A few years ago, the CEO of a large IT company who was usually travelling overseas 300 days in a year visited my office. He plonked two dossiers bursting at their seams in front of me and said:
“I don’t know how much I’ve invested and where. Can you help?”
We took up the challenge and realized that our client was primarily invested in real estate. 11 properties in all. Unfortunately, only two of them were registered. The other nine had been paid for in full, although the properties were yet to be registered in his name. We wrote to all the builders concerned and, through a painstaking process, registered all the properties for him. When we collated the list for him, he realized that he was guilty of a phenomenal underestimation of his net worth. All because of a lack of visibility and consolidation.
This is a common enough story. Being atypically smart, high-achievers in society start off by being on top of their investment portfolio. The most diligent ones continue in this manner. Others are overtaken by their success and the dire need to make large-scale investments on a regular basis. Before long, they become aware that they are no longer aware either of the breadth of their investments or the depth of them.
At this point in time, their investments are akin to a leaking car purring at high speed down the highway, with a seemingly infinite reserve of fuel. Barring the tell-tale trail of leaked fuel, there is nothing alarming in this picture. Till the wealthy person realizes that wealth is a serious affair. Although at first glance, it seems his to save or squander as he pleases, he soon accepts that he is not just the creator but also the chief custodian of his wealth. Every rupee in his portfolio is either speeding that car or dripping into that highway tar. And if he only optimized every rupee, he could bring more cheer to his family and society.
The need for a one point contact: A Family Office Investment Advisor (FOIA) has a responsibility to be loyal to the client alone, foster a succession plan, manage economic volatility, thereby freeing to client to focus on his core strengths. One of the lesser-known functions of the FOIA is to consolidate the wealth to offer a simple, transparent and lucid window into the portfolio. This isn’t merely a clerical task. It involves the pursuit of myriad loose ends and stems from the FOIA’s deep thought and commitment to the welfare of the client.
Let’s look at just a few of the tasks involved in this process:
1. Tracking inherited wealth
When a parent passes away without a Will or succession certificate, the wealthy inherit investment mirages that reveal the untruth. Or investment icebergs that hide more than they reveal. So they inherit not just the wealth, but the mess as well. The need of the hour then is to create visibility into the inherited portfolio as a precursor to simplification.
2.Divesting out of dead-end funds
Investment ghosts haunt due to various factors. For instance:
• It is an unfortunate reality that many PE Funds offer the illusion of great returns whereas they have been doing only marginally better than FDs. Divestment can be the better part of investment in such cases
• Many times, we find that our client is invested in dozens of investments that are so small that they do not matter to him. The overheads of managing these investments far outweigh the benefits of holding on to them. So it makes sense to divest at the optimal market moment
As a corollary to this divestment, taxation aspects become easier.
If we had a penny for every time a client forgot about the existence of a Mutual Fund or a savings account, we would have a hundred dollars! This dormant money can be quickly brought into circulation. All it takes is to know where they lie and how to pry them out.
Here’s an illustrative example. For one reason or another, we see many of our clients owning multiple de-mat accounts, some bigger than others. In addition to complicating their portfolios, multiple accounts reduce visibility. Many a times, we have located unattended equity in these parallel accounts. Consolidation via transfer or liquidation goes a long way in simplifying the portfolio.
4. Relooking at mobile and complex investments
Oftentimes, wealthy clients trust a person rather than an institution. This person could be a relationship manager of a financial institution. As he moves jobs from one firm to another, so do their investments. A few hops later, it becomes a challenge to understand which investments are active and which have been phased out. Consolidation is required here.
As an aside, consolidation helps HNIs compare the performance of each of their NBFC wealth managers.
5. Identifying multiple exposures to the same risk
Multiple relationship managers might have sold the client the same fund at different points in time. Perhaps under different labels and circumstances. These managers might even work for different financial institutions. What remains constant is the core risk underlying these investments. De-risking requires the client to consolidate and simplify.
6. Seeking tax-efficient investments
In the case of many clients, consolidation is simply the act of moving out of heavily-taxed instruments (such as FDs) into tax-free bonds. In such cases, higher returns are coupled with a more peaceful frame of mind.
7. Creating gold-standard paperwork
Paperwork is important for every investment. Real-estate investments, which form a substantial portion of overall wealth, especially need gold standard paperwork:
• A chasm exists between inheriting/buying a property and making it sale-ready. Khatta extracts have to be submitted, encumbrance certificate obtained and even the name on the water meter has to be changed. Having these gold-standard papers is the difference between paper wealth and authentic liquid wealth
• Investing in a home requires investment in interiors, brokerage, maintenance etc. These expenses can be deducted from the eventual sale amount of the home while calculating capital gains. So tax savings can be substantial. This is possible by tracking and documenting expenditure as they occur. And that is possible only if the paperwork is tracked and consolidated
Meanwhile, consolidation of all asset classes, not just real estate, reveals gaps in documentation that need to be fixed on a priority basis.
8. Offering taxation guidance
Dynamic tax laws are like shifting goal posts. Most HNI clients need plenty of help in this area, and that’s why any FOIA worth their salt will audit the bulk of the tax work for their clients.
Just as creatures crawl before they fly, wealth must be consolidated before it grows.
- Rajmohan Krishnan, Principal Founder and Managing Director, Entrust Family Office Investment Advisors
The thoughts and opinions shared here are of the author.
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