India’s sheer scale means potential rich pickings for
wealth managers, both local and global.
Meghna Mukerjee looks at how the emergence of young and
entrepreneurial high net worth clients is leading to a more diverse
investment appetite and growth in wealth markets outside
traditional centres.
Go deeper with GlobalData
India is an attractive market for private wealth managers
with its rich harvest of entrepreneurs and an economy growing at
more than 8% – next only to China. High barriers to entry and
well-placed rivals with extensive retail networks make many foreign
players think twice. But an undersupply of investment products also
provides plenty of room for growth.
The size of India’s private wealth
pool is what makes it so attractive. China and India have been the
most consistent drivers of Asia-Pacific growth over the past couple
of years, with a GDP growth rate of 10% and 9% respectively in
2010, according to the recent Capgemini/Merrill Lynch 2011
Asia-Pacific Wealth Report.
Quantitatively, the growth in high
net worth individuals (HNWI) is more than 20%, and the value of
liquid assets is expected to grow at 20%.
India now has a record number of 55
billionaires – next only to the US and China – according to the
2011 Forbes India Rich List.
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By GlobalDataTotal net worth of Indian ultra-HNW
(UHNW) households is expected to reach INR235trn ($4.61trn) in
2015-16 from an estimated INR45trn in 2010-11, according to Kotak
Wealth and CRISIL Research published in 2011.
“The assets and the new wealth that
is becoming available to manage by private wealth advisers like us
is increasing at a pretty brisk pace,” says Atul Singh, managing
director and head of global wealth and investment management for
Merrill Lynch in India.
Rapid growth
Despite its size, India’s wealth management services sector
is still relatively young and largely fragmented.
Traditional players in the Indian
private wealth management landscape include big domestic banks,
brokerages, foreign banks, and established offshore financial
institutions.
Large Indian banks such as HDFC and
ICICI have conventionally focused on providing a broad range of
financial products directed mostly at the mass affluent
segment.
Indian brokerages are increasingly
expanding beyond equities to develop wealth management platforms
that provide financial advisory and asset management products.
Sutapa Banerjee, chief executive of
wealth management at Ambit Capital, says there is still a lot of
room for improvement when it comes to wealth management firms
offering a complete, end-to-end spectrum of products for the HNWI
and UHNWI.
Banerjee says confusion in the
Indian private wealth market is caused by financial institutions
trying to bring the mass wealth, HNWIs and UHNWIs, under one
umbrella with no clear differentiation in their business
models.
“There is huge potential outside
the purview of the organic private banking industry, not to forget
the large amount of businesses in India that are yet to be listed,”
says Satya Bansal, chief executive at Barclays Wealth, India.
The number of family offices is
also on the rise in India’s private wealth market.
Family offices mostly sit at the
very top end of the Indian wealth management spectrum, being
relationship-based and knowing the local market thoroughly.
Richa Karpe, director for
investments at Altamount Capital – one of India’s largest family
offices, with estimated assets under supervision of INR$12bn – says
compared to family offices, private banks can “never truly be
independent” and offer a diverse yet holistic product environment
to clients.
Local vs
foreign
Banerjee says that local banks and family offices are
perhaps at an advantage in comparison to international players
entering the industry, as knowing the underlying asset classes in
India and how they work is “critical”.
“For onshore private banking, the
currency is not convertible for resident Indians. We are talking
about everything being rupee denominated. Nuances around how this
business works in India is actually quite local, in my view,” adds
Banerjee.
But foreign players are also at an
advantage, believes Singh.
“Here the markets are closed so you
cannot really use a lot of your global platform capabilities. Being
an onshore market you have got to create a lot of these platforms
and markets locally.
“And when you start doing that, you
really cannot differentiate yourself easily from local players. So
the advantage that local players would have hoped to have is much
lesser than expected,” says Singh.
Foreign players can also be more
“agile” and bring in innovative products quicker than their
domestic counterparts if the Indian context allows it, Karpe
believes.
Another force with the potential to
change market dynamics is the entry of public sector banks.
While not aggressive yet, public
sector banks will be strong competitors, particularly in the Indian
mass affluent segment, given their brand equity, reach,
long-standing corporate relationships, and ability to invest in
advanced technology platforms.
Limited product
universe
An issue, however, that private
wealth managers in India are facing is how to create high quality
advice for the HNWI and UHNWI clients, as the investment products
on offer are still relatively basic, according to Singh.
Foreign banks such as Merrill
Lynch, Barclays, JP Morgan, Citibank, and Credit Suisse, being
experienced players in private wealth management globally, have
taken the lead in developing focused products targeting the HNWI
and UHNWI.
“The challenge for us collectively,
as an industry, is what to do with all the assets and how to make
money from those assets,” says Singh.
“There isn’t a retail corporate
bond market or foreign exchange as an asset class, or hedge funds,
or other alternative asset classes that you have offshore. In turn
what happens is that clients get exposed to equity markets a lot,
and then if equity markets are volatile they tend to just pause and
not do anything,” Singh adds.
The majority of the Indian HNWI
portfolios, on average, are invested in equities and real estate,
though young investors are looking at innovative alternatives such
as new debt instruments of various types given the recent interest
rate highs, says Bansal.
Most of the money in India is
invested in equities or debt, or a hybrid of the two, adds Bansal,
saying that the structure of debt could, however, be different.
“It could be invested through
market-linked debentures, plain vanilla debentures, debt funds with
underlying debentures for tax efficiency reasons,” explains
Bansal.
The competition among the banks and
financial institutions offering private wealth management services
in India is fierce.
“New players can come in and that
in turn drives prices down. So there is a decline on the pricing or
velocity of assets that wealth managers manage. The asset side of
the equation looks attractive and promising, but the revenue
equation is yet challenging,” says Singh.
What is missing in India is
commodities, says Bansal.
“That is an asset class which has
not yet been looked at in a serious way by Indian families, unlike
global investors,” adds Bansal.
“We also see an opportunity, as the
regulations evolve, in terms of certain structured solutions around
the credit derivatives market. Those are the asset classes which
will emerge over a period of time.”
Young money
One dynamic of the Indian wealth
market that is very different from mature markets, like the US or
Europe, is its relative youth. More than 70% of Indian HNWIs are
less than 50 years of age, with a majority between 31-50 years.
Though family money is significant,
a large proportion of Indian HNWIs have made their own money – only
about 13% have inherited their wealth.
Entrepreneurship is the dominant
source of domestic wealth, and Bansal points out that a new breed
of businessmen – who plan to become serial entrepreneurs or target
early retirement – have made a “real difference” to the market.
“Their approach is dynamic and at
times our private banking approach helps them identify business
areas,” says Bansal.
Fast-growing industries such as
technology and financial services have also catapulted
middle-income group individuals into the HNWI bracket.
Indian markets typically also
account for 15% to 25% of the non-resident Indians portfolios.
Though more clients are becoming
conscious and aware of investing money differently, a large share
of India’s HNWI band has limited wealth management experience, and
thus relatively low-touch needs.
The wealth management industry in
India, according to Karpe, is now moving towards the advisory
model.
Bansal agrees, saying that in the
past four years, Barclays has focused on its services as investment
advisers in India.
“We don’t have any products to
distribute – we seek the clients’ input as to what would be of
interest to them and then look for the right solutions, maybe
within or outside Barclays,” explains Bansal.
Wealth on the
move
Most organised private wealth
management providers have so far focused mainly on the urban
segment, leaving almost 65% of India’s HNWI population unreached
and untapped, says Banerjee.
Though Singh believes that HNWI
locations are fairly concentrated in big metros – Mumbai and Delhi
being the largest – Banerjee says that a dispersion of wealth to
mini-metros, such as Kolhapur, Surat, Ahmadabad, Hyderabad,
Chandigarh, Pune and Nashik, has taken place.
According to Karpe, wealth managers
are now keen on entering smaller markets and are looking to tie up
with IFAs already operating there.
Bansal says that a lot of HNWIs and
UHNWIs from tier 2 and 3 cities are looking for wealth management
assistance from global players because most of the “generation
next” get educated abroad.
“When they come back and start
working in India, they look for the best solutions and, at times,
speak to banks like us because they are used to global exposure and
brands,” says Bansal.
Regulatory
demands
The regulatory environment in the
Indian wealth management space is evolving. Regulations covering
fiduciary duties and investor protection are forthcoming.
Khushroo Panthaky, partner at Grant
Thornton, India, says the Reserve Bank of India – the primary
regulatory body – has efficiently created a “level platform” for
Indian and foreign players to operate.
The Securities and Exchange Board
of India has been active in defining the framework for regulating
the wealth management industry and continues to do so.
The regulatory landscape in India,
like any emerging market, is catching up with global best
practices, says Bansal, adding that Barclays has a “natural
advantage of already coming from a global platform” and having
covered many upcoming regulatory changes.
For players who are not on a global
benchmark framework, regulatory evolutions could be a change in the
way they operate their business model, says Bansal.
Singh believes that “with the
regulatory framework getting enhanced and enriched”, the entry
barriers in the private wealth management market for new players
could get higher.
“That would help larger players and
make life difficult for lots of marginal or small players. There
could be a bit of consolidation in the market because of the cost
of entry.”
Given the relatively nascent stage
of the market and its significantly different demographic and
regulatory environment, the opportunity for private wealth managers
in India now lies in harnessing the wealth creation process.
“It is an unprecedented opportunity
for wealth managers to get in and help clients who get monetised
and are suddenly sitting with a lot of liquidity, with no
experience of managing money in the past. We see those examples
more and more, which is part of the excitement for us,” says
Singh.
Karpe believes bankers need patience and a long-term view to
succeed in the Indian private wealth market. Banerjee says having a
specific, client centric, business model is the only way to gain
deeper access to HNWI and, especially, UHNWI wallets.
