Caution Is The Watchword

That looks can be deceptive is best borne out by the Mumbai-based Arora family. Promoters of Arora Fibres and RAP Media: the companies reported revenues of just Rs 24 crore and Rs 2 crore, respectively in FY12. Yet, family patriarch Dilawar Singh Arora, 85, and his son Rupinder Singh Arora, 60, are among India's ultra-high net worth households (UHNHs), those with a net investable surplus in excess of Rs 25 crore.

So, in the current uncertain environment,  where are the Aroras investing? For the past four years they have abstained from investing in the equity market: "In the last four years, blue chip stocks have not done well and, today, we feel the secondary market is a minefield. Therefore, we would like to stay away," says Rupinder Singh, CMD of Arora Fibres.

The Aroras feel that Indian markets lack depth compared to overseas markets. This is surprising coming from a family that tapped the equity market way back in 1994. "We have always been conservative in our approach and preservation of capital has been of the utmost importance to us," says Dilawar Singh.

"Today, 30 per cent of our money is invested in fixed income while the rest of our investable money is in real estate (40 per cent) and renewable energy (30 per cent). Renewable energy will give us our annuity income; growth will come from real estate," says Rupinder Singh. The family's investment in land and property has been more than the average of 19.6 per cent of investment by UHNHs, according to Kotak Wealth and Crisil Research reports of 2012.

Cut to Sujoy Bose (name changed), a senior professional who holds employee stock ownership plans (ESOPs) in excess of Rs 300 crore which will vest over the next 4-8 years. But, last year, Bose, who is a diabetic, suffered a heart problem and continues to have health issues and, therefore, wishes to protect his family against any unforeseen eventuality and provide them a source of liquidity. Anshu Kapoor, head of global wealth management at Edelweiss Financial Services, made Bose purchase some term insurance policies with a sum assured matching the projected cash flow requirements over the vesting period of 4-8 years. Today, incase of an unforeseen event prior to exercise of any of the ESOPs, the term policies will provide the cash flow. The interesting aspect is that during his lifetime, Bose can let the insurance policies lapse as and when he exercises a particular tranche of ESOPs.



The tailor-made solution has given Bose comfort, but what has been Edelweiss's gain? "We didn't make a single penny by advising and offering the insurance solution to our client," says Anshu. He is quick to add, "It has built trust and confidence which, in turn, has opened the floodgates for us, as today, we not only know his investments but his entire financial balance sheet." He says in times of downturn, tailor-made offerings have been the biggest differentiator in a crowded market that is struggling to survive. Edelweiss Wealth Management manages assets worth close to Rs 3,000 crore.

Rajesh Iyer, head of products and research at Kotak Wealth Management, agrees: "People with Rs 50 to 500 crore are where the action is. Among UHNHs, risk-aversion to equities is creeping in, but they value advice and this has been the game-changer for wealth managers." Iyer says advisory services in wealth management have brought stability to their business  and over 2-3 years they would cover the entire cost of running the business. Five years ago, Kotak Wealth was focused on institution-based business. Of the overall assets under management  of Rs 15,000 crore (as per market sources), the advisory business accounts for 30 per cent, while 70 per cent comes from the transaction business.

But Ajay Bagga, MD and head of private wealth management at Deutsche Bank, has a contrarian view: "Advisory has not taken off. The Indian super rich are aware of global products, whereas Indian wealth managers have been offering them simple commoditised products for which they aren't willing to pay any fees. The ones that value advice and research have been middle-tier clients like surgeons and lawyers."

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A senior industry official adds that some of the super rich have their own AMFI registration number (ARN), which allows them 100 per cent pass-back on investments made by them.  K. Ramachandran, president, investment advisory and equity research at YES Bank says, "Regulatory issues are behind the hard landing of wealth management firms and have been the trigger for the first shakeout in the industry. Between 2003 and 2008, distributors were earning as much as 5 per cent on equity mutual funds (MF) compared to a manufacturer who was making a mere 2 per cent. The ban on entry loads in MFs has seen revenues being hit with commissions coming down to as low as 1 per cent while on the business side, markets didn't help with volumes declining."

It has been a double whammy for the wealth management industry: there has been a rise in competition, change in regulations and no new money has come into the market for the past few years. Besides, wage inflation has put severe pressure on margins of wealth management firms, which have had to think out of the box for their survival as monies shifted from equity to fixed income which pays far lower commissions.

On an average, the portfolio mix today would be largely debt, accounting for 50-80 per cent, while the rest is divided into equity, including alternatives, real estate and gold. Eighteen to 24 months back, the portfolio mix was more in favour of equities, accounting for anywhere between 10-90 per cent. Underperformance of equities and rising interest rates have spurred the shift to fixed income. With the equity markets underperforming, HNIs (those with investable surplus of Rs 5 crore) in India have declined by 18 per cent to 1.25 lakh in 2011 from 1.53 lakh in 2010, according to World Wealth Report 2012 by Capgemini and RBC Wealth Management.

EQUITY FRIGHT: Rupinder Singh (left) and Dilawar Singh Arora feel that the secondary market is a ‘minefield' and have stayed away from the equities market for the past four years (Illustration By Mala Singh)

Adds Rajesh Saluja, MD and CEO at ASK Wealth Advisors, which manages nearly Rs 5,000 crore in assets, "Broking and investment banking have died and no new money has got created since 2008, while competition has tightened with the emergence of new players. In the last 4 years, some 24 new institutions havecome into effect. The only way out was real estate and the alternate asset class which have helped in improving margins." For ASK, in the last 2 years, monies were made from discretionary portfolio management, real estate and alternatives such as private equity and structured products, which gave them an upfront commission in the range of 1.5-2.5 per cent. "We have beaten the industry as our focus on alternatives has helped us make 100-120 basis points (bps) in a business which has been delivering 60-80 bps," says Saluja, who feels that apart from high returns, the perceived risk in structured products and alternatives was considered lower than equities and that has helped in selling these products.

Meanwhile, exotic products such as art, where margins were attractive, have been a complete no-no among his clients.

The Big Shift
The downturn, in fact, has brought about a big shift in the minds of UHNIs/UHNHs, with the concept of ‘long' disappearing. "India was considered to be a growth-oriented market, that has now been questioned by UHNIs. The reason: in the last five years, the best mutual fund manager has delivered 7-8 per cent compared to a 4 per cent gain by the Nifty," says Kapoor and adds, "Today, long is not the only option; besides, there is interest in commodities and a lot of investment has gone into commercial real estate where the yields are around 8-10 per cent."

Overseas investment, especially in realty is also catching on. UHNIs are buying properties in places such as London and Singapore. This is because earnings from overseas markets have helped increase their overall revenues and they want to have a foreign base. "Even when returns from equities were good, wealthy Indians have had wealth preservation as their priority," says Ramachandran. He adds, "The idea is not to generate returns greater than their business income, but to grow their wealth without risks."

Says Atul Singh, MD and head of global wealth and investment management, DSP Merrill Lynch, "Over a long term, asset allocation creates value and we maintain the same with our clients. However, clients generally follow what has given returns, and today, it is debt."

Risk aversion has hit a new high, indicated by the willingness of big-ticket investors to pay money just to safeguard their capital. What are wealth managers doing? "This year, it is the survival of the fittest; focus will continue to be on the bottom line," says Bagga of Deutsche Bank.

Players such as Edelweiss have already started hiring non-finance sales professionals. A year ago, on a pilot basis, six non-finance sales professionals were hired and trained to become wealth managers. "Their performance has been better than expected and we got them at one-third to half the cost of any finance wealth manager with 4-5 years of experience," says Kapoor. Though managing costs will be critical, with foreign and Indian players sitting on losses, a near-term shakeout looks inevitable.

mahesh(dot)nayak(at)abp(dot)in

(This story was published in Businessworld Issue Dated 30-07-2012)