My heart goes out the credit analyst sitting in an oblivion in a successful private sector bank. He dared to ask the what if questions. What if the size of the borrowing by Nirav Modi was too good to be true. What if there was more to it than what meets the eye etc. Some of the questions led to his bank missing out on a ‘massive’ business/loan giving opportunity. Probably, he was taken to task by seniors in the bank for putting his red rubber stamp that said Rejected. Probably, for many years the analyst was the butt of all jokes to many and an eyesore to others.
Same is the case for professional wealth advisors. For years together they refuse to change asset allocation or refuse to the next coinomania on the block or refuse to change the funds or refuse to invest in American / Chinese equities. They are at the receiving end of comments like too slow to act, not proactive, boring, too diversified etc. Only years later does it all add up to a prosperous and sustainable wealth growth. And it is only years later he realises that signing up for wealth management included signing up for managing the client (behaviour) too. Infact, investments is just the first lap of a 10 lap marathon.
The first lap is important. Both for the client and the advisor. Through their experiences, over a period of time both parties calibrate their respective approaches and expectations. On an average it takes 7 to 10 years for this maturity to set in. No surprise that the time frame is similar to that of one full economic cycle. A cycle full of hypes and horrors. With so much change around, it is almost a miracle that a highly stable and closed approach comes up on top. Pretty much like the American constitution. It has been amended less than 25 times across a chaotic timeline last 200+ years. And look at the results it has delivered.
Talking about PNB, we have always maintained that Public sector continues to be poor capital allocator. Reason enough we don’t advise CPSE and Bharat 22 ETFs of the world. Another reinforcing investment lesson is that accidents will always happen. Today it’s PNB. Yesterday it was Satyam. Having a concentrated portfolio of instruments may give a slight edge in returns but it exposes the portfolio , — that too not your own portfolio — a portfolio for which we have a fiduciary responsibility – client portfolio, to irreparable damage and loss of capital.
But today our credit analyst is the saviour. The Noah who built the ark many years ago when he did not allow the overenthusiastic sales team to lend to the Nirav Modis of the world. His one simple and brave act of refusal possibly saved the death line risk to his bank. No amount of accolades can compensate for that.
Last month in a financial year is usually hectic for all enterprises. So is the case for Indian wealth management industry. e.g. It is a good time for us to review the year gone by with respect to client portfolios tilts, performance contribution analysis, fund managers sticking to OUR plans, updating our outlook through the lens of economic data and any advisable last minute portfolio tax action before the financial year ends.
It is also a good time to plan the portfolio and tax tactics for the coming year.
Come March 2018, a unique additional confluence of regulatory ripples and tax changes will be added to the above activities.
- Regulatory ripples — SEBI has (re) defined the investment universe category boundaries and also limited the categories for Mutual Funds in India. As per SEBI circular dates, this will need to be effected by Feb ’18 end.
The first level impact of this will be causing Mutual Fund houses to merge / close / rename / change the fund portfolios to bring it in line with SEBI definition.
The second level impact of this will be that client portfolios may undergo a change / deviation with respect to the desired portfolio construct. e.g. A client may need, and have, an equity portfolio with 65% in large-cap companies. However, post implementation of SEBI order, the emerging client portfolio may have a reduced allocation with only 40% left in large-cap equities. This will need a review and re-alignment of the portfolio funds to bring it back to the desired shape.
Ideally, fund houses will allow investors to carry out these re-adjustments without having to pay the exit loads, if applicable. This looks to be the case so far for the Mutual Fund houses who have announced their rejigs. DSP BlackRock
2. Tax changes — Feb 2018 saw a historic change in the way equity investors will be taxed in India. After more than a decade of enjoying 0% tax on long-term gains on equity, the tax rate has been hiked to 10% of the long-term gains.
For a wealth professional, the catch is with the date of applicability. Although, the announcement was made on 1st Feb 2018, the tax exemption continues till March ’18.
Hence, for example, we will be reviewing the status of all equity investments done till March ’17 (one year before the date of applicability threshold). This may lead to a situation where we may book all long-term equity profits in March ’18. It is also possible that there may be a long-term loss. Again it may be advisable to book it too. But in April ’18. That will allows us to book capital losses, which are further allowed to be set-off against other capital gains (which is not the case if the losses are booked in March itself!).
For our firm there is even more on the anvil! We are trying to figure out the possible regulatory stance with respect to the advisory business model in India. And then working on restructuring the organisation structure and work flows around it.
For us it’s a long ‘march’ ahead.