- June 23, 2021
- Posted by: CFA Society India
- Category:BLOG, Events
Speaker: Kishor Bagri, CFA, Director - Professional Learning, CFA Society India
Moderator: Archit Lohia, CFA, Founder, Career Topper
Contributed By: Shruti Agarwal, Volunteer, CFA Society India
What does it actually take to build a career in what is perhaps the most fertile space within the financial services – Wealth & Portfolio Management? Kishor Bagri, CFA addressed this question and talked about growth oriented career prospects in the investment management industry during Financial Talent Summit 2021 held recently.
Kishor started with laying out a broad landscape and a foundation by shedding light on how wealth management differs from portfolio management and what do they exactly comprise of. He explained that wealth management is like function of a doctor and portfolio management is more like the medicines. The medicines are the ones which treat you, but the doctor is the one who diagnosis and prescribes the medicine. Putting in simple terms, wealth management has a much broader landscape involving broader functionalities and comes at a higher level than the portfolio management as far as chronology is concerned but portfolio management is a more in depth function.
Wealth management roles are more close to the client or they are the contact point to the client. Typically, wealth management function entails:
- Assessment of the risk of the client
- Devising an asset allocation plan
- Doing dynamic asset allocation based on the market opportunities
- Deciding on the portfolio positioning at any given point of time
- Deciding the portfolio managers and allocating money among them
- Estate planning
- Tax related advice in terms of creating the whole investment portfolio in a more tax efficient manner
On the other hand, in the case of portfolio management function, once the money is allocated to the portfolio manager, there is a product defined investment strategy and the function of the portfolio manager is to deliver superior risk adjusted return based on the mandate of that particular product. The return is also compared to the benchmark that has been published as a comparative assessment tool for that particular strategy or product.
Portfolio management is perceived much more glamorous as compared to wealth management. But having been on both the sides, Kishor pointed out that it is not exactly right. Both are equally challenging and demanding, require different skill sets, passion and inclination to be successful.
Broad Areas and Functionalities where One can make a Career
Wealth management: Sales, research, advisory, operational compliance etc.
Portfolio management: Sales, research, portfolio management/fund management, regulatory aspects like compliance, fund accounting etc.
Both the career avenues have more or less similar kind of role offerings. But the difference lies in the approach of the roles in each of these two career paths. Kishor explained this by comparing some of these roles in both the functions.
Sales: In wealth management, sales involves more of a broad based understanding of various asset classes, overall market opportunities, and a lot of softer aspects of communication like behavioral and psychological understanding of the client’s needs. So, it is more oriented towards selling your overall strategy, overall goal achievement and planning clients’ finance in a more optimized manner.
Now if we draw a comparison to the similar role in portfolio management, the sales guy in portfolio management has two sets of clients. One is the wealth managers themselves to which they pitch their product, and the other is investors directly. So, the sales function here is driven by own specific product offering, investment strategy and investment style.
Research: In the wealth management function, the research is more geared towards the overall market, macro indicators, asset classes and managers (in terms of what is their style, investment strategy, in which market capitalization is a particular manager better off than the other managers).
However, the research analyst in portfolio management is more geared towards a specific company and a stock. Typically in bigger organizations, most of the research analysts are assigned a particular sector or a couple of sectors, where they do in depth analysis on that particular sector and the stocks belonging to that sector. In a smaller boutique kind of setup, it can be more bottom-up across the broad spectrum trying to generate good investment ideas.
Advisory: In wealth management, the advice that you dole out to your clients is more at a broader level like what should be their asset allocation mix at any given point of time, who are the portfolio managers that they should be investing into, what should be the portfolio positioning given the market view that one has over the medium to long term.
When it comes to the portfolio management function, the portfolio manager has got X amount of money and he/she definitely has defined investment strategy along with tying it to the benchmark that the performance will be compared to from a regulatory standpoint. So, the portfolio management function is more micro in nature and comprises of buying the stocks.
Types of Organisations
In wealth management, there are banks that offer their wealth management services. The bigger ones have all the roles defined above like a research department, product department, advisory department and sales function (which will be the contact point of the client to generate business and sell the advisory recommendations which come from the advisory function of that particular organisation). Similarly there are also big national level distributors who have a similar structure like that of banks. Also, there are big as well as small boutique firms. Now, the best part in wealth management is you can start on your own which is called an independent financial advisor. To sum up, wealth management is one of the unique business proposition in the whole financial services industry, where without too much of an experience, one can start from day one for a couple of reasons. One of them is no stringent entry barrier in terms of regulation. One just needs to take one of the NISM defined mutual fund distribution examination.
But in the case of portfolio management which includes organisations like mutual funds, boutique portfolio managers, alternative investment funds, the regulatory requirements are much more stringent and more well laid out.
Recently, an area in wealth & portfolio management that has become prominent is Fintech which can be considered too.
Organisation Structure and Fees
From a regulatory standpoint, as far as the wealth management is concerned, there are very clearly two defined paths. One is the distribution approach and other is the advisory approach. In the distribution approach, you get paid for the investment that you make into any of the product offerings available in the market, and you can’t charge clients. In the second alternative which is Registered Investment Advisor (RIA), the fee structure is well defined – maximum 2.25 per cent of the AUM which is taken directly from the client. But typical deals happen for around 50 basis points. If you can deliver superior performance as compared to the market, then you can demand one and a half or 2 per cent fee, but that needs to be justified by the outperformance that you are able to make and depends on the negotiation skills also. As there is a common phrase saying, Caesar’s wife must be above suspicion; the RIA mode creates the perception of a totally unbiased approach. The only challenge here is the mindset and human psychology. People are not used to paying for investment advisory services. However, this is just an initial challenge and as you establish your credentials, skills and trust, people would be forthcoming to pay for these services. Also, the regulator’s focus is to drive the business more towards advisory as it is more aligned to the client’s interest and totally transparent in nature.
In portfolio management, there are three kinds of licenses that the regulator issues – Mutual Fund license, PMS license and AIF license. Apart from this, there are also RIA license and Research Analyst license by which people can provide stock level recommendations. So, in the mutual fund, PMS and AI platform, the client pays the money for the product and the management happens at the product level where the money is in custody of the portfolio manager on behalf of the client. In RIA mode or in the research analyst mode, you give portfolio recommendation but the custody, execution and all the aspects lies with the customer to do that.
So for an individual, opening a mutual fund may not be easy if he/she does not have the requisite work experience, networks, setup or if it is not justified to take that much load of the compliance requirement because of the scale of business. However, one can definitely start with RIA mode or a research analyst mode to establish their credentials and skill sets of managing portfolio.