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Wealth management landscape and outlook in India: Takeaways from the global experience

Recent scenario in the Indian wealth management (WM) space

WM business has typically been an offshoot of the growth in discretionary income. With the rapid

growth in India’s GDP and income levels, its WM industry has become a hot-bed of activity. New

and existing players are competing in a yet nascent market. Indian HNI wealth and count has grown

at a CAGR of 5-6% from 2006 to 2011, similar to Asian markets but much higher than global rates

Nevertheless, a growth market has its set of challenges. Volatile markets since 2011 have played

havoc with asset values. Client’s focus is now shifting to low-risk products, with expectations of

higher service levels at competitive prices. This poses a challenge, as WM players need to reorient

their operating models to maintain their share in a competitive and evolving market

Fig 1: Indian HNI's 5 yr CAGR has been relatively strongHNI Count (Th) 2006 2011 CAGRIndia 100 126 5%Asia Pacific 2,600 3,400 6%Global 9,500 11,000 3%HNI Wealth (US$Bn)India 350 477 6%Asia Pacific 8,420 10,700 5%Global 37,200 42,000 2%Source: Merrill Lynch-Capgemini Global & Asia Wealth reports

Economic and income growth boosted scope for WM, but volatile markets and growth slowdown have posed challenges

Size and structure of the WM market in India

As per Capgemini’s report on Asian wealth, India had 126,000 HNIs with wealth of US$477bn in 2011 vs. 100,000 HNIs with US$350bn in 2006.

The growth trajectory during this period has been volatile. 2011 was especially harsh for India owing to macro concerns and economic

slowdown. On a YoY basis, India’s HNI count dipped from 153,000 to 126,000 and HNI wealth slid from US$582bn to US$477bn in 2011

India’s market is fragmented, with organized sector (independent firms, banks, brokers) battling unorganized sector (private advisors, CAs).

Celent’s research says a shift is seen towards organized sector as the market evolves, whose share is still just half that of unorganized players

India’s HNI count to total population grew from 0.007% to 0.011% from 2004 to 2011, with a high of 0.013% in 2010. However, it is still quite

small compared to major mature and emerging markets. This indicates healthy growth prospects as the ratio moves closer to global averages

Experience of a similarly evolving market like China shows that as India’s long-term economic story takes shape, the proportion of HNI Wealth

to GDP should rise. HNI wealth tends to grow proportionately higher than GDP as the discretionary income and savings grows in the economy

0.00

7%

0.02

%

0.05

% 0.15

%

0.01

1%

0.04

%

0.08

%

0.30

%

India China Brazil Korea

2004

2011

Fig 2: HNI count/population ratio in India is still much lower than both mature markets and emerging peers

Source: Indexmundi.com; Merrill Lynch-Capgemini Global Wealth reports

Emerging markets

Mature markets

0.85

%

0.69

% 0.92

%

0.98

%

0.70

%

1.17

%

USA UK Germany

34%

48%

15%

34%34%

52%

31% 31%

India China Indonesia Korea

Avg of HNI Wealth/GDP (2006-11)

Avg of GDS/GDP (2006-11)

Fig 3: Proportion of HNI wealth to GDP picks up with GDS% as the market evolves (as seen in China, Korea); HNI wealth picks up when growth in Per Capita GDP is higher (as seen in China and Indonesia); Korea is a more mature market hence its HNI wealth is already sizable

Source: IMF data, Merrill Lynch-Capgemini Asia Pacific Wealth reports

6%9% 9% 7%

11%

21%17%

3%

India China Indonesia Korea

CAGR of HNI Wealth (2006-11)

CAGR of Per Capita GDP (2006-11)

14% 8%26%6% 10%

13%16% 11%

30%

13%7%

2%42% 64%17%

10%0%

12%

India China USA

Others

Deposits

Currency

Insurance & Pension

ReservesMutual Funds

Direct Equity

Fig 4: Emerging economies allocate a smaller proportion of household personal financial assets towards equities

Source: FICCI_McKinsey report - Capital Markets 2020 - Going for 3x

38,2254,917912

Comparing Asia’s growth markets to USA shows that equity comprises a comparatively lesser

proportion of private financial wealth in Asia. It is instead dominated by insurance and deposits

Kotak’s survey shows that while Indian HNIs’ spending habits were unchanged in 2011, their

investment decisions changed. Capital conservation, low-risk, discipline were the buzzwords

Safe, low-risk assets were in vogue & demand for equities was low. But despite the low demand,

many didn’t withdraw their existing equity holdings as they viewed it as a long-term bet

Main focus has been on Tier I/II cities so far, while wealth pools outside them remain untapped

20%

-2%

46%

-8% -10%

14%

-25%

71%

15%

-16%

2007 2008 2009 2010 2011

Growth in Household Financial Savings Growth in HNI Wealth

Fig 5: Indian HNI Wealth have generally moved in a higher proportion YoY with growth shifts in Household Financial Savings

Source: RBI, Economic Survey, Times of India, ML-Capgemini Asia Wealth reports

Entrepreneurs, Professionals led the recent growth in Indian HNIs, as economic growth helped business owners/workforce enhance incomes

Recent trends seen globally

Contrary to expectations, global billionaire count actually increased last year. Forbes Billionaires

List of 2012 scored an all-time high of 1,226. US saw additions, due to innovations, strong brands

and US market upswing. Amongst BRICs, only Brazil saw an uptick, while India and China saw dips

Recent economic realities in mature markets warranted demand for safer, simpler products. A

PWC survey on US wealth shows clients are now cautious, less trusting, demand better service

and transparency in pricing, risks & investments. An Accenture report on global wealth showed as

clients became more knowledgeable, they took more self-directed decisions in vanilla products

Shift towards fee-model as it ensures sale of appropriate products and client stickiness.

Commission-model led to churning and mis-selling, which failed to achieve investment objectives.

With the preference for low-yield products, revenues in commission-based markets are hit. On

the contrary, an Accenture wealth survey shows revenue/AUM grew globally in 2011. Since larger

WM assets are in USA which is a largely fee-based market, it indicates revenues held firm there.

Comparing North America brokers and Asia Pacific ex-Japan shows a largely fee-based market

like America maintained its revenues and profitability, despite the dip in AUM growth in 2011

Demand for low-yield products, high compliance, advisor & technology costs put profit pressures.

Firms are now focusing on operational efficiencies. Costs as a percent of revenues improved

globally across major cost heads in the last 3 years. A BCG report on global wealth also shows

client assets/RM improved as firms let go of non-performers and used performance-driven sales

Clients now often question what is the real value that advisors bring for them

13

%

0.6

2%

5%

27

%

0.6

6%

16

%

1%

0.7

6%

14

%

2%

0.6

2%

15

%

YoY AUM

growthRev per

Client Assets

Pretax

Profit Margin

YoY AUM

growthRev per

Client Assets

Pretax

Profit Margin

2009 2011

Fig 6: Growth trends show fee-based markets like North America fared better than commission-based markets like Asia in terms of maintaining revenues and profits, despite the dip in AUM growth

Source: ML-Capgemini Asia Wealth reports, Own analysis

North America

Brokers

Asia Pacific ex Japan

78%

9% 13

%

41%

15

%

77

%

9% 14

%

39%

15

%

75

%

9% 13

%

37

%

15%

Total Cost to Rev%

Staff, Accnt,Marktg Costs

to Rev %

Ops and IT Costs to Rev%

Sales and Front-end

Costs to Rev%

Other Costs to Rev%

2009 2010 2011

Fig 7: Operational efficiency in terms of cost control has picked up globally across all major cost heads since the last 3 years

Source: Boston Consulting Group Wealth reports

Sameer Kamath, Chief Financial Officer

“As part of our ongoing initiative to share knowledge on the Indian financial services sector, Motilal Oswal Investor Relations presents its

article series – Fin Sight. In each issue, we discuss a topic impacting this sector. We draw upon the Group’s learning, experience and current

thinking to develop these insights. We look forward to your questions and feedback to help us provide you a better perspective of this sector…”

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Firms are also focusing on sticky products that are difficult to replicate or shift, like funds of

leading managers, specialist investment products and tax related investments

A more segmented client approach is gaining precedence, as client retention becomes an issue.

With volatile markets impacting investments, client dissatisfaction rose. Firms are using client

insights to customize solutions & deliver a relevant value proposition to each target client group

Heightened competition intensified the hunt for quality advisors with strong relationships.

Given its impact on staff costs, firms are also developing fresh advisors, who come at lower costs.

A US firm is recruiting advisors from the same universities as its target clients, to use networking

US business models are using new service formats like contact centers to offer cost-effective

personalized service, and free the bandwidth of high-cost advisors for advice and acquisitions

A Booz & Co survey showed HNI wealth growth matched GDP growth globally over the 2002-07

bull-run. The volatile period of 2007-11 reaffirms this trend of positive correlation between HNI

wealth and GDP growth. Also, during periods of economic growth and market upswing, the extent

of outperformance of HNI wealth vis a vis GDP growth was much higher, as compared to the

extent of decline during periods of downturns

Enhancing revenue with high-value products using a ‘trusted advisor’ pitch. As per an Accenture

global wealth survey, the focus is to grow discretionary mandates (where clients delegates

decisions) as it has positive correlation with ROA. As per BCG’s global wealth report, gross

revenue margin from discretionary mandates is ~2x that from execution-only mandates

Integrated firms like banks and brokers benefited from synergies gained from sharing of

infrastructure/fixed costs and existing client and distribution network for WM client acquisition

High-margin fees, cost control and a

more segmented client approach are

increasingly the focus of global WM firms

-5x

0x

5x

10x

2007 2008 2009 2010 2011

India: HNI Wealth Growth/GDP Growth

Global: HNI Wealth Growth/GDP Growth

Fig 8: HNI wealth growth ratehas matched or exceeded GDP growth whenever GDP growth picked up or market performance saw an uptick

Source: IMF data, RBI Handbook, WFE, ML-Capgemini Global and Asia Wealth reports

India 114% -64% 104% 30% -38%

Global 20% -47% 47% 17% -14%

Market Cap Returns %

2

73

4

65

Discrete%* ROA%

2009 2011

Fig 9: Criticality of high-margin discretionary products is seen as higher

% of discretionary mandates in AUM boosted ROAs in mature markets

Source: BCG Wealth reports

Asia Pac ex Japan

Discrete%* is Discretionary Mandates as % of AUM

15

87

16

94

Discrete%* ROA%

36

84

45

90

Discrete%* ROA%

North America BanksEuropean Offshore

Fee-model firms stress in client pitches

that they get salaries, not commissions

Few trends and challenges currently seen in India

WM market has seen healthy growth in India, given its economic

growth and rise in savings and discretionary income

Preference of households towards physical asset classes for

savings, rather than financial assets

Banks and brokers are utilizing their distribution channels.

Insurance firms are retraining their agents to sell wealth products.

Independent firms are focusing on product and customer niches

HNIs are now adopting a long-term disciplined approach, rather

than short-term opportunistic one. With caution and capital

conservation in focus, HNIs are maintaining a close control over

their wealth decisions

Entrepreneurs and Professionals are the dominant sources of the

recent increase in HNI wealth in India, apart from Inheritors

Bulk of the existing HNI wealth has come from primary business.

Kotak’s wealth survey showed that many HNIs did not plough it

back into the primary business, due to subdued industrial climate

Client’s awareness of WM is still low, hence it’s still a vanilla market Product variety slow to pick up, especially in alternate products Savings into physical savings has been a traditional practice. ~50% of

savings is in physical assets, higher than comparable nations Heightened competition is impacting revenue and costs and putting

pricing pressure, making WM a volume game Clients are cautious in selection their WM firm - based on advisor

capability, brand, reputation, service levels, word-of-mouth referral

Safe debt earns low yields, and demand for high-yield equities is low

Clients are more actively involved with advisors in products that

they understand, hence demand for justification of advice is higher

They may view products that they don’t understand as complicated,

making it difficult for advisors to sell them

Most Professionals are first-time HNIs and don’t enjoy strong

existing relationships. Hence, competition for this pie will be intense

as most firms are seeking to break into this untapped segment

As the industrial outlook improves and requires funding, a portion of

HNI client assets may get diverted to fuel the primary business

Based on the global experience, certain observations that may be useful for Indian WM firms

Cost effective operations, client segmentation, managing clients’ evolving expectations, using client insights to customize solutions and

deliver a relevant value proposition, referrals from clients, retention of quality advisors, expanded product suite, value-for-money pricing

and outsourcing of non-essential services will determine the next market leaders

Value proposition for each client segment

- A PWC report on global wealth says

understanding segment performance in

clients, products and costs is imminent

- Which segments are growing, profitable or

adding costs, where firms’ sales strengths lie,

product knowledge, client behavior insights

- Provide differentiated, yet cost-effective

services, with wide product bouquet,

personalized service formats and level of

analytical advice to each target client

segment and offer a unique value to each

Deliver an enhanced client experience

- Firms globally are implementing tools for

client reporting and analytics

- Advisors using interactive tools for scenario

based planning during client proposals.

- CRM and lead management tools in focus

- With many clients now opting for self-

directed decisions, Schwab, TD Waterhouse

have added ‘Do it yourself’ tools

- Using contact centers for 24*7 access,

which is more cost-effective than pure

relationship management by advisors

Expand product suite, incl. 3rd party, so

that clients get access to best products

- An E&Y survey on US wealth estimates

most firms are focusing on expanded

open-architecture & annual product

reviews to maintain relevant products

- It helps cushion against value erosion in

any one asset & ensure net new inflows

- Most firms offer ETF, MF, PE and PMS

- May use innovative products to match

return expectations, which can capture

upside along with capital protection

Target untapped gaps in the market and gain

market share ahead of peers

- Ensure pricing is relevant, accurate and with

options so clients have a choice for services,

and ensure perceiving of value by the client

- Commoditize some services using set

processes, applications to scale up faster

- Bundle common products at a discount and

charge a premium for specialized services

New entrants building new relationships

may be better off targeting Professionals

- Their incomes are growing but may not

have existing relationships with WM firms

- ‘Old Money’ UHNI clients typically have

existing relationships whom they trust

- Older firms can leverage existing clients for

referrals. In any case, the longetivity of the

relationship is only as strong as the results

Advisor productivity and cost/income

ratio efficiencies are in focus

- Targeting new advisors with strong client

relationships, remove those performing

below-par, creating incentive structures

- Keeping tight control over operational

costs, look at higher-margin products

and fee model to protect revenues, esp.

when AUM growth gets impacted

Way forward : What is required in India – focus areas and challenges

India poses a good opportunity, as its expected growth in discretionary income and the longer, working life of its ‘young’ population,

indicates opportunity for enhanced affluence and wealth

Focus areas:-

Segmental focus and client discovery is critical. As per Accenture’s report on

global wealth, analyzing client insights, understanding their changing

demands, customizing solutions aligned to specific client needs are critical to

offer a unique value for each target segment and ensure relevance of

services as per expectations, achieve client satisfaction and retention

Segment-based accurate pricing to ensure ‘value for money’. Pricing as per

the service, product and level of analytical involvement. Clients often mix

self-direction and dependence on advice in their decisions, hence pricing has

to be relevant for clients to perceive value

Replicate, scale and benchmark the successful tactics and practices of the

best advisors

Exclusivity as a value driver (exclusive funds, fund managers and products),

which cannot be commoditized and earn healthy margins

For services with cheaper alternatives, offer clients commoditized services at

competitive prices using technology or outsourcing

Earn higher margins or control operational costs in this volume game; just

adding clients without proportionate revenue flow will put profit pressures

Given the competition, the market may see a shake-down amongst players

Increase in Indian workers returning from overseas adding to wealth pool

Remittances from India’s overseas NRIs are significant and is a key target

Potential challenges:-

Focus on multiple segments may complicate their

operating model

Firms need to first identify where its strength lie and

develop into those target areas

Internal allocation of costs as per segment to estimate

healthy margin for each segment and negotiate

accordingly for mutually beneficial fee rates

Hire and develop such advisors; Dearth of focused

certification/education programmes in this discipline

Ensure product architecture & sales capability supports

the access for such products

Managing transition process during outsourcing

Maintain client experience levels despite outsourcing

Profit pressures and short-term capital demands

Sustaining operational cost controls

Poor investment performance impacts future wealth

Accessing the wealth pools in towns outside Tier I/II

Brand building outlays for new firms

Conclusion: The WM Opportunity in India

Despite recent economic headwinds, the Indian market offers a good scope for

growth, given its long-term economic prospects, positive demographics and

current low penetration. Using 5 year historical average of HNI wealth/GDP for

each year, combined with IMF’s GDP projections, we roughly estimate HNI

wealth in India to grow to US$952bn by 2017, a 12% CAGR from 2011

However, evolving challenges exist. Companies need to understand the changing

client behavior, market dynamics and reorient their operating models to adapt to

new situations. Firms with the right strategy, product mix, value proposition and

service levels can gain retention, revenues and profitability. Value proposition for

client segments and advice-based sales will be critical. The need for advice has

never been greater, but the way it is delivered will be a challenge

129,001 129,856139,504 141,898 138,899 141,201

589631

728781

842

952

2012 2013 2014 2015 2016 2017

Projected HNI Count

Projected HNI Wealth (US$ Bn)

Fig 10: Projected HNI Count & Wealth in India till 2017 based on IMF's

GDP & population estimates and 5 year historical average ratios of HNI count/population and HNI wealth/GDP in each year from 2012-17

Source: IMF data, ML-Capgemini Asia Wealth reports

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