added that ‘‘their objectives depends on the age (close to or away from retirement), profile, risk appetite, investment knowledge, life events and number of beneficiaries.’’
Note: Interview 3 opted for more than one choice while answering the question related to investors’ expectations.
Researcher’s view: HNW clients’ primary investment mandate is to always build their wealth. The expectations and attitudes of investors’ vary from person to person. The researcher agrees with the third response he received where the actions and expectations of affluent investors’ significantly depends on the risk appetite and the circumstances of the individual investor.
This was visible in his responses as he gave two answers. It could be viewed as being hypothetical but it could also be the need of the hour since the financial markets worldwide are undergoing crisis and are quite volatile at present. Thus, the need for bank customised services tailored to client requirements is needed in a holistic way.
Part 3: Summary of the Strategies Adopted by the Respondents with Investors’ at the time of Practice
One purpose of this study was to analyse and understand the strategies adopted by the respondents while practicing private wealth management. The researcher made an attempt to interview in-depth with the participants to analyse the strategies that they and their respective firms adopt while having a ‘consultative dialogue’ to acquire and retain wealthy investors’. For this purpose, I first asked about,
1. ‘‘Is there any specific approach or a strategy that you adopt while building a rapport or having a ‘consultative dialogue’ with your client.’’
Generally, every investor has different needs, wants and expectations. As is evident from the quotes below by one of the manager:
‘‘Right now in the wake of a terrible credit crisis, growth slowdown and falling stock markets, the only strategy I can adopt is to give them ‘hope’, I give my clients’ hope of a better performance in the coming years if not months and also tell them that as the markets have bottomed out this is the right time to invest your wealth.’’
(Interview 1)
Researcher’s view: In order to analyse the contents and the view of this manager (participant) further, the Indian financial market witnessed a tremendous jump in stock markets and in other areas such as gold, rise in land appreciation, rise in house prices, etc. especially from the second half of 2005 until the end of 2007, where every investor was more of a buyer rather than a seller.
Investors’ use to invest and sit back not worrying about their investments and aimed at building their invested wealth as the markets were more than supportive towards their investments. But from the beginning of this year, ‘‘the Indian stock market has fallen more than 40% in six months from its January 2008 high’’ (economywatch.com, 2008).
There were perceptions that the market was over-valued. But a growing number of investors are optimistic and hopeful about the long-term health of the Indian economy like our participant in the above quote. He added further by stating that:
‘‘Yes; one should always keep the clients’ requirements and circumstances in mind; a thirty- year old investor would be more aggressive in nature and takes higher risks and wants higher returns while a sixty-year old would be more conservative in contrast and would take fewer risks and expect steady returns.’’ (Interview 1)
This manager (participant 1) also cited a real example which can be related to his quote above where he said that Indian investors are more inclined towards systematic investment plans and more of debt in their portfolio than an equity whereas, non-resident Indians (NRIs) although they go for India specific products as they want to invest back in the country but they in contrast, go for diversified investment portfolio like real estate and commodity funds.
In order to analyse the approaches and strategies a wealth manager can have with its client is reflected below with what this manager had to say:
‘‘Assurance is the key, once the client has faith in your ethical and technical capabilities; the job is done. He further added that by saying that have a consultative relationship with the client, understand his needs, find out how much he is willing to invest and then draw a plan of high growth opportunities taking into consideration his risk appetite.’’
(Interview 2)
This manager commented to the point by saying that ‘‘remember we not just manage but also plan their life events such as fiduciary, generational planning, tax savings, etc.’’
(Interview 3)
Researcher’s view: Private wealth management has largely managed to escape the credit crunch related problems and have dodged other banking areas and has continued to see steady signs of growth. Thus, once the client trusts your capabilities he can confidently invest his or her wealth. It is noted from the responses that the researcher received from Interview 3 that he emphasised a lot on tax savings here as well as in Part 2 where he ranked tax savings to be of utmost priority when it comes to assessing the preferences and the needs of wealthy investors’. Thus, the importance of tax management in managing an individuals’ wealth cannot be stressed more and thus was included in the Literature Review.
The following response can be linked to the theme of understanding the strategies that managers’ employ when having a ‘consultative dialogue’ with their clients’. This manager went on to say the following which I thought was worth mentioning:
‘‘As a wealth manager I ensure I am always in touch with the clients’ and offer them latest developments in products and communicate latest market developments to them. I am always accessible and give clients’ clarity about their investment portfolio. We also have a policy of having an investment analyst who accompanies me to any client conversation to record facts and figures and underplay expectations to deliver greater returns. In addition to this, we also tell the clients’ what kind of risk is he taking and what damage can happen at the worst case scenario.’’
(Interview 1)
2. I then started analysing about the ways and techniques in which a wealth manager practices. Some believe in adding clients and increase the volume of portfolios; some prefer slow and steady growth of their services, while some only concentrate on the niche elite. When asked ‘‘which one statement applies to you and your firm.’’ It was sparkling for the researcher to know that all three participants gave three different responses. Some managers’ like Participant 1 focuses on steady growth by managing clients carefully, Participant 2 prefers aggressive growth while some like Participant 3 on the other hand like to target only the elite rich class as specified below verbatim:
One manager said that, ‘‘our team handles fewer clients’ the high-net-worth and ultra high-net-worth individuals (mega-wealthy) as we handle fewer portfolios. That really sets things for us as these kinds of investors’ are more inclined towards status quo and invest in classic cars, expensive gifts like antiques, arts and paintings.’’
(Interview 3)
3. The next question to the participants was aimed more towards my professional development.‘‘I guess client-engagement skills is the most important attribute as it would lead having little bit of all others skills involved such as having good communication and presentation skills and sound analytical and decision-making skills.’’. He further added by saying that ‘‘by having good relations with your existing clients’ would also lead to networking through the client to grow your base.’’
(Interview 1)
There was a common response received on this front, ‘‘two of the critical attributes for a wealth manager are client-engagement skills and technical skills. We examine every aspect of our clients’ events and accordingly match our financial instruments and planning tools that occur and will occur. We build, develop and then maintain broad and deep relationships with all our clients’ in order to manage their financial life as much as possible. Thus, understanding the client and his needs are of utmost importance in my opinion’’ quoted participant 3.
(Interview 3)
The researcher now attempts to summarise all of the research findings according to the research objectives below in part 4 in this chapter.
Part 4: Key survey messages: A summary of Top FindingsThis study’s findings were based upon the data provided by three involved participants and were only drawn in their specific contexts. A number of themes have emerged from the survey findings. From the key points that emerged from the above evidence, it can be concluded that there were seven. These topics indicate where participants are focusing their attention and are responding to the industry changes that are underway. These are specified as follows:
Considering the current situation of the financial markets worldwide, it is advisable to have a diversified portfolio by spreading the allocation of the investments. As they say, ‘Never put all your eggs in one basket.’
Primary investor focus is more towards sustaining and preserving wealth rather than building wealth. Private investors’ have become more demanding than before in a more professional and a wealth preservation manner. HNWI clients’ are striving more towards portfolio balance. Investors’ are willing to hire advisors but are investing in a more risk adverse manner and have gone beyond ‘plain-vanilla’ investment ideas. It was found that although high-net-worth individuals and families do contact wealth managers and take their services but look at them with a critical eye. This was again found in the secondary data under the section headed under ‘trusted advisor’.
Wealth managers think having a wealth management platform such as integrated desktop (all-in-one platform) is critical to firm revenue growth. This further helps them in better client reporting.
The factors that attract and retain top wealth managers’ are displayed in table 5:
Table 5: Summary of Participant’s Responses on attracting and retaining wealth managers’
|
Rank |
Previous Research Findings |
Interview 1 |
Interview 2 |
Interview 3 |
|
1 |
Company reputation |
Company reputation |
Compensation |
Compensation |
|
2 |
Access to leads |
Platform resolution |
Platform resolution |
Company reputation |
|
3 |
Compensation |
Compensation |
Company reputation |
Platform resolution |
|
4 |
Platform resolution |
Access to leads |
Training |
Access to leads |
|
5 |
Training |
Training |
Access to leads |
Training |
Overall, from the above responses, it was quite evident that ‘compensation’ was seen as the top reason that attracted and retained private wealth managers. They also felt the need of possessing a platform resolution which mainly meant that there was a strong urge on having an ‘integrated advisor desktop’ by which they can easily do client reporting on a more regular basis and serve the clients’ demands in a more strategic and a holistic manner.
Private wealth managers felt that they can easily target wealthy individuals’ and families, thus getting access to leads were not that much of a concern in the business. Going back to the response of platform resolution, Participant 2 specifically stated that: ‘‘In India, we face the lack of a proper reporting/ feedback system, there should be a web-based application like a ‘one-stop shop’ or something similar to that. This can be effectively used by us not just to increase our profits but also to serve our clients in a more professional and holistic way.’’
(Interview 2)
Platform resolution means having an ‘integrated desktop’ which can facilitate a wealth manager or an advisor at the time of advising their clients’. The wealth manager doesn’t need to refer too many applications instead can have one computer screen that attempts to answer the clients’ needs. This would lead to a more satisfied client in terms of the service he receives from the wealth manager. Thus a process improvement inclusive of desktop resolution is the key.
It was found that out of the three participants, two of them disagreed and one had a neutral opinion on hedge fund providers and multifamily office specialists as a competitor to private wealth managers. As one wealth manager remarked when asked:
‘‘Hedge funds usually are very risky and do not diversify investments of clients, they are very different from wealth management.’’
(Interview 1)
Wealth managers do feel that there is a talent shortage in the business of wealth management.
Summary
In this chapter, the collected data from questionnaires were presented to answer the research questions. This chapter has made a modest attempt to study the demographics of the respondents who participated in the survey. This was followed by the factors that influence the attitudes, expectations and preferences of wealthy investors’.
The third part shared the strategies adopted by practising wealth mangers when consulting with investors’ and the last part in the chapter highlighted some key research findings that were derived from the results of the data collected by conducting primary research.
Some of the practices and solutions can be explored in order to turn the above mentioned challenges into opportunities to gain competitive advantage.
Chapter 5
Conclusion
5.1 Introduction
The objective of the research project was to explore a wealthy investor’s attitudes, preferences and expectations related to investment decision-making; and the analysis of the strategies adopted by professional wealth managers when having a ‘consultative dialogue’ with their client.
This chapter summarises the entire study. The limitations of the study are illustrated and the recommendations for future practical work for the researcher himself, private wealth managers and other finance professionals are highlighted. And, lastly how this study has moulded and groomed the researcher both personally and professionally has been acknowledged.
After the analysis of the data in Chapter 4, the conclusions to the analysed data will be made in this chapter to assess if the objectives of this dissertation have been met or not.
5.2 Objective (a) Explore a wealthy investor’s attitudes, preferences and expectations relating to investment decision-making
The research from behavioural finance, risk-return dialogue between the manger and its client and investor psychology has enabled the researcher to understand the role it plays on investor attitudes and perceptions. Theoretically, even if a particular fund or a security is performing well but investors’ are still inclined in investing their wealth in securities that they are emotionally attached with.
This was further explored by the researcher when he found that wealthy investors’ prefer investing their wealth offshore by parking savings into real estate markets and by purchasing expensive antiques and gifts. It was also learned that investors’ laid strong emphasis on privacy.
From the findings, it was clearly observed and concluded that poor portfolio returns led investors’ switch advisors. Although, a spare of thought needs to be considered on how the financial markets are performing overall. Other factors such as recommendation from a friend or a family member, low fees from other financial institutions and conflict in personality with the advisor also had a strong influence on investor attitudes and perceptions.
Objective (b) Analysis of the strategies adopted by professional wealth managers when engaging into a ‘consultative dialogue’ with their clientThe data drawn through phenomenological exploration with practising wealth managers reflected their views and strategies about private wealth management. It was observed that in order to have a satisfied and a positive client it was important to understand the client very well. It was also imperative to know the client’s circumstances, his risk tolerance level – whether he is an aggressive, moderate or conservative kind of an investor and then accordingly craft an investment strategy for him or her.
The findings demonstrated that although there is a demand of private wealth management services especially in the Indian market but due to the current credit crisis, it will be safe to advice clients’ to have a ‘diversified portfolio’.
Nevertheless, the client is the final decision maker and how much risk he is willing to take is at his own discretion. The concept of ‘diversified portfolio’ shares a common ground both in terms of what was noted in chapter 2 and what was found in chapter 4 from the interviews.
It was also discovered that one way of increasing your client base is by maintaining cordial relations with your existing client as this would lead to networking with the other affluent individuals’ and families.
The research from secondary data on private market segmentation for wealthy investors’ would help wealth management companies and other specialists in the same field to design a business plan and accordingly devise a strategy to cater to the clients in each of the four tiers. In addition to client-engagement and technical skills, the knowledge on academic concepts and theories such as tax management, the importance of ‘rebalancing’ clients’ investment portfolio, strategic asset allocation and philanthropy would be an added advantage to make a wealth manager successful.
5.3 Limitations of The Study
There were two main limitations encountered in this study that had a direct impact on its results. Firstly, the scope of the study was restricted by the short time available. Over a period of three months I needed to understand the structure and the scope of private wealth management business, develop the research design, identify the sample and complete the project.
Therefore, the study was designed with the modest aim of exploring investment attitudes and strategies adopted by wealth managers when they engage into a discussion with their clients. Also, because of the time and geographical factors, the researcher could not conduct the research in a desired manner as he wanted to conduct face-to-face interviews by meeting the managers personally. Thus, he arrived at a decision of communicating with them via emails by sending the questionnaires in MS Word document.
Secondly, although the researcher did manage to gather primary data in the form of views and opinions he received from the three managers but on the balance I feel it will be useful to conduct a research on the same domain perhaps, with a much larger sample size.
This will not only expand the range of perspectives, opinions and feedbacks from the respondents but will also make it possible to carry out a more detailed, textured and perhaps a comparative analysis, thereby enhancing the richness of the data even more. In addition to this, there were few questions which were omitted eventually as the respondents chose not to answer them and were sent back blank to the researcher.
Notwithstanding the above limitations, all the other main research questions were answered, the research findings were presented and then analysed, and, to some extent, the findings revealed the authenticity of the study.
Moreover, the discussions were not exhaustive as they were driven by the time available rather than a natural closure of the subject. Thus, the phenomenological framework of research did generate some useful perspectives and successfully highlighted the wealth managers’ voice in the discussion.
5.4 Recommendations on Practical Work and Further Research
The findings from both primary and secondary data display the importance of tax management and its benefits in having tax savings, the role of rebalancing client portfolios and the importance of having a diversified investment strategy are well clarified in this study. This will be useful and are expected to benefit not just wealth managers or financial advisors but also others finance and investment professionals.
This is because the concept of behavioural finance and investor psychology was well specified in the study and the role it plays in choosing an appropriate security in investing one’s wealth. Thus, considering the factors that impact investment attitudes and preferences of wealthy investors’ and the strategies needed in tackling the demands of these wealthy clients suggests research projects for other researchers and wealth managers in their practical professional contexts. Thus, the implications of the above academic theories in this research may be useful to the management and business community. (Remenyi et. al., 2005, p.257)
The findings of the research might not be surprising to the participants in the study but they are sparkling to the researcher. One of the factors that the research findings demonstrated was the usefulness of possessing an ‘integrated one-stop advisory desktop’.
It was found from one of the participants the importance of having a platform resolution while managing client portfolios. It will be interesting to know if this really helps and benefits the wealth management companies in terms of increasing their profitability and revenues. As it was found out while conducting research that it will help wealth managers to improve their service standards and advise clients more comprehensively and holistically.
There was a mixed opinion found when asked if multifamily office and hedge fund providers possess a competition to wealth management. As, in the secondary data assessment it was found that they do pose a threat to wealth management business but the participants thought otherwise. Thus, a combination of the above two areas could generate interest for further research in the same field.
5.5 Personal and Professional Development
The entire research experience has made a significant contribution to my personal and professional development. Right from the outset of gathering secondary data for the purpose of my Literature Review to the research philosophies (paradigms) I learned and then eventually chose one for my research.
I also gained knowledge of how to gather primary data and then present and analyse it from a qualitative standpoint. Overall, I now look at solving problems with a creative flair and an assertive mind frame. These skills are essential for me to work in a complex and challenging environment of finance, in the division of private wealth management, especially when I’m dealing with very rich and demanding clients’.
I intend to follow and imbibe these skills and values when I start advising and managing high-net-worth wealthy investors’ once I start practising professionally on a full-time basis. Thus, the entire research process was a personal accomplishment as the researcher learned how to conduct market research and studied about various wealth management concepts and is also preparing to make it a profession. 16785 1483
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