Personal Wealth: Winds Of Change

Turn the clock back ten years and the significant shifts undergone by the wealth management industry in India come to surface. India was then at the cusp of a powerful bull run that would see its benchmark indices double in less than two years.

In 2006 alone, 78 new IPOs (initial public offerings) hit the market, mopping up close to Rs 30,000 crore. A plethora of mutual fund NFOs (new fund offers) followed suit. High net-worth individuals (HNIs) with expanding risk appetites and swelling liquidity were more than eager to write cheques to the growing workforce of slick, freshly minted MBAs. Companies jostled for a piece of the pie and assets managed by wealth management companies grew quarter on quarter.
Then came the crash of 2008, shattering illusions that many HNIs harboured about their advisors. Several lost money and even more lost jobs, as wealth management businesses globally scaled back their workforce.

Between 2008 and now, we’ve seen a fair recovery in the stock markets. The total wealth held by HNIs in 2015 was reportedly close to Rs 280 lakh crore, with wealth in financial assets (the key driver of wealth management businesses) more than doubling in the past six years. And yet, large global players have been scaling down or opting out of the fray altogether, leaving domestic players to battle it out.

Anshu Kapoor, Head, Private Wealth Management, Edelweiss Broking, believes that international wealth management players could have done more to adapt themselves to the Indian market. “Global firms tried to replicate global models in India and they did not work as expected because needs of Indian clients are very different. Many firms also could not scale up as they had built up unsustainable cost structures,” he said.

Focus on Revenue
Many reasons have been cited for this contraction, but its seeds were possibly planted when the industry began to flourish. At some point, the industry devolved into being more ‘revenue centric’ than ‘client centric’. With scant attention being paid to customer suitability and risk, advisor performance became more about generating commission income than investment performance. Even risk-averse HNIs sometimes held equity heavy portfolios, with little understanding of the risks involved. A lot of wealth management firms seemed to have succumbed to short-term thinking, not realising that a single market downturn could upset their house of cards.

Ranjeet S. Mudholkar, vice chairman and CEO, Financial Planning Standards Board (FPSB) India, believes that such revenue centric wealth management businesses have taken a hit in recent times. “In the fast changing economic and regulatory environment, there have been some setbacks to revenue centric models due to reduced commissions across financial products. Also, a trend towards financial planning and therefore, a client centric approach and fee-based remuneration calls for a subtle shift,” he says.

In 2009, the Securities and Exchange Board of India (SEBI) decided to ban entry loads in mutual funds. Prior to that, wealth management companies were earning upfront commissions of anything between 2.5 per cent and 5 per cent on mutual funds, which formed a key element of their fee income. The regulator has taken more steps since, to control payouts to distributors in the interest of clients.

Regulatory Factors
The introduction of direct plans saw a further flight of mutual fund assets from some wealth management companies and the trend may gain momentum with commission disclosure norms, due to kick in soon. In 2011, SEBI issued guidelines for additional disclosures for the largely unregulated and complicated structured products market as well.

Kapoor believes the tightening of the regulatory screws has had a net positive impact on the industry. “With increasing regulatory requirements, trust between clients and financial advisors has gone up,” he says.

Cultural preferences have also created headwinds, prompting foreign players to exit. Many business moguls in India are more inclined to invest in physical assets like real estate and gold, but their tribe has been declining over the years. Even within financial assets, there is a distinct preference for lower risk assets, such as deposits and bonds and these products offer only paper-thin commissions to intermediaries.

Mutual Funds account for only around 3.5 per cent of the overall wealth pie and alternative financial assets account for an even more insignificant proportion. A significant proportion of wealth is held in direct equities. Passively held, non-fee generating equity holdings aren’t lucrative for wealth management companies and could create a conflict of interest, wherein, advisors may entice their clients to churn money in and out of stocks frequently, usually to their detriment.

International wealth management companies have had a rough ride in India after the turbulence of 2008. Some companies, however, have thrived amidst the chaos. Domestic wealth management outfits, such as Edelweiss, IIFL Wealth Management, ASK Wealth Advisors and Anand Rathi, have added to their advisor count and lapped up the talent pool left behind by foreign players.

It’s hard to pinpoint what makes these businesses tick. Quality of advice, robust risk management processes, a client centric approach, coupled with a solid research back-end, could be counted among their defining characteristics. Many of these players believe that bull markets are not the best time to add to their client base, as clients tend to be blindsided by possibilities of short-term profits and proper wealth management practices go out of the window. The key to scaling a wealth management business, therefore, lies in patience, a long term philosophy and the quality of AUM (assets under management), rather than profitability.

Besides a strong culture of client centricity and robust technology, systems and processes too have played (and will continue to play) a pivotal role in the growth of wealth management companies. Edelweiss, for instance, is focused on digitising its core: sales processes, workflow automation, client analytics and proactive real time advice.

The Road Ahead
The challenges of the past decade, notwithstanding, the future looks bright for wealth management firms that get their strategy right. Key players do not see robo-advisors as a threat to wealth managers, as the latter provide the face-to-face engagement that the Indian HNI community isn’t quite ready to move past yet.

Undoubtedly, companies will need to evolve, both in terms of technology and products, to keep up with changing dynamics. We may even witness further consolidation as shorter term players exit the business, but the industry is expected to keep forging ahead. Mudholkar of FPSB agrees.

“The wealth management business in the next five to ten years will be driven by addition of ultra high net-worth individuals (UHNIs), new wealth created due to e-commerce startups, as well as a growing young affluent investor base. There is a huge upside for the wealth management industry as only three per cent of total net worth of UHNIs is currently managed by advisors,” he says.

aniruddha@businessworld.in