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Children Of A Lesser God – Do HNIs Have A Regulator?

BloombergQuintOpinion

With due apologies to the 1986 drama, which had nothing to do with this topic.

Nirav Shah (name changed for obvious reasons) called the other day and asked what was going on with his investment in India REIT. According to him, Scheme- IV was doing very badly and he had only recently looked at the expenses vis-à-vis the performance. He was distraught.

He had invested a total sum of Rs 35 lakh, drawn down from May 2010 to January 2014. Till date, he has got back about 75 percent of his capital and dismal returns.

What is more stressful is, the amount of capital that they are yet to return, is about Rs 8.6 lakh and the fees charged up to March 31, 2018 is almost that much.

Children Of A Lesser God – Do HNIs Have A Regulator?

I had known him briefly during my professional assignment at a wealth management firm – his relationship was handed over to me. I got the call only because he still had my number. The Relationship Manager who had sold him the product was no longer part of the industry, phone number unavailable with anyone we commonly knew. Her manager was still with the firm but was evasive. The big boss of the business has moved on to another firm! The client was exasperated and I wished I could be of help.

I am staring at another statement shared by an ex-colleague in a similar real estate investment where the client had contributed Rs 1 crore at one go in June 2015 and till date, has received 85 percent of the amount invested.

The post-tax XIRR of his cash flows is below 5 percent.

This client had asked for a meeting to request the fund manager to waive off a portion of the fees, as a gesture. I learn that the fund manager, who talks in a particularly hushed voice, arrived late for the meeting to inform the client that nothing could be done. His reason – he would not have increased asset management fees if the fund did exceedingly well. Now, this is mezzanine debt so there is no question of superlative gains. What was forecasted is 18 percent in this case but never mind. This fund manager, with his hushed voice had told us during the launch of the product and I quote – “We have the builders in such a firm grip through various guarantees that it will not be too much to say that his wife and daughter are bound by his guarantees”. I remember how it felt being the only lady in the room with my male colleagues. Some of us didn’t recommend the product – It may be a coincidence but the same bunch of us didn’t get a raise that year.

A client, who works with three large distributors, requested me recently to calculate how much return he was making on a year-on-year basis. Don’t be surprised to hear that;

“Most HNIs don’t know what their returns are at a portfolio level”.   

It took a month of work, given the number of instruments he had. We calculated and as it turns out, he had made a CAGR of 3 percent in the last 5 years.

One can go on and on with examples of failed private equity funds, defaulting real estate projects, disastrous insurance policies. A standard approach in our country is to keep increasing the “minimum investment” in instruments to ensure that retail investors may not be duped. That is how Portfolio Management Services (PMS) minimum investments became Rs 25 lakh, AIFs: Rs 1 crore and so on.

This is almost a way of saying that if the client can invest such a large sum in one product, he is capable of understanding the risks himself. Not really. 

Here is a snapshot of SEBI’s page for people to study PMS returns. I have taken Reliance for an illustration, not to say they are good or bad. You can spend some time on the website if you like. MoneyLife Foundation has been after this ambiguity of reporting since 2013!

Children Of A Lesser God – Do HNIs Have A Regulator?

What they share, is their AUM, their size, unfortunately nothing there for you, about you – your returns.

The performance figures are at an entity level so you have no way of knowing how your scheme did at large.

We know that lovely investment booklets are made and model portfolio returns are shown by every PMS provider claiming tall orders of performance, hardly replicated in actual holdings. Do you know the difference between money weighted and time weighted returns? Ask your relationship manager, better still, ask his boss. I would be keen to know how that discussion went.

Ashok Jaitley (name changed), took an insurance policy at the request of his banker during the year end. His business has overdrafts with the bank and it seemed like a small request. Now that he was making a wealth register of sorts, to hand over to the next generation, he wanted to pull out all the records.

He handed over the policy document and told me that he had expected some level of decency from his banker. Here is what he got:

Children Of A Lesser God – Do HNIs Have A Regulator?
At the age of 53, he was sold a policy where he would have to keep paying premiums till he reached 100 years of age. 

He wasn’t angry to discover this. He was amused that he had acquired a new dependent, one he would have to support for as long as he lived. The “Manager” was ushered to meet us and he tried to sell another policy. We had to politely ask him to leave.

Now here is the thing –

I have done HNI wealth management for a very long time and I can say this with some authority that the business is about anything but wealth management.

It is well known, that it is actually a race to sell products. However, it is also not as simple as that. The trouble is multifaceted and it is difficult to point fingers at any one set of people.

There are broadly 3 problems:

1. The industry is relatively new

As a country, we are yet to have a common certification that everyone in the business of advising clients (incidentally or otherwise), needs to pass. The AMFI certification is needed to sell mutual funds, most find it way too simple. I am sure it has merit in being simple because mutual funds’ distribution must find much bigger reach.

However, most ‘private bankers’ pass only AMFI and go on to sell everything under the sun. India was administering the globally merited CFP under the Financial Planning Standards Board but the lesser said about the FPSB fiasco, the better it is. NISM has ‘Investment Advisor’ level I and II but they are not mandatory for anyone in wealth management firms.

2. Many Fund Managers do not report returns cogently and correctly

Does the regulator have enough qualified people at the moment to audit and bring in best practices? When mutual funds got rechristened, many AMCs have had a field play at merging poor performing schemes with better performing ones. How many of us understand ‘Survivorship Bias’?

The bulk of HNI products are done like private placements. There is no publicly available information to verify the performance of fund managers in the past or present. 

I know of people who have veritably failed a fund, closed it and then collected money in another AND have been endorsed by financial advisors.

3. Wealth management firms are conflicted in their model

Wealth management firms, which still form the biggest chunk of ‘advisors’ in India are conflicted in their model. Advisory regulations are underway and incomplete. The Regulators have done precious little in the past to encourage people who want to advise. The bulk of firms doing HNI wealth management are distributors who provide ‘advice’ which is incidental! Did you know that? If there were a Know Your Advisor (KYA), like a Know Your Client (KYC), it would really be very interesting.

“During the journey of Nifty from 1,500 in early 2000 to above 11,000 now, some people have just drifted, like driftwood, into these positions.”

Some are products of the pre – 2008 bull run, some were MIS managers in an allied business (like assets, insurance), some were doing retail banking, selling photocopiers, I kid you not – anything goes. Very rarely, you would find someone in these positions with a nail-dirtying, investment related background to show for. Most of them do not have a bona fide degree in Finance, some have never studied Economics. I have worked with a CEO who didn’t know that when a Mutual Fund says 30 percent dividend, it means 3 rupees on 10 rupees, the face value. Like Rushdie says – “If this thing wasn’t not funny at all, it would be quite funny”.

In spite of all the media attention to Mutual Funds, so much goes unnoticed in terms of not sticking to the original mandate etc.

“The regulator will need a much stronger, much larger, much more efficient team to get to even the tip of the iceberg in what happens in the world of HNI wealth management.” 

Just because the suffering investors are rich, the regulator is leaving them to fend for themselves when they (very obviously) cannot. Investors are hamstrung by lack of knowledge (both on theirs and their advisers’ part). This is in addition to misaligned incentives. Worse still, the all- too powerful manufacturers of financial products know that HNIs are children of a lesser God and therefore not even a modicum of consumer protection that the buyer of a toothpaste gets, is made available to them.

This article was originally published on the AbanWill Consultants website.

Abaneeta Chakraborty has close to two decades of experience in managing money for UHNI families. She founded the firm Abanwill Consultants LLP in 2017 to provide independent views on investing. She can be contacted at abaneeta@abanwill.com.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.