The rich and wealthy surely have a lot of money. However, you would be surprised to see the kind of money they lose. And the worst thing is the looses and the loot go undetected for a long period of time. This is a post meant only for those investors or investor families investing in excess of Rs. 20-30 crores.

When families invest big sums of money, it is normally delegated to one or 2 people who take the ‘top’ responsibility. The others just sign cheques, delivery slips, etc. and do not normally take part in the investing process. This creates problems – especially if the guy handling it is a little bull headed and is dull. I have seen families think that a slightly dumb individual can handle this – after all the others are busy in the day to day business – the ‘main’ business.

Some of these houses have lost a lot of money..and I could think of the following reasons:

  • the investment co-ordinator from the family was sheer incompetent
  • corrupt adviser – one of them kept telling the family guy “you are capable of much bigger things..lets do business together”
  • no audit whatsoever
  • the CA for filing returns was never asked to see the returns, etc.
  • poor accounting – not even knowing whether all the cheques given to the adviser were used correctly
  • it took one house about 6 years to know about being swindled
  • sub optimal performance was just accepted
  • excessive and complete churning of the equity portfolio and high brokerage – suspecting a kickback for his silence
  • poor and pathetic asset allocation
  • conflict of interest – the guy doing the admin got a top end luxury car. Obviously ULIP was what his nephew bought!

I can really go on and on.

Now the question is what could be done to prevent such happenings in the future?

  • create an investment committee
  • have a written policy for every person not just for the house
  • take a sign off after conducting a small training
  • have an audit on a quarterly basis and let the committee review
  • have more than one IFA / adviser / Financial planner
  • have a planner to suggest and an IFA to execute
  • create a good money sharing between the executor, planner, and get them to pay for the audit, BUT choose the auditor yourself

My learning: People sound confident because they are lazy, not necessarily because they are trusting.  The problem is so many people are drawn to a confident adviser they come into contact with. Frauds speak with such an air of certainty that the people who invest with them ASSUME they can deliver on all of their LOFTY ideas.

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  1. Good point sir.
    Little Digression:
    I have come across people who are too busy to do the investing part themselves. In most of those cases either the family money sits in FDs or gets into incompetent hands.

    People who are brilliant in their own field of work are often so hands-on that they cannot invest in funds or trust others to do anything right/manage their money. I have seen a lot of friends – businessmen and professionals alike who have lost money in the equity market due to negligence but never trusted a fund manager/Mututal funds.

    As a result the money is never invested. Or given to fixed return assets(Like Builder seeking FDs) which might be more riskier than equities.

    – Also, you are on point about Sub Optimal returns being accepted.
    Specially people with 20-30 crs to manage are seemingly happy with 8% pa post tax return as long as their principal is safe.

    – I have one last point to make, seen this quite often, when families are big and one person is responsible for the investment(Like your example here), that person has no risk appetite because he wants to be safe, if his portfolio is ever in red the whole family will be after him. Because most people still dont take out the time to understand the markets and hence panic or play the blame game too quickly.

  2. Audit or Auditor role could come later.

    The family should create a process that includes objectives, planning, roles & responsibilities, execution, communication and review (quarterly) akin to any certification system. Just by creating process, you would not only see immediate improvement but open the doors for tremendous improvement at later stage.

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