This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 21 - 17, 2016.

Investors can get reasonable returns if they stay invested for a longer time, says Rakesh Kaul, country head for retail banking and mortgages at Citibank Bhd.

“The era of making short-term gains is over. The data shows that if you stay invested during and beyond a crisis, the chances of getting reasonable returns are far higher than trying to time the market. Stick to the investment objective and timeline for maximum gains,” he points out.

Citibank’s customers, who comprise high-net-worth individuals, the mass affluent and emerging affluent (those with more than RM200,000 and RM50,000 respectively under management at Citibank), have accepted this new reality, says Rakesh.

“The most important thing in this environment is to have a frank conversation with our customers about how the world is changing. We have noticed that clients do not ask for products that give 20% returns anymore. They have become more realistic with the market conditions, the new normal per se,” he adds.

“Clients who do not want to take on more risk are happy to get a return of 100 basis points higher than the inflation rate or term deposits. At the same time, clients who are willing to take some risks are happy to get a return at inflation plus the country’s gross domestic product, which for Malaysia is currently about 8%.”

The International Monetary Fund (IMF) and World Bank have trimmed their global growth estimates to 3.4% and 2.9% respectively, from 3.6% and 3.3%. While all eyes are on the Chinese economy’s transition, the US economy’s recovery has created a divergence of opinion in the market. Thus, volatility is expected to continue while the global economic outlook remains uncertain.

In times like these, investors should stick to the practice of diversifying their investments and investing according to their risk profile, says Rakesh, who has 19 years of financial industry experience and saw first-hand the fallout of the global financial crisis, including the collapse of Lehman Brothers.

“I would say 2008 was one of the best learning years for me. I was in India working with the CEO on a company-wide strategy planning. India had a record year in 2007 and we were still basking in that glory when the global financial crisis hit,” he recalls.

“It was unthinkable that organisations built over a century were impacted and caused worldwide collateral damage because of the crisis. For the first time, we really understood the terms ‘domino effect’, ‘contagion impact’ and ‘market capitulation’, and how real all these were to us. I must admit that there were times when I was genuinely worried.

“It was a big lesson for me — that the world could change overnight. And when I relate that to what Malaysia went through last year, when oil prices fell from US$100 to US$30 a barrel and the local currency depreciated sharply, you see the parallel [between this and what the financial industry went through in 2008].”

When it comes to Rakesh’s personal investments, his rule of thumb is to invest outside the industry he is in. Also, he invests in asset classes and geographical areas that are not related to each other.

“As a principle, I never invest in the industry I work in. As I work in the financial industry, my investment holdings are biased towards non-financial-industry-related unit trust funds. This could be a contrarian view as people tend to invest in sectors they know well. But for me, the idea is not to put all my eggs in one basket. I let the industry which my future is tied to and my investments stay non-correlated,” he says. 

“I try to keep all asset classes in my portfolio. I have some gold in my portfolio even though it is less than 5%, and will probably invest more if the price edges lower. Gold has its own cycles and it has proven to be a long-term hedge against inflation as it is negatively correlated to equity movements.

Rakesh says it important for investors to know their financial goals and invest accordingly. For instance, he has two major financial goals — his retirement and his children’s education — and he uses a different investment strategy for each goal. “For my retirement, I invest in higher-risk growth-oriented investment products because I have enough time to retirement to ride out the market swings. For my children’s education, I take fewer risks and invest with a longer time horizon as my children are still young. 

“I have also purchased adequate protection through life insurance coverage to ensure my family has sufficient cash flow in the event of unforeseen circumstances. I make a conscious decision to review my insurance coverage every five years to reassess the changing needs of my family.” 

Start investing early

Is sitting on cash a good strategy during an economic downturn and heightened market volatility? Rakesh is not one to time the market. Instead, he believes in the power of compound interest and using dollar cost averaging. 

“It depends on the customer’s needs. As an adviser, the one and only principle is to ensure that the customer sticks to his risk profile and asset allocation,” he says. 

“Products can get complex, but one thing that stands the test of time is sticking to the basics, which is knowing how much risk one can take.”

For Rakesh, the secret to meeting one’s financial goals is to start investing early. People should set aside a fixed sum to invest every month and use the rest of their income to manage their lifestyle — not the other way round. He also emphasises the importance of discipline when it comes to investing. “Make investing a habit. You can start with as little as RM500. Keep stretching your goals and invest regularly,” he says. 

“Keep in mind two things — the power of compound interest and the value of dollar cost averaging — which can have a powerful effect on your investment portfolio. If you start investing in your 20s, by the time you are 30 or 40, you will have accumulated enough savings on top of what you have in your Employees Provident Fund account. Once you have attained a degree of financial freedom, this will not only be good for your retirement but also give you confidence in life and enable you to make better decisions that you would not be able to make if you are not financially well-prepared.”

The MSCI World Index, he points out, shows that the value of the US dollar has appreciated 450% in the past 46 years, translating into a return of 9.78% per annum. “The market has gone through all kinds of economic cycles over the years. But that investment would have yielded you a return you could not have made by timing the market. Start investing early.”

Rakesh says he continues to invest regularly in this gloomy economic climate and has allocated more funds to equities. “This is because the stock market has fallen so dramatically and valuations are attractive. It makes a lot of sense to take that additional risk as my investment horizon is pretty long and I can live with the volatility.”

The global financial crisis not only changed the banking system but also gave birth to more discerning high-net-worth individuals, who experienced shocks and suffered huge losses in savings and investments. Since then, they have questioned banks on issues such as transparency and are more involved in making their own investment decisions based on the information provided.

“The biggest impact of the crisis was on the customers. Since then, customers around the globe have been asking [banks] the hard questions and become more demanding. They are pushing their advisers, which is the bank, to the maximum level. This is very good as it raises the bar,” says Rakesh.

“Globally, customers are getting more savvy and serious about their investments. They are taking financial planning and retirement planning as one of the most important goals in their life. It is as important as getting a job and looking after your family.”

This trend can be seen in Malaysia. When oil prices plunged from more than US$100 a barrel to below US$30 and the ringgit weakened by more than 20%, Citibank’s clients constantly asked their relationship managers to keep them better informed. They also wanted more diversification in their investments.

“The oil price shocks and ringgit depreciation should be taken as very strong signals for customers to diversify their assets. The thing you realise in the last three to five years is that customers have come to embrace market volatility. This is especially true for clients who have business interests across geographical areas or those who want to send their children overseas for education, as well as those who want to buy assets outside Malaysia,” says Rakesh. 

“Staying in the same asset class is really not the right approach for wealth management. From our perspective, we try to do the right thing for our customers, which is to diversify into different currencies and asset classes so that they are protected [at all times]. If you don’t embrace volatility and plan accordingly, you will not achieve your objectives.” 

With the advances in technology, high-net-worth individuals today not only want instant access to market and financial information but also useful analysis and reports that help them make better investment decisions. And banks have taken note of this. 

“Citibank was one of the pioneer banks to launch online banking. Now, there are big developments in mobile banking. In fact, our new mobile app has garnered much interest in Malaysia. It is one of the more popular banking apps on the market,” says Rakesh.

“Our clients can get almost every banking need met via our mobile app. Not only do they get the same [market and financial] information but they can also see their investment portfolio and instant market updates on the screen. Then, they can have a conversation with their relationship manager and make investment decisions immediately.” 

Rakesh says banks won’t have a future if they don’t adopt technology and come out with innovative products and services. As one of the largest banks in the world, with a history that goes back more than 200 years, Citibank understands the importance of and is actively involved in funding and promoting technology.

“Financial technology (fintech) is playing a huge role in how banking and wealth management will evolve in the future. Robo-advisers are quickly becoming a trend,” he says. 

“Citibank was one of the first banks to invest in technology. We have set up a pretty large fund in New York to invest in fintech companies that can build advanced solutions for our customers. Very soon, you will see a lot of these tools become available to our customers.” 

Taking a leadership position

Rakesh says Citibank has taken the lead globally by being upfront and transparent with its customers about its fees. “We declare every penny that we make from sales upfront to the customers. Transparency is key. This is a huge advancement post-2008.”

The bank has also put in several layers of controls to assess its customers’ risk profile and to make sure the relationship managers do not recommend products that are not suitable for their customers. “We conduct a thorough analysis of our customers’ needs,” says Rakesh. “What do they really want to do? How much risk do they want to take? Are the products really suitable for them? What is the time horizon of their investments and what is their knowledge and experience?

“Product transparency is where Citi has taken a leadership position, not just in Malaysia but also globally. Our relationship managers do not make any money if a product sold is not aligned to the client’s needs. So at Citi, there is no motivation for our relationship managers to push products.” 

Citibank’s relationship managers are also objective when it comes to recommending products to clients as the bank is an “open architecture firm” and does not manufacture its own products. Also, the bank does not set any product targets for its relationship managers. “In other words, all the products on our platform are treated equally and the relationship managers have absolutely no bias when it comes to the products they recommend. All the products are for achieving the customer’s objectives and needs,” says Rakesh. 

Rakesh says the upfront sales charge for unit trust funds is expected to come down in the future. This would be good news for the industry as a lower fee would encourage more people to be involved in financial planning, especially the younger generation.

“This will happen sooner or later. The fees, or rather the overall fee structure, is due for a disruption and transformation. It is just a matter of time before the fees align with global averages,” he adds.

“I would really like to see the fees come down. This would not only encourage the Malaysian population to participate in wealth management but also create opportunities for them.”

Rakesh points out that the median age of Malaysians is 28. “This means that half the population is under the age of 28. With this, the future of wealth management in Malaysia is bright. These are the people who are going to become the high-net-worth individuals of the future.” 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.