Rajendra Kalur
Two weeks back, Mr. Parekh a SEBI Registered RIA was jolted out of his sleep as his landline rang incessantly. Clearly not used to receiving calls at this hour, Mr. Parekh’s initial response was to ignore it but finally he reached out for the receiver curious to know who could have called him at that unearthly hour.
The call was from his classmate settled in USA with whom he had only been in touch over the social media. His classmate had recently remitted some money to his ageing dad for his retirement corpus and wanted advice on how to invest the corpus. Not being in touch with India, the classmate had no idea about the investment options in India.
Further, since the corpus was for the retirement expenses of his superannuated dad, he wanted absolute safety of the principal. His initial hunch was to go by the relationship manager’s advice but wanted a second opinion from an RIA and that’s how Mr. Parekh received the late night call. Mr. Parekh studied the recommendations of the Relationship Manager and found that all the recommendations were for Debt oriented mutual funds and showed excellent performance history and consistent dividend payout record.
However, the Relationship Manager had not prepared an Investment Policy Statement documenting the objectives of the client, risk profile, tax status or any other constraints. Being an RIA as well as a CFA charter holder, Mr. Parekh considers an IPS as the bedrock of the client-advisor relationship. In this particular case we have an ageing person on superannuation planning to invest the corpus safely to defray his retirement expenses.
Further, being a former govt employee with limited means he only pays tax in the lower slab. The risk profile showed the client as very conservative and had high dependence on the corpus gifted by his son. The stellar performance of the funds recommended notwithstanding, they do have a fair degree of volatility. Further, the underlying fund costs and the dividend distribution costs do take away a fair part of the returns. Of course, a fair part of the splendid performance of the funds could be attributed to the fact that the interest rate cycle has turned and the policy rates declined.
The expected returns of such funds are bound to show a decline as the portfolio yields decline and the funds have limited option to generate excess returns through lengthening of the maturity profile. Now that the RM’s recommended list of MFs failed the suitability and appropriateness test, Mr. Parekh went back to the drawing board and found that the client can invest a portion into Senior Citizens’ Savings Scheme and Fixed Deposits of a good quality bank/s. While interest rates have declined from the peak, there is both a visibility and safety of returns in such schemes. Further, as Senior Citizens they do get an additional rate of interest. These instruments also can be used as collateral and liquidated prematurely at a nominal cost.
Mr. Parekh explained to his classmate that many of the RMs are driven by targets and many a times these recommendations are in conflict with client needs. However, a SEBI registered RIA derives his fee from the clients and can provide conflict free advice. Most RIAs also provide a regular review of the portfolio as part of the standard services. Mr. Parekh is now happy that his classmate and his dad can sleep peacefully with the advice he has given them.
Author is CFA charterholder and the chief executive officer of TrustPlutus Wealth Managers (India) Private Limited
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