Whither Wealth Management in India

The following article was published in the Business World (4th April, 2011) as 'A Wealthy Experience'

http://www.businessworld.in/bw/2011_03_25_A_Wealthy_Experience.html



India's booming economy is leading to great changes in its financial markets. One such change is the emergence of numerous players in the booming Indian Wealth Management market place. The economic growth in India has led to significant rise in disposable incomes and the ranks of affluent household have been soaring like never before. This huge business opportunity calls for specialized wealth management companies and various companies with little to do with wealth management have stepped in. But how will these players create their space in this action packed market which is yet to break out of the structural constraints of yester years?

This industry operates in various segments – i) Mass Affluent, customers with invest-able surplus of some Rs30lakhs to upto Rs1crore; ii) Affluent, customers with invest-able surplus of approximately Rs1crore to upto Rs5crore; iii) High Networth Individuals (HNI), customers with invest-able surplus of more than 5crore.

While the Mass Affluent and Affluent customers are being serviced by preferred or priority banking divisions of the retails banks, HNIs by organizations which call their services ‘Private Banking’. The new entrants in the market have the affluent customer as their target segment. These independent Wealth Management (IWM) companies plan to address the more sophisticated requirements of the Affluent customer and also benefit from the sense of disillusionment against their existing Wealth Managers.

Investors across the spectrum suffered during the credit crisis because of the inherent shortcomings of the existing structures in the wealth management practice - product pushing, and absence of advice and portfolio churn. This and recent events such as the Citibank wealth management fraud has catalyzed action towards putting together comprehensive regulations for this business – not an easy task given involvement of multiple regulators.

IWM companies are trying to fill the space between private banking and preferred banking as Affluent customers are currently being served, rather very inadequately, by the preferred banking divisions.

The current regulatory structure doesn’t allow banks to offer a wide range of investment products or offer the advisory services the Affluent investor requires and increasingly expects. Further, changes in the mutual fund industry have reduced the existing margins dramatically – MF being the mainstay of the investment product offerings at preferred banking divisions. The regulations suggest that investors pay directly to advisors hence link revenue to quality of advice and service. This can be best done in an independent wealth management company structure.

The business model of an IWM revolves around the following factors
• Offer a very wide product suite which can help provide customized solutions for the investor.
• Offer advice which is independent, sophisticated and proactive.
• Have an enhanced level of service offering, using superior technology.
• Create a brand to which trust, credibility, integrity can be readily associated.

Affluent customers confront considerable complexity and vast opportunities in the financial markets. To help affluent customers navigate the market ups and downs and to take advantage of opportunities while paying close attention to their needs and factors that may affect individual circumstances, a sophisticated advisory process and a very wide product suite is required.

However the current offering from these IWM companies seems to be a copy of their preferred banking cousins. They are found wanting on all counts except with regards to their ability to offer a wider product suite. An IWM product suite normally comprises, besides the regular MF, PMS, VC Funds and deposits, high involvement products like real estate, trust services, and sophisticated structures. In other aspects too, when pitted against preferred banking business, IWM companies again fall short.

Products push approach, recommendations based on only quantitative variables and historic data characterize the advisory platforms of preferred banking divisions. And as IWM companies have hired most of their client facing team from the preferred banking space, their advisory platform too is hostage to these factors. Most such people are yet to develop an approach of listening to and understanding client needs, and proactively provide an up to date investment advice and designing wealth management solutions.

Further no IWM company has yet been able to create a brand to which trust, credibility, integrity can be readily associated. They are no match to the delightful service banks, especially MNC Banks offer to their preferred customers.

Hence for IWM companies to become significant players in the Indian wealth management industry a hard look at the existing structures is required. They will need to invest, in a big way, in their people. There is a pressing need for training and skill enhancements of the people so that they are well informed and can offer high quality advice to their customers. In the advisory proposition there is a need to include more sophisticated tools for asset allocation and model portfolios. Including concepts of dynamic asset allocation and qualitative factors in the advisory process, along with specialized research on Alternate Investment products will position themselves to offer products and services that affluent investors rightfully demand and expect.

A brand building exercise is also important as most of these IWM have been set up by equity broking companies and the equity broking companies in India have rarely commanded trust and respect. A respected and trustworthy brand will help IWM companies reach out to their rapidly increasing potential customer base, who might be currently being serviced by the private bank across the street.

Independent Wealth Management companies should offer end to end services from wealth creation, to wealth protection and estate planning and in the process form generation long relationships. It is only then that these independent wealth management companies will be able to come into their own.