INDIAN BANKS ADOPT ADVISORY APPROACH

India’s booming wealth management sector has been one of the key casualties of the global financial crisis according to the 2009 CapGemini Merrill Lynch World Wealth Report, covering 71 countries across the world. The report states that after posting the fastest rate of growth of 22.7 per cent in 2007, the number of high net worth individuals (HNW) in India with investible assets of over $1m, shrank 31.6 per cent to 84,000, the second largest decline in the world. In 2008, notes the report, India suffered declining global demand for its goods and services and a hefty drop in market capitalization of 64.1 per cent. These sobering statistics, however, do not appear to have diminished the interest in India’s wealth management industry. A recent survey of Asia’s leading wealth managers by investment banking firm Barclays Capital revealed that India is still regarded as among the most attractive markets for wealth management in the region. Nearly one-fifth of the survey respondents have forecast revenue growth in India of over 15 per cent over the next two years. A similar sentiment was expressed by London-based wealth management research firm, Ledbury Research. India represents one of the greatest opportunities to wealth managers over the coming decades, states Ledbury, adding: “Even in today’s financial environment, the wealthy population in India is large and growing, yet the market is served by an underdeveloped wealth management industry.” Ledbury estimates that India has the tenth highest number of dollar millionaires in the world and their rate of growth is higher than in any other country. “No doubt, the financial crisis has had an impact on the wealth management industry. But we need to note that this industry is investor-sentiment driven. Now that cross-border flows are on the rise and some green shoots are visible, with expectation of better macro economic data, local investor sentiment will change and this in turn will lead to the growth in the wealth management industry,” remarks Ramnath Krishnan, managing director and head of private banking at HSBC, India. The growth momentum in India has not stopped, says Vishal Kapoor, head of wealth management, Standard Chartered Bank, India. “We continue to be very bullish about India. The number of millionaires will keep growing.” Himanshu Bhagat, head of sales for Morgan Stanley’s private wealth management activities in India, reiterates the positive sentiment about India: “Given the global financial crisis, there has been a drop in the number of millionaires in the country, but the industry will keep growing.” Morgan Stanley entered the Indian wealth management space around a year back and is targeting those individuals with more than $5m investable assets in the country. “We have a more focused approach towards our clients,” says Mr Bhagat. “We aspire to get around 1000 families in the next three to five years. Only they can take advantage of our integrated platform and customised offerings. We are extremely pleased with the positive response we have received in the market.” The Indian market has a wide variety of financial institutions servicing the mass affluent and HNW segments. This includes brokerages, asset management companies, insurance agencies, independent financial advisers and private banks. While recent entrants into the Indian wealth management space, such as Morgan Stanley, Credit Suisse and Barclays Capital are solely focused on the HNW segment, banks such as Standard Chartered, HSBC and Kotak target both the HNW and the mass affluent segments. “The mass affluent market, which we categorise as individuals having an investible surplus between $60,000 and $1m is growing very rapidly and is much bigger than the HNW sector,” says Mr Kapoor of Standard Chartered. He estimates there are nearly 4.5m individuals across 40 cities in India who fall within the mass affluent bracket. OUT WITH THE OLD One of the big impacts of the financial crisis on wealth management service providers in India has been the dawning realisation about the importance of personalised advice. Most of the recent entrants to the scene, such as Credit Suisse and Morgan Stanley, showcase their ability to offer an integrated offering covering investment, asset and wealth management. In addition they highlight their focused, personalised, investment advisory approach customised to the investment appetite of the client, as against the product-push approach that has been the hallmark of most of the existing wealth management players in the Indian market. However, the industry is now witnessing a gradual shift away from a product-centric to an adviser-centric strategy. A spokesman for Kotak Wealth, a leading provider of wealth management services, stated that the firm has changed its business strategy. “Kotak Wealth has witnessed the evolution of wealth management from opportunistic, event-driven and reactive advisory to a more structured diversified and planned science. While the science of wealth management evolved, the business model for a wealth outfit in India is still largely transaction oriented. Here the fees payable are from the manufacturer to advisor on every transaction done by the client.” Kotak would therefore, he states, be shifting away from the conventional transactional based approach to an advisory based approach to provide differentiated and relevant value added services to its customers. This model, said the spokesman, “is followed by Swiss banks and is common in Europe.” Nitin Jain, head of wealth management and private banking at financial services firm, Edelweiss, which is also focusing on an advisory approach, explains the strategy shift evident in the market today. “India experienced a phenomenal bull market between 2002 and 2007. Firms were focusing on primarily selling products since margins were high, clients were making money and there was little to chose from in terms of differentiated advise. But last year, due to the financial crisis, several financial products did not perform well, which dented the trust and confidence of investors and has made people focus on a more advisory based offering rather than only transactional services.” Narrow approach Even as India’s wealth management market evolves, the product portfolio across the spectrum of wealth management clients in the country is marked by a singular lack of diversification. Currently Indian investors are limited to only two key asset classes, equities and fixed income. This, say industry experts, is primarily due to regulatory strictures that do not allow financial institutions from introducing a wide variety of products. Customers that might have been adventurous earlier have burnt their fingers in the financial crisis and have shifted from riskier equity-linked and real estate assets to safer bank deposits and fixed income assets. “We saw markets heading downwards in mid-2008 and turned our attention to preserving capital by investing in shorter term deposits and less risky assets such as government bonds and fixed deposits,” says Puneet Matta, head of Credit Suisse’s wealth management operations in India. In recent months, he says, clients have started allocating money to equity. “We are over-weight on equities and believe that Indian equities is where prudence suggests investments should be made.” Indian regulations currently limit overseas investment per individual at $200,000. Hence it is not surprising that domestic equities account for majority of the investment. However, the fact that domestic equity markets have mostly performed better than elsewhere is also a key reason why HNWs are opting for domestic investments. “Clients primarily look at local equities. They are hesitant to invest in emerging markets, Asian and global equities even though we are constantly advising them on global diversification,” says Mr Bhagat of Morgan Stanley. “We do offer overseas, global products through a feeder route structure but the uptake at the moment has not been successful,” adds Mr Kapoor of Standard Chartered. At Standard Chartered, time deposits form a large part of the bank’s wealth management client assets. Investments in unit trusts and mutual funds contribute to a much smaller part of the client portfolio. Real estate funds, he says, are not very popular since they are not available at the mutual fund and Reit level. Hedge funds are also absent from the portfolio since regulations bar clients from investing in them while structured products form a very small proportion. “Broadly speaking, asset allocation of most private banking individuals is spilt 60-40 in favour of equity linked products,” observes Mr Krishnan at HSBC. “Debts, bonds, structured notes, equity-linked notes, and real estate products account for the remaining 40 per cent.” As a market that is experiencing rapid economic growth, India is bound to witness a change in demographic profile. More individuals will break into the ranks of the wealthy and the size of the mass affluent and HNW segments will grow as a result. However, Mr Krishnan notes that certain regulatory changes need to take place for the wealth management market to flourish in the country. For instance, banks cannot offer cross-currency products because of capital convertibility issues. “Regulators need to provide the flexibility to develop new products to ensure that there is a greater depth of offering.” Another sticking point in the industry is the absence of a level playing field for service providers. “There are multiple regulators regulating the same industry. Non-bank financial institutions face less restrictions than banks. Today, for example, as a commercial bank HSBC cannot advise its clients on any overseas investment while other players in the space can. There needs to be consistency in regulations to enable us to offer similar propositions.”