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Fin Sight Oct2012
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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
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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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