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  • Sakshar Law Associates

Legal governing principles behind wealth management

Updated: Sep 1, 2022


Sakshi Shairwal

Sakshi Mittal

Wealth management is an investment advisory service which brings together other financial services to meet the needs of wealthy customers. It is an advisory process whereby the advisor collects information about the needs of the client and made plan using suitable financial products and services. A wealth manager or wealth management consultant is a type of financial advisor that uses the variety of financial disciplines available to manage the wealth of a wealthy customers for fixed fee, such as financial and investment advice, legal or estate planning, accounting and tax services, and retirement planning. Depending on the country, wealth management activities also varies.

As a result of globalisation, India has experienced a steady rise in its high net worth population. Wealth management has become more important and desirable as the economy shifts towards higher income levels and saving choices. India's wealth management sector is at a preliminary stage with the potential to develop into a market for high-growth wealth management. Referral services, investment advisory services (IAS) and portfolio management services (PMS) are typically included in wealth management services. In India, banks with a well-developed network of branches have access to a wide client base. Because of the mis-selling of goods, conflict of interest, lack of awareness and transparency regarding products and fraud, banks providing wealth management services are exposed to reputational risk. Accordingly, RBI issues guidelines for banks' wealth management services. [1]

1. Marketing/Distribution of financial products and services

In certain cases, banks were not specifically separated responsibilities of marketing staff from other branch roles, and employees received direct offers from third parties to promote their goods and services, such as insurance, mutual funds and other agencies. Section 10(1) (b) (ii) of the BR Act of 1949 forbids a bank from hiring or continuing to be employed by any individual whose remuneration or part of the remuneration takes the form of a fee or a share in the bank 's income, except as set out in the proviso. Although banks which serve as agents of third-party issuers of financial products and services on a fee-based basis, additional safeguards are required without any involvement in risk.

The bank should adhere to the guidelines laid down for its agency business by the sector-specific regulator. Reasonable technical qualifications should be available to individuals performing marketing / distribution services of third party financial products in order to perform the function. A system of continuous development & training (internal as well as external) of such individuals should be in place so that they can appreciate the complexity of the product. Section 10(1) (ii) of the BR Act 1949 shall not be violated with respect to the payment of commissions / incentives or of the guidelines provided by the third party issuer's regulator. No reward (cash or non-cash) related directly or indirectly to the income generated from the marketing and distribution role should be paid to employees engaged in third-party product marketing / distribution services. The bank should strictly comply with all KYC / AML guidelines as provided on the subject from time to time.

2. Segregation of the bank's WMS functions by creating a separately identifiable department or division (SIDD)

In order to resolve the problem of conflict of interest resulting from a single organisation performing both advisory / fund management and marketing activities, there is a need to distinguish between two functions. Therefore all WMS operations, i.e. referrals, IAS and PMS, can be carried out by banks either from a separate subsidiary or from a separately identifiable department or division (SIDD) formed for that purpose. Before conducting WMS services, banks would require RBI's prior approval, whether through a subsidiary or SIDD, and would have to comply with some requirements in both cases.

Registration with SEBI and compliance with SEBI Guidelines for the provision of such services, including, where applicable, the Code of Conduct is essential requirement for both subsidiary/SIDD.The KYC / AML / CFT guidelines applicable to banks, issued by RBI from time to time, may be complied with in respect of customers to whom the referral / IAS / PMS services are given.

3. Grievance Redressal Mechanism

Regardless of the type of the service offered, i.e. the selling, advice, referral or fund management of third-party goods, or the manner in which it is given, whether departmentally or through a subsidiary or through SIDD, the bank must put in place a comprehensive redress mechanism for customer complaints that should form part of the approved policy of the Board.

Apart from these there are some principles that values wealth management.

4. Rebalancing:

In order to rebalance the portfolio, a structured, systematic strategy ensures a more stable degree of risk over time. Routine rebalancing aims to take down over-performing positions and adds capital to under-performing positions, a de facto method of selling high and buying low.

5. Total Return whereas Income Investing:

The misguided view that one should only spend the money created by a portfolio is often adopted by individual investors. This approach can be especially detrimental to portfolio construction and volatility in a low-yielding setting. Individuals might overweight long-term bonds, high-yield bonds, and stocks with above-average dividends when yields are poor. While this could raise portfolio revenue, it has the unintended effect of increasing interest rate risk, credit risk, and overexposure to the sector. These risks are mitigated by following a total return strategy and consumers recognise that cash flow.

The overall outlook in India shows a huge opportunity for wealth management in India with the growing number of market players and modern-day infrastructure. The patterns in the wealth management industry suggest bright prospects and potential for the sector to boom. The regulatory environment in India is expected to change rapidly, keeping pace with the market, and investors need to develop into a high-growth economy that manages wealth.


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