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The Wealth Gurus
Meet the stars of India’s wealth management industry, who steer the wheels of fortune for the country’s growing band of millionaires
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Lakshmi, Kuber, Plutus, Ebisu and Caishen are some of the popular names from mythology associated with wealth. Special attention is given to them as part of the daily ritual in cultures and geographies by those seeking to preserve or gain wealth. For one angry gaze could destroy a lifetime of savings. And thus go the legendary stories. Well, where gravity rules, we tend to worship a completely different set of gurus. At least those few who know what these gurus, or wealth managers, are capable of.
Wealth management has been a concern of India’s top-guns for centuries, if not millennia. For more than 70 years of India’s Independence, it was the domain of the big business groups and even the upcoming business honchos. This was done through private trusts largely put in place by banks, though the very large business families crafted their own private wealth-management vehicles. This has been the practice for nearly, or, all of the years since or even before the country gained Independence.
Top of the pyramid
Wealth management took off on the back of the tech boom when tech millionaires had to figure out ways and means to protect their wealth from the bust that followed. Managing one’s wealth has now become the flavour of the season, with the sudden increase in number of millionaires and what with private non-banking financial companies identifying wealth management as a blossoming segment in itself.
The boom in wealth management coincided with the rise in wealth among professionals, particularly techies and coders, finance professionals, dotcom entrepreneurs, who grew immensely rich due to the ESOPs and part-stake sales in their enterprises. These individuals now seek top-dollar advice on investments, structured products, estate planning, and the formation of private trusts to pass on their wealth to the next generation.
In fact, the rise in entrepreneurship is expected to raise India to the third largest number of billionaires in five or seven years, per some market reports. According to wealth management experts, the Walmart buyout of Flipkart flooded India with $3 billion in liquidity. Such buyouts are music to the wealth management industry. What wealth managers are looking for is an investible surplus – and the good news is that the number of individuals with Rs 25 crore liquid cash is only going to boom.
Kotak Wealth’s Top of the Pyramid (TOP) report, which analyses trends of ultra high networth individuals, estimates that there were 160,600 ultra HNIs in FY17, up from FY16’s 146,600, with a combined net worth of Rs 153 trillion. Note that the average UHNI is below the age of 40.
A Capgemini study released in June reports, “India was the fastest-growing market globally, with a 20.4 per cent HNI population expansion and 21.6 per cent HNI wealth growth.”
Now, in the next few years, Indian millionaires will be looking for more avenues to park their wealth. By FY22, the number of UHNIs is expected to more than double to 330,400, commanding a net worth of Rs 352 trillion, estimates Kotak’s TOP report.
“The future of private banking and wealth management in India is definitely exciting and this is led by the domestic savings rate of over 30 per cent, a growing economy and growth in the number of UHNIs,” says Ashish Gumashta, CEO of Julius Baer Private Wealth Advisors India, the India arm of the 128-year-old global wealth management firm. “The regulatory landscape in Indian capital markets has seen many developments, resulting in greater transparency and accountability, as well as increased investor confidence. These trends have created robust demand for quality investment advice,” adds Gumashta.
You could say the real viridian shoots in wealth management started to show up about eight years ago when entrepreneurs and professionals started seeing more liquidity in their hands, while investment advisory regulations spread its tentacles over and into the wealth management world.
What’s more, the jet-setters are not just housed in a few top cities, but increasingly tier 2 and tier 3 cities are seeing a rise in the number of the well-heeled. So, for a wealth manager, while scale could be built in the Top 2 cities, the potential of scaling up the wealth management business in smaller towns has also increased lately with cities such as Pune, Chandigarh, Ludhiana, Hyderabad, Bhopal, etc, on the radar of wealth managers.
The professional wealth manager
With the formation of a new government four years ago, the green shoots grew into sturdy branches when some optimistic projections about the wealth management industry began to be made. All the top pundits predicted the stock market commanding sky-high levels with the potential for immense returns to equity asset owners. “The industry has grown rapidly and there also has been a good wealth effect in the economy after Modiji’s government with the economy doing better,” says Nirmal Jain, founder-chairman of the IIFL group. “The wealth effect is only going to get better as more people come into the higher wealth bracket.”
In the past four years, more HNIs and UHNIs sought to diversify their assets into equity and other financial assets and structured products being created in equities to protect wealth and enhance returns without taking on too much risk, driving the need for an increase in wealth management services.
Demonetisation drove millionaires further away from physical assets into financial assets. This set the wealth management business ball rolling, and reaching for the stars. In 201, wealth management top guns saw their assets under management (AUM) shoot up by $62 billion according to the Asian Private Banker report to about $179 billion, and counting (See: The Czars of Wealth Management).
The year before, the same players added $42 billion to AUM, showing that the super-rich, the rich and the not-so-rich have been slowly warming up to professional wealth managers, and more than willing to take top-dollar advice on asset allocation, investments and estate planning.
Wealth managers also attribute the boom to the steady rise in international markets in the last 8-10 years, which has been the driving force in pouring liquidity into the mainstream economy. With increasing frequency in foreign buyouts, many Indian entrepreneurs have been cashing a part or all of their legacy businesses and becoming ‘cash rich’ in the process. More entrepreneurs are setting up family offices – largely to manage their personal wealth.
Of course, India still has a long way to go in global rankings. Yet, the country recently overtook the Netherlands to climb to the 11th position, with 263 HNWIs in 2017, up from 219 in 2016, according to the Capgemini report.
No surprise then, that this spectacular rise in the number of affluent individuals is increasingly driving demand for quality wealth management services. New wealth management firms are sprouting up. Recently, Wadhawan Global Capital (WGC), announced its intention to set up a wealth management arm.
Thanks to the little nudges and pushes over the years, wealth management is now more than a $180 billion industry in India – and growing. “Everything was coupled with the stable phase of government with initiatives like the demonetisation,” says Nitin Rao, CEO, Reliance Wealth Management. “There was a boom in insurance requirements, too. It was all coincidental that everything came up at the same time. If you ask me, you also have to thank banks for having built a large customer base for this surge in the wealth management industry.”
Diversity in money management
Another key driver of the boom in wealth management has the been the rise of alternative investment funds or AIFs, essentially either private equity funds, hedge funds, real estate funds, SME funds, infrastructure funds, and other such, where HNIs make sophisticated bets on new investing strategies, unlike the staid world of mutual funds that is used by the millions of small investors.
In 2012, market regulator Sebi brought in new regulations for AIFs to corral unregistered funds within the ambit of the law. There has been no looking back since for this set of investments. AIFs are aimed at HNIs where the minimum investment is Rs 1 crore. While an AIF should have a minimum corpus of Rs 20 crore at any given time, no more than 1,000 investors are allowed in an AIF structure.
Under the AIF structure, the well-heeled do not take on run-of-the-fund investment products. So, if you are looking for a long-short fund, where the fund manager takes positions on both the long and short sides of the market, you could find an AIF fund doing just that.
Also, if you are looking at a fund that solely invests in distressed assets as many good assets find takers that go under the hammer through the bankruptcy law, a distressed asset fund could be your answer. Similarly, some funds invest hugely in pre-IPO stocks, that is, stocks of companies that are expecting to be listed on stock exchanges within a year or two.
Such is the diversity of flavours available in the AIF world that HNIs are increasingly warming up to these funds. Cumulatively over the last five years, AIFs raised over $3.8 billion. This calendar year, AIFs raised $475 million in investments till date and the figure is only expected to rise.
“We are seeing interesting opportunities created by manufacturers and we would typically go to these products if they are not available within the traditional mutual fund space to complement the core portfolios of HNIs. So, we have added some interesting AIFs to our customers’ portfolios, says Rajiv Anand, executive director, Axis Bank.
In fact, the workings of the wealth management business have undergone a sea change over the last few years. According to insiders, private banks usually stick to basic products such as mutual funds and cross-selling of other loan products, whereas private equity or structured products are carried out through specialised wealth-management companies.
The HNI customer
Whichever segment wealth management firms are targeting, you could see that the wealth-management business is profitable, provided businesses keep their costs low. While there are not many physical entry barriers, you need basic research capabilities and investments in relationship managers, unlike a factory which needs large amounts of capital.
A few wealth management businesses in India moved shop. RBS’ wealth management business was acquired by Sanctum Wealth Management in India. Some of the foreign players exited the business for reasons of rationalisation of business overseas and cost rationalisation, but this has led to gaps in wealth management services being filled by the local NBFCs and other smaller firms. “The scope for growth is so immense that you can grow dramatically for quite a few years,” says Shiv Gupta, CEO, Sanctum Wealth Management. “If you go look at the average growth rate, it will be 30-40 per cent growth for a long period of time. This may not be linear because markets can fall, and mark-to-market assets can fall, but the industry is growing at all levels.”
The UHNI segment has much disposal income for investment, usually beyond Rs 25 crore – and this is the segment which takes investment seriously on the basis of sound advice. For a wealth manager, the differentiator here is the type of products on offer, the service levels to customers, and the depth of relationships with customers.
“We ensure that we have products for each investor whether she/he is conservative or aggressive,” says Jaideep Hansraj, CEO, Kotak Wealth Management and Priority Banking. “If an individual wants different sets of solutions, the platform is capable of providing all of them. For instance, if a client today wants succession planning, can we help them? Can we guide them regarding who they should look to for legal advice? Is the institution ready to refer or guide them to the right set of people? It’s a combination of all of these things that works for us.”
Of course, competition at the high end is stiff in the wealth management business, but as the pie is getting bigger, wealth managers will see good business for some time. However, if businesses want a larger slice of the wealth management pie, the real growth (with a great deal of innovation in products and use of technology) will be in the mid-market segment. For instance, the rise of robo-advisory is expected to take off in this space because the mass will be seeking a larger bouquet of products, but with lower fees.
This is also where the benefits of cost reduction of the wealth management effort to customers have not yet been felt. The differentiators in this segment will be financial advice at reasonable cost. At the high end of the market, though, it will be relationship- and product-driven. Wealth managers who have a handle on better products and can provide advice on the personal business front stand to gain.
All this is good for a customer because she/he will get better and better solutions at lower and lower costs.
Typically, there are 3-4 categories in wealth management where the top-end consists of people who have an investible surplus of Rs 25 crore and more. The Rs 5 crore-25 crore category follows, which may or may not be securing sophisticated financial advice. The below-Rs 5 crore category constitutes the mass of wealth climbers.
With the financial markets ever changing, new asset classes are always emerging where opportunities for wealth managers to dispense the right advice are immense. So, for example, the way the currency market depreciated in the past 3-6 months means that there was a returns opportunity for those who could forecast its fall. Crude oil prices, another area, have been on a rise lately.
Noticeably, AIFs are filling the product gap and the quest for yield of the rich class. “One of the other pieces is that a lot of money today is going into AIFs. In the AIF space, there are funds looking at new themes such as pre-IPOs, distressed assets, multi manager funds, long short strategies and so on,” says Nitin Singh, MD and Head, Standard Chartered Wealth Management. “At the top end, customers have an understanding of various complex products and strategies and are aware of their risk appetite. They are looking at diversifying their portfolio and increasing their yields.”
Edelweiss recently launched a yield-plus fund that raised Rs 2,300 crore from HNIs to invest in transmission and power assets, among others, which gave reasonable yield added with the possibility of a small capital appreciation. Avendus, for instance, recently launched a long-short fund where investors can make money irrespective of where the market is going. There are funds, for instance, that will invest in SME stocks, and so on.
The sky is the limit
So, whichever wealth manager can support sophisticated and timely advice on wealth-creating opportunities stands to gain more in the long run. “All assets are good. If you have a more thoughtful approach based on the needs of the client, based on the right products, then he will do well. Right now, we are focused on yields, and there are many good opportunities on the yield side,” says Nitin Jain, CEO, Edelweiss Global Wealth & Asset Management.
The sky is the limit in terms of the number of product innovation that can happen at the high end, depending on what the ultra-rich want. Usually at the high end, there are always two components at play. One, is the formation of a core portfolio to protect the rich’s wealth and inheritance. Second, enhanced yield products for those with a higher risk taking ability such as AIFs, PMS and small- and mid-caps.
But now that the wealth management business has well evolved, it is only going to gather more pace. The only question is whether the industry will be able to get trained people for growth. So, the issue is not whether customers are willing to jump onto the wealth management bandwagon; the issue is the supply of enough people to drive the shift to wealth management more rapidly.
In the business of wealth management, the real capital is people – particularly good relationship managers who understand Mr Richie Rich’s demands and needs. The only capital is people. The business model is such that if you give good advice and are profitable, the rich tend to stay for long. “We need mature people to face clients; people who are not looking at the short-term objective of revenue maximisation, but are able to add value to a client over a long-term relationship,” says George Mitra, CEO, Avendus Wealth Management, an HNI wealth management firm that has taken up the advisory model of wealth management.
Now, coming back to where we began, while gaining wealth has been the prime (if not the only) purpose of most cultures in India, even to the extent of praying to the iconic symbol of it all (goddess Lakshmi), preserving and growing it has been a life (and generational) concern. Even more markedly now, passing it on to the next generation with the new tools insights and techniques of wealth management will perhaps, in the years to come, make Lakshmi, Kuber, Plutuss, Ebisus mighty pleased.
THE PLAYERS IN WEALTH MANAGEMENT
* Universal banks: Large banks, mainly private banks with late entrants being some PSU banks
* Wealth Management Companies: Specialist wealth management firms offering comprehensive wealth management solutions
* Global investment banks: Mainly foreign banks and private boutique firms focusing on the UHNW segment
* Brokers & Financial Intermediaries: Traditional brokers have also set up wealth management arms
* Robo Advisory: This platform is just making a beginning in the wealth management space
* Wealth Advisors: Largely individuals and wealth advisors registered to offer financial advisory services
* India is expected to be the second largest country with the highest number of billionaires in a few years
* The number of rich individuals with an investible surplus is also expected to balloon as businessmen/professionals monetise their wealth through ESOPs and stake sales
* Direct equity and MFs have been beneficiaries of the financial boom. MF AUMs have risen 50% to Rs 23 trillion in FY18
* Alternative investment funds are increasingly being sought by HNIs looking for higher yields and structured assets
* The rich are increasingly looking at private equity and unlisted equity and seeking higher returns
* UHNIs have set up family offices to help them in managing investments and topreserve wealth