Indian-Wealth ManagementTrends & Issues

7/15/2010

Anshul Agrawal

I n d i a n W e a l t h M a n a g e m e n t – T r e n d s & I s s u e s Page 1WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT & RESEARCH

PGDM-BD 2009-2011

ROLL No 5

Executive Summary

Wealth management industry in India is one of the sunrise industries that have a promising future. With the growing individual income levels and healthy spending outlook prevailing among families, everyone is trying to balance their lifestyles as per their income levels.

As corporate culture penetrating even in PSU banks and undertakings, it is evident that the future of India lays in much more robust and dynamic managerial talent of the country. The idea gains strength with government banks and PSU’s on a hiring spree on day 1 of campus placements among top B-schools of India.

So with government tying hands with corporate India it is almost certain that there will be disciplined increase in wealth creation for the nation. So the core purpose of the paper is to understand the current outlook of wealth management in India and roadmap into the future.

In the annual survey done by Cap Gemini, SA and Merrill Lynch it was found that ranks of millionaires grew 6% in the previous year, because the number of richer people grew in India & China where India is competing China. India & China posted the biggest gain in millionaires advancing by 23% & 20% respectively.

When we are watching the world wide increase in number of millionaires the facts collected by Cap Gemini, S.A. and Merrill Lynch survey report. India has 23% growth in the last year. The biggest Asian economy China stands on second position with 20%, west Asia 16%, United States 4% and United Kingdom (UK) 2%.

So we can understand that there are more opportunities in the wealth management business in Asia especially in India.

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Wealth Management in India

In India wealth management sector is dominated by banks. In fact Wealth management can be a synonym for the services offered by banks to its HNI clients. Almost every bank weather Public sector like State Bank of India or private sector like ICICI Bank; Indian Banks like IDBI or MNC giants like deutsche bank; wealth management forms an integral part of their offerings to their value clients.

In order to woo their clients banks often assign individual relationship managers who acts as one point contact for all the banking and wealth management needs of the customer. In order to increase their share of wallet banks have widened their basket of service offerings and have gone beyond mere banking.

Now Both Indian and Multi-national banks are offering host of services and trying to change the customer experience in using these services. The typical services provided by Banks in India to their customers are

Banking A/c (deposit based) Loans

o Homeo Caro Personalo Jewelleryo Education

Overdraft Credit Cards Financial Planning

o Tax planningo Estate Planningo Retirement Planning

Portfolio Management Insurance

o Life o Non-Life

Foreign Exchange Services

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And to make these services more accessible to the customers banks are deploying following channels:

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The above figure clearly indicates the multitude of channels through which banks provide their professional services to clients 24*7.

In terms of profitability Internet –banking is emerging as most cost-effective platform for banks and is therefore seeing tremendous promotional efforts on their part. Banks are providing a host of discounts and rewards for using internet in payment of bills, purchasing and transferring funds.

From customers point of view also internet banking and mobile banking are the most accessible channels but since both of these channel and their transactions are electronic in nature, reliability remains a question in consumer’s mind.

Now despite a host of services that are offered by banks and multi-channel network to deliver the services, what a wealthy individual needs in a wealth management solution depends on their stage of wealth-building/distribution, and specific on-going financial needs.

And what a wealthy individual wants in products and services is often event-related, like retirement, care-giving, business liquidation or generational wealth transfer, all of which must be considered.

This can be a challenge for wealth managers who must profile their wealthy clients and determine the best solution that will create a satisfactory client experience and achieve profitability targets for the firm. Each individual’s situation, while seemingly unique, can be profiled for a class of products and services. For example, while calculators and planning tools might work for a Mass Affluent individual, a HNW individual will need more sophisticated tools, such as separately managed accounts (SMA), asset modelling, risk management, and tax and estate planning.

The right technology tool to support the client at the right time in the client's wealth event cycle is important factor to consider since their wealth status can quickly change due to wealth creating events.

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Advantages of Wealth Management

1) Helpful In Tax Planning: The wealth management professional always shows the good path to the customers and provide the service of tax planning. How to minimize the tax and save more money. The answer lies in complex section that are even difficult to be understood by a common man. The problem here is not that customer is avert of paying taxes but assessing & paying right amount of tax is a tough job and requires a lot of domain expertise.

2) Helpful in Selection of Investment Strategy: Another advantage from the customer point of view is with the help of WM Professional the customer can easily know about his/her risk profile and risk appetite and accordingly formulate the investment strategy and maximize return on investment by mitigating the risk associated with the investments.

3) Helpful in Estate Management: With the help of wealth management professional we can also manage our estate. Estate management is a task to provide objective administration of our funds tailored to aim in responsible distribution and protection of our overall estate.

4) Aid in Tracking Cash Flows: People who take assistance of professional financial planners and wealth managers are more justified in tracking their cash flows and hence are in a better position to guide their investments into appropriate place.

5) Access to more sophisticated investment tools and Strategies: - With professional wealth management in place which is highly regulated by securities and exchanges boards of India, client can choose to adopt a discretionary and non-discretionary portfolio management service by a wealth manager.

Also while taking services of professional wealth managers; customer has access to the more exotic investments like derivatives, securitized bonds, private equity etc and technical expertise required to manage these investment options.

6) Access to World Markets: - Wealth management aims at maximisation of returns. And with economies going global, investment options provided by banks are also becoming borderless. It is now possible for an individual to invest his/her money in global markets right at the convenience of a click.

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Wealth Management Process

Wealth managers have become more active and professional when it comes for managing the clients’ wealth. Nowadays Financial planning has become a buzzword and is a handy tool for wealth managers in better understanding of client and his/her expectation from investments.

Wealth managers across India are following similar approach for managing their clients wealth

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Recent Trends in Wealth Management

Real Time

As wealthy customers demand more frequent and a higher quality of guidance from their financial advisors, and become more active in the investment processes and performance measurement of their portfolios, the need for real-time access to information becomes critical. Strong data management with highly integrated feeds from internal and external data sources will be essential for the real-time wealth management platform. Real-time securities pricing information greatly enhances the effectiveness and value of risk metrics and supports more informed, and better timed investment decisions.

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Predictive MarketingTo grow the wealth management business profitably, wealth managers must have CRM capabilities that are highly analytical in using customer data to draw sophisticated insight and predictions around profiling and targeting profitable customer propositions. Wealth managers need to customize offerings and deliver value within efficient service models that balance costly resources against a high quality customer experience. Feedback on marketing campaigns, customer interactions, and customer transaction insights is crucial to the continual improvement of the success of the CRM analytics and predictive trending forecast.

CentralizationGoing forward, wealth managers will need to institutionalize their knowledge about customers and their needs to allow for more timely advice, more consistency of client servicing across advisors, and a better customer experience in each of the access channels. More institutionalized customer information will also support the replacement of existing high-cost, decentralized delivery models with lower-cost centralized virtual models, thereby making more personal service available to more customers at a lower cost.

OutsourcingThe cost of developing and maintaining wealth management platforms and operations is a significant component of the overall cost base of the wealth manager. In addition, there are many wealth managers who are looking to develop integrated platforms with the characteristics described above. Integrated platforms with sophisticated wealth management functionality would take many years to set up, and require an enormous investment, along with the cost of maintaining them. Therefore, many wealth managers are more aggressively outsourcing large portions of their middle and back office technology and processes such as securities processing, settlement, trust accounting, reconciliation, and performance reporting. ASP models are also providing similar support in a more standardized model to smaller wealth managers.

Web ServicesWealth managers and wealth management servicing providers are making their platforms available to the wealthy end users and Independent Financial Advisors (IFAs) through private-labelled-hosted web services applications that allow an investor to directly collaborate with an advisor. For example, advisors can use a third party secure publishing platform which handles a variety of document formats such as HTML, Word, Excel and PDF, and is integrated with the wealth management processing platform.

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Need-Gaps in Wealth Management

Range of Trading Options: The range of trading options herein refers to the trading platform which banks and brokers offer to their clients. In India leading brokers still offers age-old BTST, AMO, and day stop-loss options through their terminals; whereas customers expectations have gone much beyond.For Instance if a investor from his analysis figures out that share of ICICI Bank is going to fall to say 750/per share in coming month. Now in order to buy the ICICI share at said price he’ll be forced to track market on a daily basis as brokers in India do not have GTM1 (Good Till Month) feature.Therefore only options that remains with investor is to either go through derivatives route (Future & Options) which is more riskier or forget the deal.

Lack Of Transparency in statements: The periodical portfolio statement generated by brokers for their clients are a big challenge. A client who has little or no exposure to investment markets will really find the portfolio statement difficult to understand. Since it is a consolidated figure of all gains, losses charges commissions it becomes a mess for an investor to judge his/her net effective return.

Product, profitability focused approach: In this era of competition the banks and brokers are constrained to focus more profitability and products rather than customer and their goals, that is actually their job. In order to maintain breakeven revenues and generate profits wealth managers instead of adopting risk-mitigation strategies, are going for more risky avenues in order to maximize client’s returns, so that their commission based income is enhanced.

Still out of reach: Wealth management is available only for HNI’s. While some may say that it is a myth giving examples of mutual funds and financial planning; actual reality is that if we want to take professional advisory services from banks or brokers we’ll have to maintain a minimum balance of 5-10 lac investible assets with them. Now that is a big amount of money even now for majority of Indians. While It is true that growth rate of millionaires is highest

1 GTM :- GTM orders remains valid in exchange system for 1 month from the date they are punched in.

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among India and China but another face to story is India is nowhere in Top-10 nations in terms of number of HNI’s.

Hurdles in reaching global investment Markets: Since the Indian capital markets are highly regulated by SEBI (Securities and Exchange Board Of India) and RBI (Reserve Bank Of India), Indian investor is still not able reap the benefits of global markets. For example if an investor has analysed that dollar is going to appreciate against euro in coming month and he is looking out to sell euro-dollar contract, he can’t do it in India since forex trading has recently begun and only few currency pairs are allowed to trade. In order to tap this opportunity he’ll have to open an account with a foreign broker having Indian branch and then pay a heavy charges as per brokers norms and then he’ll be allowed to trade in global markets.

Untapped BOP Potential: In India every bank and brokers is running towards for HNI’s and the likes whereas a vast majority of Indian transaction still invests in FD’s and Bonds of govt, Post offices and Provident funds like traditional options.So there lies a vast untapped pool of investors who on little insistence can bring in a huge shift in Wealth management business by deploying their funds in capital markets and taking calculative risks.

Conclusion

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The middle class should drive growth in India The growth of the middle class and the economic growth of India are in a virtuous cycle. Rising incomes lead to more consumption, which in turn leads to higher economic growth, then more employment opportunities and subsequently higher wages and the circle starts again. Thus, as the middle class grows and continues to increase domestic demand, the economy will also continue to grow. In terms of consumption, real private

consumption (including both households and private companies) accounts for approximately 55% of GDP. The growth of the middle class will continue to increase household consumption in the country. The middle class also demands better healthcare and education. In addition to the benefit of strengthening human capital and thus productivity, this also leads to more private expenditure on healthcare and education and thus improvements in existing infrastructure. In fact, the CLSA survey of middle income and upper-middle income behaviour

showed that education was the third largest household expenditure behind essentials such as rent/mortgage and groceries. In terms of investment (already around 35% of GDP), the growth of the middle class will also make an impact as it will force more business to expand or new business to take root. The middle class is also increasing its share of financial investments and thus providing new sources of capital for companies. Although household savings and investment rates as a % of GDP have remained relatively the same over the past several years, investment in shares and bonds has risen over the past several years. As the middle class recovers from the crisis, this trend should continue.

One key point to ensuring that the link between middle class growth and economic growth continues to strengthen is providing the right education and skills to the middle class and creating enough opportunities in society to absorb these employees.

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Matching middle class skills with the demands of the growing economy

One benefit of India’s strong economic growth is that the economy has the potential to provide employment for the growing middle class. The boom in call centres and other outsourcing industries helped many households to achieve higher incomes over this past decade. However, one challenge is to continue increasing skills at all levels of the income pyramid to ensure that the newly emerging middle class (or those on the fringe of the middle class) are viable employees.

The second challenge, of a more general nature, is to increase the number of skilled professionals in the workplace to change the structure of the economy to a higher-skilled economy. Graduates often do not have the necessary skills to be effective in the marketplace. For instance, the World Bank estimates that a threefold increase in civil engineering graduates would be necessary to meet India’s large infrastructure needs

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BIBLIOGRAPHY

TCS- Report on Wealth Management

World Wealth Report 2010

Deutsche Bank Report Issue 15th Feb 2010

Websites :

Fpsb.co.in

Icicibank.com

Motilaloswal.com

Indiratrade.com

Economic Times (News Paper). Delhi

Financial Express (News Paper). Delhi

Business World (Magazine). Delhi

Business Economy (Magazine). Delhi

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