Financial Advisors and Wealth Managers: Their Roles and Importance

Financial Advisors and Wealth Managers: Their Roles and Importance

Earning money is one thing. But managing it and ensuring that it works for you in the right way is an entirely different ball game. Planning towards wealth management can be a tough task, especially for people who are already juggling between their hectic work life and family life. Financial advisors are more than just investment advisors. They are central to wealth management and can provide assistance to people considering their financial setting. That’s the reason why a wealth manager or a financial advisor is quite popular among investors around the world.

Let’s look at how you can use wealth managers in the right way.

What is wealth management?

Wealth management is a service offered by professionals who are well-versed in the areas of finance and investments. These advisors not only dole out investment advice to their clients, they also offer guidance in other financial aspects such as retirement planning, accounting, legal and tax planning. In other words, portfolio management services in india is also known as the holistic approach by a professional helps investors to reach their financial goals in the most efficient manner.

How to find the right wealth manager?

There are a number of wealth management companies and financial advisors available. As a result, finding an advisor who is the right fit for you can be a bit tricky.

Be on your guard, if an advisor starts off by directly offering an exotic investment option. That is the characteristic of a sales person rather than a financial advisor.

Using a wealth manager in the right manner

The best financial advisors or wealth managers begin by creating a strategy that can sustain and enhance your financial assets based on your economic condition, objectives and comfort factor with risk. Once a plan is established, the manager will connect with you regularly to revise or renew your objectives, assess and rebalance your financial portfolio, and analyse if supplementary services are required, with the primary aim of remaining in your service through your lifetime.

A good wealth manager offers advice based on your financial situation and life goals.

Good wealth advisors identify problems and offer suggestions on how their clients can manage their money differently.

They tell you how much to save, what amount of risk is suitable for you, how much insurance you require, how you can benefit from tax deductions and so on. Many advisors also provide insights not only on retirement planning but also estate planning.


From organizing and managing finances, assisting in financial windfall, planning for retirement, reviewing your insurance and more, the role and importance of financial advisors and wealth managers cannot be understated.
As an investor, it can be quite helpful to employ the services of a financial advisor. But ensure that you select an advisor who is the right fit for you, and who doesn’t have a conflict of interest


How well do you manage your portfolio?

How well do you manage your portfolio?1) How frequently do you invest?a) Regularlyb) SporadicallyCorrect answer: aAs an investor, it is necessary to invest on a regular basis in order to create a large corpus later on in life. An efficient portfolio management process can be done monthly, quarterly, or even semi-annually. Greater consistency in investments offers higher potential to earn greater returns.2) Have you made any investments that you do not understand?a) Yesb) NoCorrect answer: bIt is important that you avoid investments that you don’t understand. Warren Buffett too recommends this course of action. Invest in funds that you are well aware of, so that you are always in control of your investments. Many reputed financial institutions offer portfolio management services in India that you may want to consider.3) Diversification is:a) Necessary for a portfoliob) Unnecessary for a portfolioCorrect answer: aDiversification is absolutely necessary if you want to avoid huge losses. By investing in different asset class like gold, equity and bond, you can minimize your chances of losses in case stock markets sink. Therefore, even if one or two funds perform badly, the other funds can help compensate the total losses of the portfolio. You may want to speak to your financial advisor on the different types of portfolio management for your profile. 4) More the funds, better the portfolio?a) Yesb) NoCorrect answer: bA higher number of funds in a portfolio do not necessarily translate to better returns. It is a good practice to maintain different funds in your portfolio for the sake of diversification. But that does not mean you should populate your portfolio with a number of funds. Eventually, it could become tough to manage the portfolio overall. Speak to your financial advisor to know what is portfolio management services and how it can benefit you.5) Do you monitor your portfolio?a) Yesb) NoCorrect answer: aHaving made necessary investments, you must monitor your investments periodically to see how they are performing. Review your funds regularly in order to ensure that their performance matches your goals and expectations. In case they underperform, it may be time for a change.6) Do you alter your portfolio composition frequently?a) Yesb) NoCorrect answer: b) NoIt is important to monitor and rebalance your portfolio once in a while. On the other hand, frequent changes in portfolio composition could impair your returns. Once you have a well-balanced portfolio, it would be best not to alter it unless required. Helpful portfolio management tips from your financial advisor can go a long way in building wealth to meet your goals.7) Do you give time for the fund to deliver returns?a) Yesb) NoCorrect answer: aDifferent funds require different amounts of time to grow and deliver returns. Hence, it is essential to wait for a certain amount of time to reap in the benefits. For example, it may be unwise to dump a long term investment based on its short term performance. 8) Do you act on unsolicited investment tips?a) Yesb) NoCorrect answer: b) NoIt is important not to invest based solely on unsolicited tips. Always conduct your own research before investing in any fund.9) What is asset allocation?a) Investing in different funds to earn high returnsb) Investment strategy that helps to balance risk and returns of a portfolioCorrect answer: bAsset allocation is a strategy used by investors to maximize their returns based on their investment goals, investment horizon and risk appetite.10) Do you go for funds that are at the top of the performance table?a) Yesb) NoCorrect answer: bIt can be tempting to invest in funds that have a good track record. Unfortunately, past performance is not an indicator of future performance. Thus, investing in a fund simply because it has performed amazingly well in the past 52 weeks may not be such a good idea after all. FINAL SCORE:How did you score?0-3: You may want to read through and understand the chapter on portfolio management once again. Or, speak to one of our experts for better understanding.3-6: You’re half-way there on understanding the importance of managing a portfolio. Keep up the good work. But work on mastering the different aspects of portfolio diversification. 6-9: Excellent! Review the few wrong choices and a quick read on those chapters can work wonders for you. 10: Congratulations! You are now ready to start managing a portfolio all by yourself.

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Why plan taxes before investing

We read in the previous section that tax planning can help you save a lot of money. But tax planning can be truly efficient if it’s undertaken before investing and not after—a mistake that many make. Only then can you enhance your ‘real return’ and ‘post-tax yield’—your returns after being adjusted for inflation and tax. Of course, while taxes shouldn’t drive your investment decisions, it is important that you consider it before investing. Let’s understand why: 1) Tax planning helps you understand tax exemptions, deductionsInvestments have different tax angles. Notable are tax exemptions and deductions. And before you take an investment decision, it’s important that you know about these. This can help you make a better, more tax-efficient decision. Tax ExemptionsAs you may know, not all income is taxed. The same applies to investments too. For example, the interest payments from Fixed Deposits are taxable as per your Income Tax slab rate. But dividends from Mutual Funds or Insurance payouts are exempt from tax—they attract zero tax. And while you may report them in your Income Tax filing, they don’t get added to your taxable income. Every investment option has its own tax rules. If you get your tax planning done in advance, you will know what investments fit you the best from a tax point of view. This can mean the difference between high tax liabilities and tax savings. Tax DeductionsMany confuse exemptions with deductions. In truth, they can’t be any different. Exemptions, as we read earlier, are when the income is not taxed at all. Deductions, in contrast, is an expense that lowers your taxable income, thus reducing tax liability. Now deductions can be expenses of all kinds—towards assets, investments, etc. The most notable tax deductions in India are the investments under Section 80 of the Income Tax Act. If planned wisely, these can be used for maximum benefit.i. U/S 80C: Investments like Tax-saving Mutual Funds (ELSS), 5-year Bank/Post Office Fixed Deposits, Public Provident Fund (PPF), Employee Provident Fund (EPF), National Savings Certificate (NSC), etc. can help you get a tax deduction of up to Rs 1.5 lakh every year. Your expenses towards Life Insurance and Home loan repayment too can get you a tax deduction of Rs 1.5 lakh under this section. ii. U/S 80D: All premium paid towards medical insurance can get you an additional tax deduction of up to Rs 60,000 in a year. This amount, however, includes the premium paid for policies that cover you, your spouse, dependent children and parents. iii. NPS: Contribution to the National Pension Scheme or NPS can get you an extra tax deduction of Rs 50,000 over and above the Section 80C limit.iv. Home Loan: Under Section 80C, you availed a tax deduction on the ‘principle repayment’ of your home loan. You can get an additional tax deduction of up to Rs 2 lakh on the ‘interest repayment’ of your home loan as per Section 24 of the Income Tax Act. First time buyers can get an extra deduction of Rs 50,000. 2) Even when taxed, some investments are more tax efficient than othersInvestments can be taxed or get you exemptions/deductions at three levels – the initial investment, regular interest or dividends generated throughout the tenure of the investment and the final stage—when you sell the investment to pocket profits. So, when you consider an investment, look at all three tax points. Some investments, for example, have an EEE tax policy. This is when it is tax-free at all three stages. Stock market investments are an example of such investments (if you hold it after 1 year). It does not get you an initial tax deduction, yet, when taxed, it turns out to be more tax efficient. 3) The tax-efficiency of an investment depends on the tax bracket you fall in It’s not just about how the investment will be taxed. What also matters is the tax bracket you fall in. Imagine if there are two investment options that give you equal returns. But one is taxed as per your Income Tax slab rate. The other has a fixed tax rate of 20%. In such a case, two people can make opposite decisions. Someone in the 10% tax slab would choose the first option. After all, the slab rate is lower than the 20% tax rate. But a high-networth investor (HNI) may opt for the second option. After all, for the HNI, the 20% tax rate will be welcome. This is why the post-tax yield varies for investors considerably even though the amounts invested, tenure and the products might be the same! Other important points to note about Investments and Taxes:- You may need secondary sources of income. Investments can be one of the sources. In such cases, it’s important to know your tax liability first. Income from your investments are not always taxed equally. For example, if you invest in a bond directly, then you may be taxed for the interest payments. But if you do so via a Debt Fund, the income you receive through dividends are not taxed in the hands of the investor. - How long you plan to invest also has tax repercussions. This is because tax rates differ as per holding periods too. For example, if you invest in stocks and sell before a year, then you have to pay a 15% tax. But if you sell after a year—even if it is the 366th day—then you pay zero tax. - You may already be getting enough tax deductions. In such cases, you choose investments on different parameters. But you need to know about your tax status in advance. A 5-Step approach to building an efficient investment portfolio through tax planning Step 1:Consider your income, the various tax allowances and exemptions that you can avail so that your gross taxable income and tax liability is reduced. Step 2:Choose expenses and investment products that can get you a tax deduction under: a. 80C (ELSS, EPF, PPF, Life Insurance premium, Bank FDs, NSC, etc.)b. 80D (health insurance)c. 24 (Home Loan interest repayment)d. 80CCD(1B) (additional Rs 50,000 deduction through NPS)Step 3:Consider taxation at the time of maturity, sale or redemption. Then, choose the investment with the least tax liability.Step 4:Hold on to investments for longer tenure to avail extra tax benefits. For example:• Real estate: Hold on for over 2 years to get indexation benefit. You can then purchase 54EC bonds for Rs 50 lakh to reinvest your profits and reduce tax further.• Debt Funds: Redeem after 3 years to get indexation benefit. You then get taxed at 20%. If you sell before 3 years, then you will be taxed as per your Income Tax slab rate.Step 5:Offset capital losses against capital gains from the same type of investment. A last wordMeaningful tax planning can create a significant difference to your investment corpus in the longer run.

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