Client Servicing Is A Mix Of Technology & Human Interface: Prateek Pant, Sanctum Wealth Management

Tell us about some of the key trends in the wealth management domain. With equity markets going through an extended time correction, are HNIs looking out for alternative investments at this time?
Some of the key trends in the Wealth Management domain are – Investors are looking for aggregated holistic solutions (estate planning, investment banking, credit etc.) from their wealth managers.

Traditional product based fees are being replaced with Advisory fees or profit fee sharing.
Real Estate is no longer looked as a transaction asset class but yield asset with back ended capital appreciation.

Client servicing is a mix of technology and human interface. However, DIY smart tech user interfaces are appreciated by millennials. Investors are wary of blind pools but keen to invest directly in private transactions in the unlisted/start-up space. New investment products like REITS, INVITS, ESG and Impact funds are finding favour with investors.

Interest in alternatives amongst HNIs has increased consistently over the years. As of June 2018, funds raised by AIFs was ~ Rs. 97,600 crores as compared to ~ Rs. 48,000 crores in June 2017 (data from Securities and Exchange Board of India SEBI). With the increasing volatility in the equity markets, absolute return funds are garnering focus. These funds aim to generate consistent returns for the investors irrespective of market volatility. The other AIFs include Venture Capital funds, Real Estate funds, High Yield Debt funds, Private Equity Funds etc.

What’s your take on structured products? Are they worth considering at this stage?
Structured products provide a way to represent your view of the market into a strategy. They are typically structured as debt instrument of NBFC and long dated options. These instruments allow higher market participation with capital protection. Some structured products also provide a fixed coupon along with market participation and capital protection. The products add diversity to the portfolio since it is differentiated and cannot be replicated with traditional products.

What about Real Estate? What would your advice be to an HNI who holds real estate in a prime location in a metro city, but is wary of the lack of capital growth and poor rental yields? Would you recommend a sell?
Residential Real Estate post GST/ RERA and significant oversupply in most of the metro markets has lost its appeal as an investment asset class. However, Grade A commercial real estate or sunrise sectors like co-working, co-living and student housing offer significant yield opportunities.

For an HNI who holds primary residential real estate for his own use, he would tend to hold the asset for emotional or strategic reasons. Most of our urban cities have poor infrastructure while prime city centre asset offers easy access and stability of prices due to low supply. Prime Location in a metro city is relatively risk free in times of economic recession or political turmoil.

There’s been a renewed interest in ULIPs post the changes in the last budget which made equity mutual fund returns taxable. What’s your take on this?
ULIPs are insurance strategies which combines investment products with term insurance options. In the past, ULIPs have been expensive products due to Premium Allocation Charges (PAC), high expense ratios and opacity of charges. However, in the last few years, many insurance companies have launched low cost ULIPs which have very competitive expense ratios vs mutual funds. These insurance companies have beefed up their investment offerings to compete on performance, pricing and product innovation. ULIP structure offers advantages vs other instruments -
In the last Budget there was 10% LTCG introduced on equity investment. However, ULIPs are not covered in this notification. Hence, there is no LTCG on equity or debt offerings through ULIPs. Therefore, the proceeds are tax free on maturity.

An investor can switch between equity and debt any number of times without any tax impact in ULIP structure.

ULIP offers 10 times annual premium as the insurance cover. This would be deducted in the risk premium which would be paid as part of the premium.

The downside is that the product is locked in for 5 years and no exit/liquidity prior to this period.

With small and mid-caps having corrected heavily, and seemingly making a base, are they a good place to be in right now?
Small and mid-cap indices have shown a correction of 20-30% from their peaks with some stocks falling by more than 50% as well. We do feel this presents an opportunity for investors to start building exposure in this space. However, we are cautious of the quality of companies that one should invest in.

Forward P/E multiples for mid-caps have contracted more than the large caps and are near their long-term average thus bringing forward valuations on mid-caps lower than large caps
Mid-caps have shown a top line growth of 17% and a PAT growth of 39% on a y-o-y basis

Lastly, what’s your take on direct plans of Mutual Funds and the RIA model?
Though direct plans of Mutual funds are at lower costs vs regular plans, it may not be suitable for everyone, especially investors who require regular financial advice. Many new investors need hand holding to understand the technicalities of the product i.e. product positioning, suitability, fitment, etc.

Cost is only one of the factors to evaluate while investing in MFs. In 2018, performance variance between Quartile 1 & Quartile mid-cap funds was in excess of 20%. Also, the volatility through the year had many first time investors in panic. Good quality advisor was essential to ride through the turbulence.

SEBI introduced RIA regulations around 6 years ago. Around 1,054 RIAs are registered with SEBI of which around one-third, which is roughly around 350 or 400 are actually into financial planning and wealth management practice. Rest of them are into stock tips or research. Many of them haven’t even started the practice after taking the RIA license.

While theoretically RIA model ticks all the right boxes to eliminate conflict of interest through induced incentives offered by a manufacturer of product and pay only for advice, the practical issue in implementation is investor behaviour. Most investors are reluctant to pay especially in a tough market environment. Hence, in order to incentivize distribution and ensure that there is a wide penetration of financial products, Indian markets will continue to offer both RIA and distribution models.