Posted tagged ‘portfolio manager’

Should you have a Portfolio Manager for yourself?

April 22, 2008

If people think (or know) that you have some connection to the stock markets, they do turn to you with queries. One of the questions that I am asked – for the past 3-4 years has been “Do I need to hand over my money to a Portfolio Manager?”

Whether an investor would benefit from having a PMS or not is a personal question, really. I’m no money manager. I am only a trainer – a financial domain trainer who dabbles in writing. And, in any capacity, I don’t give personal investment advice.

But like a typical teacher, I can tell you that PMS has both advantages and drawbacks.

Big and large investors used a money manager to run a portion of the institution’s money and make all the investment decisions. Until recently, individual investors could only get access to these managers if they had millions of rupees to invest.

But in recent years, the minimum investment requirements – and, just as importantly, costs – have come way down. Or so it seems.

When you open a PMS, it means you have signed a limited power of attorney to let an investment professional run your portfolio or some portion of it. Generally speaking, the manager should (will) begin by determining your investment goals, time horizon and risk tolerance.

So, typically, the portfolio of a 70 year old school teacher without children will look very different from that of a 25 year old son of a millionaire who plays baseball.

Thus you should be able the get the following benefits of having your money managed by a professional portfolio manager.

1. Custom asset allocation. The portfolio should be based on your personal investment goals, not a general strategy like “growth” or “income.” Thus the money that you need in 6 days would be in a savings bank account, money that you require in 6 months in a floater account, and money that you require in 6 years in an (say) Index fund.

2. Transparency. You should be able to see your portfolio on a 24/7 basis – all your investments should be posted to a website where you can do an analysis as you wish. The website should give your booked profit, un-booked profit, capital gains – booked and un-booked profits, current value of your investments, etc.

In case of mutual funds, you know what’s in your account only when you get the month end portfolio – but you have no clear idea when it was bought and at what price. Here you can what you own.

3. Tax management. Your portfolio can be run so that taxes are minimized.

4. Competitive fees. PMS managers charge a flat annual fee plus profits rather than a flat fee like a mutual fund. However you will still incur costs like custodian charges, administration fee, brokerage (therefore churn costs), etc.

5. Performance. PMS accounts often offer the services of top money managers with good investment systems and favorable track records.

6. Convenience. If you are too busy to give your investments the attention they deserve – or if you are an inexperienced or emotional investor – having a professional run your portfolio may be a good solution.

Of course, managed accounts have drawback too. For starters, there are all kinds of money managers: good, bad and mediocre. Clearly, it’s not worth paying for anything less than the best manager you can find.

Then there is the matter of costs. Managed accounts are generally cheaper than using a full-service broker in a transaction-based relationship. Still, no one can manage your money more inexpensively than you can on your own.

Managed accounts are generally not for do-it-yourselfers. If you enjoy the investment process, have the time and expertise to implement your own investment strategy, and are satisfied with your results, you don’t need to turn your money over to someone else to manage.

Managed accounts aren’t for everybody. However, I speak to a lot of investors who realize they could be doing a lot better than they are. They know they should asset allocate their portfolios, but they don’t. Or they aren’t sure how. They don’t want to be over- or under-diversified, but we look at their portfolios and see that they are. They know they should run trailing stops behind their stocks, but they get distracted or forget. Many of these people are smart, sophisticated investors, incidentally. They’re just too busy running a company, taking care of their families or pursuing their interests to give their portfolios the attention they deserve.

How about investors who say they can save money by doing it on their own?

“You may be able to do it more cheaply on your own,” says a fund manager. “But, remember, the most important question is not ‘what are my costs?’ It’s ‘Am I satisfied with my investment returns net of whatever fees I’m paying?’ If the job isn’t getting done, you may want some help.”

In the end, whether or not you need to consider a managed account really boils down to whether or not you prefer to grow your own tomatoes.

Some people are natural gardeners. They want to till the soil, plant the seeds, water them, fertilize them, weed them and, eventually, harvest them. When they eat those tomatoes, they have the pride and satisfaction of knowing they raised them themselves.

Other folks are uninterested, unqualified, or too busy to grow their own tomatoes.

In the end, the choice is yours.

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Financial Planner – do you need one at all?

January 14, 2008

Uma Kannan is a good friend and an ex- blue blooded MNC banker. Here she is taking potshots at her own ilk. She says when she was with the bank, she was a “rogue deal seeker” but she felt good in calling herself a relationship manager, investment adviser, associate director…and various other nice names which HR faithfully found her!

A small investor should never invest on her/his own. S/he should choose a mutual fund. But is it easy to

choose a mutual fund? Heck no. S/he needs a financial planner to tell her/him whether s/he should

put money in a mutual fund, a structured product, a unit linked plan, a classic endowment plan,

a pension plan, real estate, or what have you.

And what will a financial planner do for you? S/he will structure your portfolio, s/he will suggest that you file your income tax return through a particular CA, ask you to invest in a particular mutual fund, buy a particular insurance, suggest that you make a will, check your nominations etc.

Then you go to a CA to file your return, a bank to make your deposits, a mutual fund agent to buy you mutual funds, a life insurance agent to buy life insurance, a lawyer to make your will and the story goes on.

Ha ha, now how many ‘professionals’ do you deal with? Here’s a small list. You ca add your own to this at leisure.

Professional

Her/his fees per annum
A financial planner Rs 25,000
A CA to file your IT returns Rs 10,000 (assuming 2-3 returns in a year)
A mutual fund cost approximately 3 per cent as asset management charges
A life insurance company cost same as a mutual fund in the long run
A portfolio manager for your shares 4 per cent charges
A broker + banker 2.5 per cent charges

To keep all of them happy you need a portfolio in excess of at least Rs 1 crore to start with! And all these guys (or gals) smart, sophisticated, nicely attired and perfumed cannot stand each other. So you need to find them all on your own.

Let us say you do have a handsome amount of Rs 3 crores and you employ the above orchestra to play for you. Let us see how much it will cost you.

Also, let us assume that this orchestra helps you earn 13 per cent return on your Rs 3-crore investments, which amounts to Rs 39 lakhs per annum. Then this is how your expense cookie will crumble:

Expenses

Financial planner        Rs 25,000
CA Rs 10,000
Mutual fund Rs 90,000
Insurance premium Rs 90,000
Portfolio Manager Rs 1,17,000
Banker Rs 1,00,000
Total costs Rs 4,32,000

At a portfolio of Rs 3 crores this amounts to ALMOST 10 per cent of the return that you received. After all this, they will tell you the following:

“We are paid on efforts basis; we cannot guarantee results. Mutual funds are subject to market risks”

Past performance is not a guarantee of future performance — or like Sehwag should we say “past non-performance is not a guarantee of future non-performance”?

Interestingly, if instead of this whole orchestra you were to put your money in PPF, a long-term bond fund and an indexed fund and earn a little less than 13 per cent per annum, you may still be better off.

But, I do have a financial planner who says that I need the fellow professionals to help me. What do I do?

Well, er, if your financial planner was selling car loans, home loans, mutual funds, life insurance and s/he has suddenly turned from a larva to a butterfly, well s/he still wears some of those hats. So surely out of the 10 per cent charges that this client is paying some of the money goes back to her/him.

Let’s look at this conversation between the client and his financial planner:

Client: Hi I heard you are a financial planner, can you plan my finances?

Planner: Yes of course, I can and will.

Client: Will you promise returns superior to the market?

Planner: Oh no! I can help you set your financial goals, risk profiling, finding you a lawyer who will make a will for you, a CA who will file your returns etc. But for selecting which mutual fund to invest and such other questions you should be asking a Portfolio Manager.

Client: And how much will you charge me for this service of yours?

Planner: Well I charge Rs 25,000 or 1 per cent of your assets whichever is higher.

Client: Thank you. Now I will meet the portfolio manager.

Client: Hello, Mr P M, will you manage my portfolio please? Of course, I know you will but what I want to know is how much will you charge me for doing this?

PM: Of course I will, and I will charge you about 3-4 per cent of the assets under management.

Client: Well, that’s too high but will you promise me a return greater than the average return in the market for the fees that you charge?

PM: Well I will actually decide on how much money to keep in debt instruments, how much in cash and how much in equities. I hope your financial planner has taken care of your life insurance. By the way, you will be glad to know that I am also a life insurance agent.

Client: Oh yes. My planner has asked me to buy a very low up front charge based unit linked life insurance plan.

PM: Oh this life insurance? Their initial charges are low, but their asset management charges are quite steep. Why did you choose this plan?

Client: I thought my planner was keeping my interest in mind.

PM: Of course, of course s/he must have thought of you. By the way I think you should invest 30 per cent in RBI bonds, 20 per cent in a unit linked pension plan which is equity based, 30 per cent in a classic endowment plan, and keep about 20 per cent in cash.

Client: In which mutual fund do you think I should invest?

PM: Here are some mutual funds with an excellent track record for the past 3 years — they all have given about 45 per cent return and I think they will do well in the next few years.

(After a few days)

Client: Mr Planner out of the money that I gave you for life insurance only 70 percent has been invested? Why?

FP: Sir I did tell you that it is low front end loaded unit linked life insurance�.

Client: But 30 per cent charge on such an insurance plan cannot be low, can it be?

FP: Of course it is low. There are some schemes which have 70 per cent load, comparatively this is low; is it not?

Client: Oh I see. And the endowment plan which the PM recommended to me. In that case I do not know how much the charges are. Correct?

FP: Yes, Sir.

Client: the mutual fund has also charged me about 2 per cent. That is very low is it not? Is it not lower than the 3 per cent that you told me?

FP: Yes sir. However, I have to tell you upfront — in keeping with the best practices — annually the mutual fund is allowed to take 2.5 per cent charges. You see they have to pay the trustees, the fund management company, the distributor’s trail, the audit fees, custodian, the registrar and transfer agent, the bank, etc.

Client: Oh I see. I hope these are the only charges that are levied.

FP: Yes of course, but for some small brokerage that actually gets added to the cost of the shares and is hidden from you by the mutual fund.  

Client: But I am happy to see that my RBI bonds got invested fully.

By the way it is nice to see that my planner, my portfolio manager, my broker, the trustee, the auditor, my CA who files my return, my lawyer who makes my will, the custodian, the asset management company, the distributor, the auditor of the schemes, the registrar and the banker will all make money. I really feel good.

By the way, will I make money�er, do I have guarantees?

FP: In this whole investment cycle which you saw, did I ever tell you to do any work?

Madam/Sir it is a very fair world — those who work hard make money.

The client goes away — to watch television which will tell her/him how easy it is for the common man to make money using futures and options. But then that is another story all together.

Do you need a financial planner at all?

January 10, 2008
Uma Kannan is a good friend and an ex- blue blooded MNC banker. She calls herself a housewife, and is a great parent.

Here she is taking potshots at her own ilk. She says when she was with the bank,

she was a “rogue deal seeker” but she felt good in calling herself a relationship manager, investment adviser,

associate director…and various other nice names which HR faithfully found her!

This article originally appeared in rediff.com

A small investor should never invest on her/his own. S/he should choose a mutual fund. But is it easy to

choose a mutual fund? Heck no. S/he needs a financial planner to tell her/him whether s/he should

put money in a mutual fund, a structured product, a unit linked plan, a classic endowment plan,

a pension plan, real estate, or what have you.

And what will a financial planner do for you? S/he will structure your portfolio, s/he will suggest that you file your

income tax return through a particular CA, ask you to invest in a particular mutual fund, buy a particular insurance,

suggest that you make a will, check your nominations in the existing assets that you have�etc.

Then you go to a CA to file your return, a bank to make your deposits, a mutual fund agent to

buy you mutual funds,

a life insurance agent to buy life insurance, a lawyer to make your will � the story goes on.

Ha ha, now how many ‘professionals’ do you deal with? Here’s a small list. You ca add your own to

this at leisure.

Professional

Her/his fees per annum
A financial planner Rs 25,000
A CA to file your IT returns Rs 10,000 (assuming 2-3 returns in a year)
A mutual fund cost approximately 3 per cent as asset management charges
A life insurance company cost same as a mutual fund in the long run
A portfolio manager for your shares 4 per cent charges
A broker + banker 2.5 per cent charges

To keep all of them happy you need a portfolio in excess of at least Rs 1 crore to start with! And all

these guys (or gals) smart, sophisticated, nicely attired and perfumed cannot stand each other. So you

need to find them all on your own.

Let us say you do have a handsome amount of Rs 3 crores and you employ the above orchestra to

play for you. Let us see how much it will cost you.

Also, let us assume that this orchestra helps you earn 13 per cent return on your Rs 3-crore investments,

which amounts to Rs 39 lakhs per annum. Then this is how your expense cookie will crumble:

Expenses

Financial planner Rs 25,000
CA Rs 10,000
Mutual fund Rs 90,000
Insurance premium Rs 90,000
Portfolio Manager Rs 1,17,000
Banker Rs 1,00,000
Total costs Rs 4,32,000

At a portfolio of Rs 3 crores this amounts to ALMOST 10 per cent of the return that you received. After all this,

they will tell you the following:

“We are paid on efforts basis; we cannot guarantee results. Mutual funds are subject to market risks”

Past performance is not a guarantee of future performance — or like Sehwag should we

say “past non-performance is not a guarantee of future non-performance”?

Interestingly, if instead of this whole orchestra you were to put your money in PPF, a long-term bond

fund and an indexed fund and earn a little less than 13 per cent per annum, you may still be better off.

But, I do have a financial planner who says that I need the fellow professionals to help me. What do I do?

Well, er, if your financial planner was selling car loans, home loans, mutual funds, life insurance

and s/he has suddenly turned from a larva to a butterfly, well s/he still wears some of those hats.

So surely out of the 10 per cent charges that this client is paying some of the money goes

back to her/him.

Let’s look at this conversation between the client and his financial planner:

Client: Hi I heard you are a financial planner, can you plan my finances?

Planner: Yes of course, I can and will.

Client: Will you promise returns superior to the market?

Planner: Oh no! I can help you set your financial goals, risk profiling, finding you a lawyer who will

make a will for you, a CA who will file your returns etc. But for selecting which mutual fund to invest

and such other questions you should be asking a Portfolio Manager.

Client: And how much will you charge me for this service of yours?

Planner: Well I charge Rs 25,000 or 1 per cent of your assets � whichever is higher.

Client: Thank you. Now I will meet the portfolio manager.

Client: Hello, Mr P M, will you manage my portfolio please? Of course, I know you will but what I want to

know is how much will you charge me for doing this?

PM: Of course I will, and I will charge you about 3-4 per cent of the assets under management.

Client: Well, that’s too high but will you promise me a return greater than the average return in the

market for the fees that you charge?

PM: Well I will actually decide on how much money to keep in debt instruments, how much in cash

and how much in equities. I hope your financial planner has taken care of your life insurance.

By the way, you will be glad to know that I am also a life insurance agent.

Client: Oh yes. My planner has asked me to buy a very low up front charge based unit linked

life insurance plan.

PM: Oh this life insurance? Their initial charges are low, but their asset management charges

are quite steep. Why did you choose this plan?

Client: I thought my planner was keeping my interest in mind.

PM: Of course, of course s/he must have thought of you. By the way I think you should invest

30 per cent in RBI bonds, 20 per cent in a unit linked pension plan which is equity based,

30 per cent in a classic endowment plan, and keep about 20 per cent in cash.

Client: In which mutual fund do you think I should invest?

PM: Here are some mutual funds with an excellent track record for the past 3 years —

they all have given about 45 per cent return and I think they will do well in the next few years.

(After a few days)

Client: Mr Planner out of the money that I gave you for life insurance only 70 percent has been invested? Why?

FP: Sir I did tell you that it is low front end loaded unit linked life insurance�.

Client: But 30 per cent charge on such an insurance plan cannot be low, can it be?

FP: Of course it is low. There are some schemes which have 70 per cent load, comparatively

this is low; is it not?

Client: Oh I see. And the endowment plan which the PM recommended to me. In that case

I do not know how much the charges are. Correct?

FP: Yes, Sir.

Client: the mutual fund has also charged me about 2 per cent. That is very low is it not?

Is it not lower than the 3 per cent that you told me?

FP: Yes sir. However, I have to tell you upfront — in keeping with the best practices —

annually the mutual fund is allowed to take 2.5 per cent charges. You see they have to

pay the trustees, the fund management company, the distributor’s trail, the audit fees,

custodian, the registrar and transfer agent, the bank, etc.

Client: Oh I see. I hope these are the only charges that are levied.

FP: Yes of course, but for some small brokerage that actually gets added to the cost

of the shares and is hidden from you by the mutual fund.

Client: But I am happy to see that my RBI bonds got invested fully.

By the way it is nice to see that my planner, my portfolio manager, my broker, the trustee,

the auditor, my CA who files my return, my lawyer who makes my will, the custodian, the

asset management company, the distributor, the auditor of the schemes, the registrar and the

banker will all make money. I really feel good.

By the way, will I make money er, do I have guarantees?

FP: In this whole investment cycle which you saw, did I ever tell you to do any work?

Madam/Sir it is a very fair world — those who work hard make money.

The client goes away — to watch television which will tell her/him how easy it is

for the common man to make money using futures and options.

But then that is another story all together.