Putting the wealth back in wealth man­age­ment

Growth of au­to­mated in­vest­ment ser­vices and more in­tu­itive data tools open­ing up new doors for in­vestors.

The Star Malaysia - StarBiz - - Viewpoint - YAP MING HUI star­biz@thes­tar.com.my Yap Ming Hui (ymh@whitman.com. my) is a best­selling au­thor, TV per­son­al­ity, colum­nist, coach and host of Yap’s Money Life Show on­line. He feels that the fi­nan­cial world is get­ting too com­pli­cated for ev­ery­one, and init

THE wealth man­age­ment in­dus­try is set to see some ex­cit­ing times ahead, thanks to var­i­ous forces that are re­shap­ing the fi­nan­cial land­scape such as tech­no­log­i­cal ad­vances and reg­u­la­tory en­hance­ments.

The growth of au­to­mated in­vest­ment ser­vices (robo-ad­vi­sors and fin­tech) and more in­tu­itive data tools are open­ing up new doors for in­vestors as well as wealth man­age­ment providers, par­tic­u­larly those in large fi­nan­cial in­sti­tu­tions that have am­ple re­sources to in­vest heav­ily in the lat­est tech­nol­ogy.

While these new ad­vance­ments may serve to ben­e­fit in­vestors in many ways, it is cru­cial to ad­dress and deal with the un­der­ly­ing deep-rooted chal­lenges ex­posed by the weak­nesses of the cur­rent wealth man­age­ment mech­a­nism be­fore real sus­tain­able change and trans­for­ma­tion can take place. Sim­ply putting a band-aid as a so­lu­tion is not enough.

The re­sult can only be as good as its pro­cesses

The ap­proach used by the play­ers in Wealth Man­age­ment 1.0 or WM 1.0 (the cur­rent sys­tem) is my­opic at best, in that short-term con­sid­er­a­tions are ap­plied with­out giv­ing due thought to the client’s in­ter­est and ben­e­fits. This in­her­ent Achilles heel in the cur­rent wealth man­age­ment sys­tem is the very rea­son why the in­dus­try has failed to rise to cus­tomers’ ex­pec­ta­tions.

In a typ­i­cal sit­u­a­tion, wealth man­agers would as­sess the client’s fi­nan­cial po­si­tion us­ing only the client’s as­sets avail­able in the bank and, based on this in­for­ma­tion, rec­om­mend in­vest­ment prod­ucts and sub­se­quently pro­vide a re­port based on the per­for­mance of the client’s in­vest­ments.

A lit­tle knowl­edge can be a danger­ous thing

The process stated above is flawed right from the be­gin­ning as the wealth man­ager has failed to take into con­sid­er­a­tion the in­for­ma­tion of the client’s wealth out­side of the bank.

There­fore, he is only look­ing at part of the client’s wealth and con­se­quently, his ad­vice is par­tial and in­com­plete.

As a re­sult of look­ing at things par­tially, any sub­se­quent in­vest­ment rec­om­men­da­tions will not be in line with the client’s over­all fi­nan­cial goals.

Worse still, the rec­om­men­da­tions could be counter-pro­duc­tive and be more detri­men­tal to the client’s fi­nan­cial fu­ture. Suf­fice to say, the func­tion of the wealth man­ager is ba­si­cally rel­e­gated to rec­om­mend­ing in­vest­ment so­lu­tions and per­for­mance re­port­ing.

In light of this tun­nel vi­sion, any rec­om­mended in­vest­ment so­lu­tions do not come with com­plete risk cal­cu­la­tion and man­age­ment. As we know, every client’s needs are dif­fer­ent and so too are their fi­nan­cial risks.

With­out tak­ing into ac­count the risk el­e­ment when in­vest­ing, how can the wealth man­ager be sure that the in­vest­ment so­lu­tion is ben­e­fi­cial to the client?

Se­condly, per­for­mance re­port­ing is ba­si­cally just that. The client will be told how his in­vest­ments are far­ing on an in­di­vid­ual ba­sis, but what he will not know is how the per­for­mance of each of his in­vest­ments are im­pact­ing his over­all wealth growth.

What good can come out of our cur­rent wealth man­age­ment if it con­tin­ues to op­er­ate in ver­sion 1.0, where the fo­cus is only on in­vest­ment prod­uct rec­om­men­da­tion but with­out the en­tire blue­print?

Ev­i­dently, the client ends up be­ing the vic­tim of a sys­tem that does not take into ac­count his fi­nan­cial needs and goals. When the client is asked to in­vest with­out his holis­tic fi­nan­cial po­si­tion in the fore­front, he will not be able to max­imise his in­vest­ment re­turns nor in­su­late him­self from the risks at­tached. The end re­sult – any wealth growth will be un­cer­tain.

In spite of its ob­vi­ous short­com­ings, the fun­da­men­tal rea­son why WM 1.0 has not been able to un­dergo a par­a­digm shift is due to busi­ness prac­tices that pri­ori­tise and re­ward short trans­ac­tion cy­cles and time efficiency.

While it may sim­plify the wealth man­age­ment de­liv­ery process for the providers, it comes at a price for the clients who are be­ing de­nied key com­po­nents of wealth man­age­ment.

As long as the old mind­set is fix­ated on par­tial wealth man­age­ment, no amount of ad­vance­ment in tech­nol­ogy or hu­man ef­fort can bring about the nec­es­sary trans­for­ma­tive re­sults.

Wealth Man­age­ment 2.0 is the an­swer

En­ter a new frame­work, Wealth Man­age­ment 2.0 (WM 2.0).

The key premise be­hind WM 2.0 is that it re­quires an in­sight into the client’s en­tire wealth in or­der to de­liver holis­tic wealth man­age­ment.

WM 2.0 of­fers a panoramic 360-de­gree view of a client’s fi­nan­cial po­si­tion by in­cor­po­rat­ing five crit­i­cal com­po­nents of­ten over­looked or non-ex­is­tent in the wealth man­age­ment process un­der WM 1.0.

By filling in the gaps left by cur­rent prac­tices, WM 2.0 is able to pro­vide the wealth man­ager with a com­pre­hen­sive pic­ture of the client’s over­all fi­nan­cial po­si­tion and as­set al­lo­ca­tion. This un­der­stand­ing would help the wealth man­ager craft cus­tomised strate­gies to min­imise risks and op­ti­mise in­vest­ment op­por­tu­ni­ties, which in turn grow the client’s wealth with high cer­tainty.

Mean­while, here is how end-users, i.e. wealth man­age­ment clients, may ben­e­fit from the ad­di­tional steps:

Step 1) Holis­tic fi­nan­cial plan­ning:

Holis­tic fi­nan­cial plan­ning en­tails the wealth man­ager look­ing at the big pic­ture and tak­ing into ac­count all of the client’s fi­nan­cial needs for the fu­ture. Ex­am­ples would be pro­jec­tion of funds needed for chil­dren’s ter­tiary ed­u­ca­tion or prepa­ra­tion for an im­pend­ing re­tire­ment. By fac­tor­ing in the time­line of these mile­stones, the wealth man­ager will have an ex­act guide on how one’s wealth should be grown and man­aged to ful­fil the needs holis­ti­cally.

Step 2) Cash­flow man­age­ment: WM

2.0 takes into ac­count one’s cash flow man­age­ment, which is the key to de­ter­min­ing your in­vest­ment hold­ing power. Many peo­ple over­look this im­por­tant prin­ci­ple when it comes to in­vest­ing. The ad­van­tage of be­ing buffered with cash re­serves is that you can af­ford to wait for a badly-hit in­vest­ment to re­bound be­fore cash­ing it in. In con­trast, some­one with no hold­ing power will be forced to sell pre­ma­turely, some­times at a loss, just for the sake of re­cu­per­at­ing his cash now re­quired for other pur­poses.

Step 3) Strate­gic as­set al­lo­ca­tion:

The old way of al­lo­cat­ing some part of wealth into one in­vest­ment port­fo­lio is not good enough. In­stead, a strate­gic-level al­lo­ca­tion method is ap­plied which in­volves di­ver­si­fi­ca­tion of to­tal wealth into dif­fer­ent as­set classes. As a re­sult, you will be more likely to cap­i­talise on var­i­ous re­turn op­por­tu­ni­ties avail­able in the mar­ket. And the ic­ing on the cake is, no mat­ter what hap­pens to any as­set class, your over­all in­vest­ments will be bet­ter pro­tected.

Step 4) Risk-cal­cu­lated in­vest­ing:

Whereas typ­i­cal as­sess­ment of in­vest­ment op­tions fo­cuses on the ROI (prof­its from an in­vest­ment), equal im­por­tance is hereby placed on the re­turn of in­vest­ment; i.e. the re­coup of the ini­tial cap­i­tal should the in­vest­ment fail. Un­der WM 2.0, the wealth man­ager takes into ac­count the risk tol­er­ance level of each in­di­vid­ual client, and un­der­takes a thor­ough back­ground and fact check of dif­fer­ent in­vest­ment prod­ucts to re­port on the his­tor­i­cal per­for­mance, the track record of the fund man­ager and fund re­lated charges. As a re­sult, you se­lect only su­pe­rior, best of breed in­vest­ments to put your money into each as­set class.

Step 5) Ac­tive per­for­mance man­age­ment:

A com­mon mis­take made by many in­vestors is to ex­pect the in­vest­ment to take care of it­self once they have in­vested. With WM 1.0, you may re­ceive pe­ri­odic per­for­mance re­port on your in­vest­ments, but you will not know how these re­late back to your over­all fi­nan­cial goals. Ac­tive per­for­mance man­age­ment en­ables you to be one step ahead all the time and gives you a win­dow to make the nec­es­sary ad­just­ments to your in­vest­ment port­fo­lio in a timely man­ner.

When ap­plied to­gether, the fivestep process works in syn­chronic­ity to de­liver an in­com­pa­ra­ble and com­pre­hen­sive wealth man­age­ment ex­pe­ri­ence which ticks all the right boxes in every as­pect of a client’s fi­nan­cial needs.

The winds of change

A to­tal wealth man­age­ment in­dus­try over­haul brought about by the era of fi­nan­cial tech­nol­ogy can sig­nify the dawn of new be­gin­nings for in­di­vid­ual in­vestors. How­ever, it can only be a re­al­ity if, and only if, the process of re-en­gi­neer­ing takes place as well. As long as the first three steps are miss­ing from the en­tire process, the end re­sult will al­ways be un­cer­tain and un­sat­is­fac­tory to con­sumers.

In other words, the play­ers in the wealth man­age­ment in­dus­try need to first, get their house in or­der and ad­dress the ele­phant in the room, be­fore em­brac­ing the new ad­vance­ments and en­hance­ments brought about by new tech­nol­ogy and the sup­port­ing in­dus­try dereg­u­la­tion.

Putting efficiency be­fore ef­fec­tive­ness is akin to plac­ing the cart be­fore the horse; no mat­ter how one strives to ob­tain re­sults, he can only get so far be­cause the right steps were not im­ple­mented in the first place.

In to­day’s on­line era, the power to change any in­dus­try lies in the hand of con­sumers – which means YOU. You hold the power to put the “wealth” back into wealth man­age­ment. If you want to im­prove the wealth man­age­ment ex­pe­ri­ence of­fered to you, start by de­mand­ing more from your wealth man­age­ment ser­vice providers. Tell them, you want Wealth Man­age­ment 2.0.

No prob­lem can be solved from the same level of con­scious­ness that cre­ated it. Al­bert Ein­stein

Newspapers in English

Newspapers from Malaysia

© PressReader. All rights reserved.