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BW Businessworld

Big Shifts Ahead

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Given the current investment climate, protecting family wealth for the uber rich is of tremendous importance to wealth managers. This has manifested in two forms. One is the greater acceptability of the asset diversification strategy while consolidating investments under one advisor. The other is to create watertight structures that allow for strict mandates for managing and clear procedures for transferring of wealth across generations.Towards the beginning of the century, during the IT boom, there was significant wealth creation in India. This led to the development of more formal money management or wealth management offerings in the country. Wealth management in India was initially conducted in a relatively disorganised manner, with advice being provided by accountants, tax consultants, and other trusted advisors of the uber rich; rather than professional wealth managers. Banks, the largest players in the wealth management industry, used to focus on deposit-taking. With the advent of foreign banks, the domestic players began to scale up the business.

Depth of Investment Solutions
The early stages of wealth management saw traditional products like mutual funds (equity primarily), direct equities and insurance being offered to HNIs. During the bull market phase, structured products (Nifty-linked) gained ascendency. Subsequently, there was a lot of interest in private equity and real estate — both from a funds perspective as well as on a transaction basis. In recent times, we have seen debt investment solutions such as tax-free PSU bonds, corporate bonds and high-yield NCDs gaining traction. Market volatility has also forced wealth managers to consider absolute return strategies using derivatives such as arbitrage, long-short, etc., although such products are fairly nascent in the Indian context vis-à-vis global markets. 

Understanding Risk
Every individual has unique needs based on his risk appetite, ability to tolerate volatility and cash flows. While attempts have been made to broadly classify investors according to their risk profile, the market has been evolving constantly. For e.g., from 2004 to early 2008, the Indian equity market witnessed a phenomenal rally (Sensex delivered 34 per cent CAGR during this period), and most client portfolios were overweight on equities. This lured wealth managers and many HNIs into taking undue risk for the sake of superior returns, without much thought to the underlying instrument. For the subsequent 5 years or so, post the Lehman crisis, the equity market remained flat with high volatility. This phase of the market has driven home the concept of risk-adjusted return for wealth managers.

So, while equities historically dominated the portfolios of HNIs, we have now seen a reversal of trend with most portfolios being biased towards fixed income instruments. 

Portfolio Approach vs Transaction Approach

The concept of asset allocation at a portfolio level has gained precedence over the transaction approach over the last 3-4 years. Earlier, wealth managers used to identify a market trend, construct a suitable product to fit that trend, and recommend the same to HNIs. This was the traditional transaction approach based on the merits of a particular product.

However, post the Lehman crisis, the industry has realised that there is always a shelf life to individual products and the way forward is asset allocation. There are many ways of achieving a correct portfolio strategy with diversification acting as the guiding principle. However, diversification as a concept has existed for long in the minds of investors. Many of us would know about the perils of putting all eggs in one basket. Therefore, more than the idea of diversification, it is important to arrive at an objective method of scientifically diversifying in order to obtain the most efficient risk-return combination. The science is to select the portfolio which either holds the least amount of risk, given the return, or to get the best possible return given a level of risk. Now, HNI clients are being offered non-discretionary advisory services which entrail risk profiling, arriving at a strategic asset allocation, products based on their risk suitability and regular monitoring and review at a portfolio level. HNI clients have benefited through this approach over the last 2-3 years.

Along with the portfolio approach, HNI clients are also being made conscious of what should be their ‘safety pot’, i.e., funds which should be kept free of any sort of risk. 

Family Office
A Family Office is a group of dedicated professionals who combine to provide highly customised, expert advice in areas of importance to the ultra HNIs. The group provides a far greater depth of understanding than any one advisor can offer.

The primary function is investment advisory, which includes not just advising on the portfolio with that particular wealth manager but also consolidating all the other investments that the family may have with other advisors (if any), and providing a holistic view. This makes it easier for the family to monitor and review their investments across various advisors. The ancillary services provided include Estate Planning, Accounting & Taxation oversight, concierge assistance, etc. We see an emerging trend among ultra HNIs for Family Office services.

Estate Planning
Asset preservation and handover to the next generation adds a layer of customisation and complexity to the process. The importance and relevance of Estate Planning is now being appreciated by ultra HNIs. This ensures efficient management and seamless transfer of assets and wealth to the family. It also eliminates uncertainty and avoids disputes. This service is gaining importance for wealth managers.

The author is business head, wealth management, Kotak Mahindra Bank

The views expressed in the article are personal

(This story was published in Businessworld Issue Dated 14-01-2013)