India’s private banking and wealth management leaders need to think long term – and on a bigger scale than anything which exists today – if they are to take full advantage of the many opportunities in the market.
Date: May 10, 2012
Tags: India, Growth, Strategy, Value proposition, Regulation, Training, Differentiation
India’s private banking and wealth management leaders need to think long term – and on a bigger scale than anything which exists today – if they are to take full advantage of the many opportunities in the market.
This requires the industry to overcome the many challenges it faces. These include the changing dynamics of the market, far-reaching regulatory changes over the past two to three years, high cost-income ratios, a shallow talent pool, the race for assets, and a limited product set.
Collaboration is one way to achieve a consistent and united voice as a starting point, said participants. As is proactive and appropriate regulation.
These were some of the thoughts of chief executive officers (CEOs) and other senior management in the Indian private banking and wealth management market at a private roundtable discussion hosted by Hubbis in Mumbai in April 2012.
Ultimately, succeeding in Indian private banking might mean building a new type of business, said some CEOs, given that the industry was so focused pre-2008 on execution rather than training relationship managers and educating clients.
This requires firms to first get together to work towards the establishment of a more robust industry, and therefore to be patient.
Yet there is strong demand, it seems, for a self-regulatory body to give the industry a more structured way to develop and ensure higher standards – for example, creating registers of advisers which have been engaged in wrong-doing, in turn creating more trust and confidence among clients.
Another key challenge highlighted is the fact that many firms in India engage in private wealth management – not private banking.
And with more than 40% of savings going into real estate, organisations which don't have a lending proposition and just rely on wealth management or private banking might find it difficult to make money.
The right business model might also require a move away from the traditional and Western-style asset-gathering approach, and instead towards ensuring profitability by only taking on client assets which yield a return on capital.
A potential way the industry might evolve is also through fragmentation of firms and clients – given that many clients are model-agnostic so pick-and-choose what is best-in-class from a particular model.
In terms of some of the other emerging opportunities, industry leaders said there is some potential for an external asset management model as a complementary offering. Further, there needs to be a shift from a product strategy to a portfolio strategy to bring the right offering to those clients who are willing to pay for advice.
Chairperson
Hansi Mehrotra
Managing Director, India
Hubbis
Participants
Ajay Bagga
Head of Private Wealth Management, India
Deutsche Bank
Amit Pande
Head Privee, Private Banking
Axis Bank
Anshu Kapoor
Head, Private Wealth Management
Edelweiss Capital
Anurag Seth
Head, Global Wealth Management
Quant Capital Advisors
PR Dilip
Managing Director
Impetus Wealth Management
Karan Bhagat
Managing Director & Chief Executive Officer
IIFL Private Wealth Management
Nitin Rao
Senior Executive Vice President, Private Banking Group & Third Party Products
HDFC Bank
Rajesh Saluja
Chief Executive Officer & Managing Director
ASK Wealth Advisors
Rohit Bhuta
Chief Executive Officer
Religare Macquarie Private Wealth
Sameer Kaul
Head & Global Market Manager, India
Citi Private Bank
Sharad Sharma
Country Head, Wealth Management
BNP Paribas Wealth Management
Shiv Gupta
Managing Director, Private Banking India
RBS Private Banking
Industry trends & outlook
Hansi Mehrotra: As a starting point, what is your outlook for the private banking industry in India, and how are you positing your organisations?
Shiv Gupta: When I think about the outlook for private banking in India, we should all look at the industry as something which we need to scale if we are to take full advantage of the opportunities over the long term. This requires all market leaders to position themselves in a way which can do this.
In the shorter term, therefore, it needs to be about doing what it takes tactically to achieve individual milestones so that each firm can meet the goals it sets for itself as part of the longer term strategy.
From our perspective, the scale needs to be much larger than anything which exists in the market today. This means that the focus should be much longer than four or five years, even if this creates forecasting and planning difficulties.
Hansi Mehrotra: So what does long term mean for a private banking strategy?
Shiv Gupta: When establishing strategic intent, this means thinking over the next five to 10 years; but when establishing specific plans, firms need to think shorter term with specific milestones. And for foreign players, global parent companies must be supportive of these timeframes.
Sharad Sharma: I have a slightly different view after being a practitioner for 10 years in the wealth management space as a foreign player. We saw good growth of wealth management business in the past, especially from 2004 to 2007.
However, the industry now faces various issues, such as changing dynamics of the market and the regulatory changes over the past two to three years. After seeing what is happening in India, my personal view is that banks create suitable platforms for meeting their clients’ needs even if this may require segregation of their private banking businesses.
With a hybrid model, there is a fair amount of duplication that has cost and compliance implications. As a result, we have to have clear rules stating what is possible to do within the existing platforms.
This won’t happen quickly, so taking a view over three to five years is a reasonable timeframe.
Nitin Rao: Somebody recently asked me whether we could grow the business five-times in the next three years and I almost fell out of my chair. There are many challenges, and post-regulatory changes we need to build a new type of business.
Given that the costs are high, while income is increasingly difficult, rebuilding the business has to be done in a viable way. As a result, I see consolidation over the next year or so. Then, when there is a recovery and firms start making money, better cost-income dynamics will make it possible to grow the business.
Rohit Bhuta: The industry has shot itself in the foot. Pre-2008, it was all about execution, and clients and advisers were all making money, so firms didn’t focus on training relationship managers (RMs) effectively. RMs moved from one organisation to another, receiving salary increases of anywhere from 10% to 50%, and we are now finding ourselves in a situation where the remuneration levels are not in line with their underlying skill-set. Many firms are finding that clients are asking for direction and leadership but are not getting it simply because there is no know how of how to.
I am looking for advisers with the right skill-set but I can’t find them, and that's a conundrum.
So while having a three- to five-year outlook is great, I think as an industry we need to accept that while we go through the training and education process, we will lose first before we gain.
We must all admit first and foremost that a robust wealth management industry has not in fact existed in India. Acceptance is half the battle won – we then need to get together as industry leaders to work towards the establishment of the industry. There will inevitably be losses before any business of significance can be achieved – patience must be the name of the game at least for the next 24 to 36 months.
Amit Pande: Even though Indian private banking is clearly a long-term business, the industry is going through a consolidation phase right now, and internally every firm is going through its own challenges at the moment, either locally or globally, as a result of the rising cost-income pressures. However, firms are are contributing to the increasing costs because many of us are competing for the same amount of manpower.
The industry is facing a challenge in scaling up the advisory calls across all clients because of capability issues among the client relationship side of business, therefore leading to deviations between model versus client portfolios. This is leading to the dilution of value proposition which the platform brings to the clients.
Sameer Kaul: Income appears to be falling while costs continue to rise, and I am curious as to whether enough firms in the industry are really thinking about the cost-income challenge.
A key challenge to address is the fact that most firms in India do private wealth management – not private banking. With roughly 42% of the savings of clients in this country going into real estate, firms which don't have a lending proposition and just rely on wealth management or private banking will find it difficult to make money.
Further, I agree that there is a lack of talent, and many people are not really private bankers in the true sense, and instead just push products.
For Citi, our thought process is to contain expenses and hire selectively people with a certain amount of vintage who can add value to our clients. We also have a very defined target market for private banking clients, and we see opportunities in terms of leveraging and real estate.
Increasingly, when we start to deal with clients who have more than 50 to 100 crores which they want us to manage, we are walking away from transactions because there’s nothing on the table. Further, there is increasing price-cutting by some local and multi-national players.
Shiv Gupta: I was somewhat encouraged when there was talk previously in the industry about a self-regulatory body, whether this is supervised or not, because getting together in a slightly more structured way would be a forum to address these issues. For example, creating registers of advisers which have been engaged in wrong-doing will help to strengthen the industry in the long run.
In addition, whether it is called private banking or private wealth management, firms need to find a vehicle which allows them to aggregate whichever products and services they offer as efficiently as possible – whether these include banking, investment services, wealth planning, credit services or whatever other overlays they choose to provide.
So I would like to see a distinct umbrella regulatory framework with a clear set of guidelines which addresses all the activities we provide and a vehicle which firm can use in an efficient way to be able to deliver that, whether this is an NBFC or a bank.
Finding the right business model
Anshu Kapoor: We believe that the opportunity in India will surprise us, so we need to find the right revenue and business models. However, what’s happened to date is that we’ve copied the global wealth management asset-gathering approach. Yet clients in India are different.
The challenges include people, in terms of trying to create a supply chain, and also penetration, in terms of trying to do more with each client given that owner-promoters have two balance sheets – the corporate side and the private wealth. Also, creating distribution by using technology is a hurdle to overcome, for example use mobile offerings to deliver services or client experience at lower cost, and to provide scale.
Our approach has been to try to invert the cost structure in some way by creating an independent consulting model, where we try to find entrepreneurs rather than employees and give them access to our entire platform. We’ve hired about five to six people to do this so far, and the results are encouraging. They use our brand to support and train them. Because they are independent, there is no fixed cost.
PR Dilip: In my experience, the most effective financial adviser is one who can think independently without bearing in mind any of the his own business imperatives while advising a client. Someone who is employed within an organisation works under a controlled environment – often with weekly, monthly and quarterly performance reviews – whereas a person who is totally independent gives unbiased advice which the client is able to understand and accept.
Revenue models based on pure advisory fees increase the trust-level of the client. However, at present, advisers in India don’t have much of pricing power, partly because of the lack of awareness about the need for prudent financial planning or asset allocation, and partly because of the general lack of trust.
I find that clients insist on meeting the senior-most official in the organisation, even though other wealth managers are very adequately experienced and well-qualified. This creates a problem in terms of being able to scale up the business. The most sought-after service model by UHNIs is a blend of the size and scale of a large organisation combined with highly personalized services of small financial boutique.
Nitin Rao: My approach is to take the 150 people within private banking who were each providing a mix of products and services, and then segregating their duties.
This has involved us having 100 individuals who have an investment background to operate as plain vanilla bankers, making it possible to run a viable cost-income model at that end of the organisation. We have then taken the other 50 or so advisers to develop them into mid-tie private bankers, targeting the 1 to 10 crore segment. Over that we can then build the UHNI proposition and offer family office services. This creates a feed of talent to service the different client segments.
Rajesh Saluja: While the long-term opportunity is clear, I don’t think the industry has got going yet. It’s not there either in terms of client sophistication or quality of advisers. Also, the products we offer tend to be vanilla most of the time.
In the short term, therefore, the strategy for many firms is to look at offering alternative investments which are proprietary in nature and for which the margins are better – especially in real estate and private equity.
A big change that I foresee going forward is a move away from the previous focus on building AUM. Instead, profitability is now key, so many firms will move away from unprofitable clients and from taking on AUM which doesn’t yield good returns on capital.
This focus on profitability is also the case for foreign players, which used to have a much longer horizon in India but today don’t want to accept 10 years of loss-making with bloated cost structures. This will lead to some short-term pain as firms downsize to change costly structures.
Another big factor which will take the industry to a different level is clearly regulation, where doing things like having registered advisers and firms, and auditing the sales process, will create more trust and confidence among client. Many clients, even in the UHNI segment, still don’t use third party wealth managers and prefer to remain dependent on their chartered accountants or tax advisers.
Ajay Bagga: There are various dynamics to bear in mind as we look at the private banking industry. First, it is coming off the back of multi-year product non-performance, so now is the time to look at cost-income ratios, and it is creating a cautious mind-set.
Secondly, there will always be a few less rational players in the industry among the 25 or so players which will look to buy market share.
Thirdly, the macro outlook for India has been revised negatively, so most foreign firms are likely to explore the options of China and then Indonesia before India.
Fourthly, when we look at mutual fund AUM, it has gone down to June 2009 levels, and people are moving out of the insurance sector too. This is bringing a lot of pressure on fees, which is impacting private banks.
Finally, when I look to the future, firms need to keep a close watch on the bottom line to ensure they can continue to survive. I think customers are model-agnostic and will pick and choose what is best-in-class from a particular model. As a result, I don’t think there will be consolidation, and instead we will see fragmentation of firms and clients.
Anurag Seth: I agree that the industry will stay fragmented, and firms are struggling between focusing on market share, through a discounting model, and on mind share, which is what clients are looking for.
Karan Bhagat: From a client perspective, average returns for the last five years on a compounded basis, subject to a client managing their portfolio very well, would be in the region of 7% to 9%. And that too, if two-thirds of their assets had most likely been in fixed income rather than equities. As a result, the quantum of commissions earned by a firm will automatically be capped.
Going forward, most clients which are today giving us a retention of 55 to 70 basis points should move towards 100 to 120 basis points. This will be possible if the structure allows it and if we can add some kind of alpha to the portfolio.
Given the limited product set, firms have to rely on technology, the aggregation of information, and possibly the good administration of assets to differentiate themselves.
With AIF guidelines and other instruments, I hope to see more diversity of portfolios. Once that happens, clients won’t be against paying a certain percentage of their returns.
A united & consistent voice
Hansi Mehrotra: What would you as industry leaders aim to achieve if you were to get together more often to discuss the various issues such as we have touched on already?
Shiv Gupta: We need to be realistic, in the sense that most firms enter the market driven by a certain amount of self-interest, so look to do what they think is the right combination of activities for them and their objectives.
With this in mind, regulation of any nature – whether it is supervised or self-regulated by the industry – will create higher standards in the industry and improve its credibility overall.
One of the challenges for private banking is that there is always a disproportionate contribution from market performance from a correlation perspective, whether over a one-year or five-year timeframe. So given the market circumstances over the past year or so, we should be realistic about the extent to which any structural transformation can take place.
Rohit Bhuta: It is important that as an industry we continue to come together on a regular basis to discuss our macro issues, industry issues, training issues and others, as a catalyst to the establishment of a more formal wealth management industry in India.
It is about saying the same things in the same language to encourage regulators to ultimately establish this industry. This will however only work if the forum is taken in the right spirit, which is for the betterment of the industry, and not used to judge each others’ businesses.
Ajay Bagga: A key issue we face as an industry is that we call ourselves private bankers, but we need to be clear about what we are really offering which a small time broker in the local neighborhood cannot provide to the investors.
At the moment, it seems the crucial factor is the survival as models evolve. But I think we will see wealth management at least in the form of preferred banking leapfrog, in the same way as we saw in the telecom industry.
Rajesh Saluja: We are seeing issues around scalability in the UHNI segment. These clients want to interact with the most senior person in the organisation, because they believe these individuals have the knowledge and probably will have more continuity.
That means three or four people regardless of how many advisers we have. So even if we scale the business to 50 advisers, for example, there will only be a handful of people which are really managing clients.
This is to do with trust, as well as a loss of faith from clients as they see RMs continuing to move firms. Even when we hire new advisers, we need to look at how much in AUM they actually bring with them – as it is only about 10% to 20% maximum.
There are no magic answers because of the limited resources available. But to expand the wealth management business and acquire more clients will rely on the average age of a private banker to increase to around 40 years old.
Emerging opportunities
Hansi Mehrotra: To what extent will the Indian follow what’s happened in Europe and Singapore in the development of the external asset management model, given that clients want their advisers to be slightly older, more experienced and better trained?
PR Dilip: By outsourcing the custodial services from a reputed bank, at Impetus we have reduced the back-office load on our organisation and increased the comfort-levels of our clients.
As a result, we don’t need to have a very big team for back-end activities. Instead of having separate teams for sales, investor profiling, and portfolio construction and implementation, if a well-trained professional takes the investor through the entire process, it enhances the confidence and comfort levels of the investor.
To be able to scale this, we would need to identify good quality people in different parts of the country and they would act as channel-partners to service the clients directly.
Rajesh Saluja: I think there is a requirement in the Indian market for external asset managers, but scalability is an issue. Also, a lot of UHNIs have their own set-ups along these lines already, with chartered accountants and chief financial officers working for them.
However, it is in the mid-market and for new wealth creators where the requirement is coming from. These clients see value in independent advisers, as long as they are working as part of an organisation.
Also, we need to be clear that the external asset management model, or family office as we call it in India, is a long way at the moment from what it is internationally.
Sameer Kaul: In terms of opportunities going forward, I am seeing that clients will give money to firms who create new ideas for them. Giving clients pass-backs is a lose-lose situation. But creating ideas either through your own proprietary network or through a third party will lead to product differentiation, and the conversation with clients won’t be focused on pass-backs.
A concern I have about the industry in India is that the threshold for people to enter it and become a wealth manager in India is very low. Unlike in the US, where you have certification, which not everybody passes, the entry standards in India seem lower.
As a result, we all need to be concerned about who we are putting in front of the client, in terms of the integrity of that individual. The industry would benefit from having higher industry standards which will make it more difficult for people to be wealth managers than is the case today.
Nitin Rao: We now have a more detailed bank audit to make it compulsory for our private bankers to focus on the sales processes too. This includes checking emails and calls, and we find that some people look to escape these controls by joining another organisation where these processes are not audited.
I encourage regulation and such audits to be consistent so that advisers cannot move firms and work without a structured process.
Anurag Seth: Something else the industry needs to debate is how to move from a product strategy to a portfolio strategy. Margins are coming down, but there are enough clients who are willing to pay, provided we bring them the right product strategies.
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