Indian upstarts make moves into Wealth arena

Competition in the Indian wealth management industry is heating up. In the early days, it was banks and brokers such as HSBC, Citi, Kotak, ICICI and Merrill Lynch that extended their traditional offerings to provide wealth management services. They were then joined by global wealth management specialists such as Credit Suisse, UBS and Barclays Wealth. Now, a new breed of firms – homegrown financial institutions – are making a strong play.

Last year, investment management and brokerage firm, Ambit Capital launched its wealth division, hiring Sutapa Banerjee, who was handling ABN Amro’s private banking business in India. Notably, Ambit does not have any prior experience in the wealth management sector. Neither does Avendus Capital, another Indian financial services firm that started offering private wealth management (PWM) services only a month ago. Avendus has also hired an industry veteran, Nikhil Kapadia, who had successfully built Deutsche Bank’s Private Wealth India onshore practice, as the chief executive officer of its PWM unit.

“The wealth management market is the fastest growing segment in the Indian financial services industry. It is expanding in terms of sheer number of people and the assets under management,” remarks Joydeep Sengupta, director at consulting firm McKinsey in India. He estimates the wealth segment is growing in excess of 20 per cent annually in terms of revenue streams.

According to the 2010 Merrill Lynch-Capgemini World Wealth Report, India's population of high net worth individuals (HNWs) with minimum investable assets of $1m grew by as much as 51 per cent to 1,26,700 by the end of 2009, compared to just 84,000 in 2008. While it is not difficult to see why the industry is attracting new players, some of them with no history in wealth management, the question is how will they fare in a crowded marketplace?

According to Mr Kapadia of Avendus, “people” are their biggest strength. “We think people make a brand. We score over others because of the talent we have been able to attract.” The 14 member team at Avendus has come from big names in the industry such as Deutsche Bank, Fidelity and Morgan Stanley and has several years of experience.

Mr Kapadia says customers have a strong sense of disillusionment against their existing wealth advisers, having suffered during the credit crisis because of the malpractices endemic to the industry. Wealth management firms mis-sold products, there was lack of transparency and advisers churned portfolios purely to earn commissions. As a result of this mistrust, he says, wealth management customers are not necessarily gravitating towards the big players in the industry. Instead, they are looking for high quality advice. Avendus’ focus, says Mr Kapadia, is to provide “customer-centric solutions” with high quality advice that will help their customers “create” wealth. The firm is targeting the ultra HNW with an investible surplus upwards of $5m.

Foreign wealth management firms, he says, are at a disadvantage in India because they do not necessarily understand the complexities of the Indian market. Also, they are not very agile since most of their decisions are driven by regional headquarters located outside India which makes the entire decision making process rather slow.

Sutapa Banerjee, head of wealth management at Ambit, says the industry lacks firms that can provide professional end-to-end services. Ambit, she says, is filling this gap. Using the complementary expertise within other units of Ambit Capital, they claim to provide “holistic end-to-end services” including wealth management, wealth protection and services to help pass on wealth to the next generation.

“After 2008, brand value has gone through a big change. The financial crisis caused a lot of damage to brands of big banks,” she says. “So today, large is not necessarily good. While an institution is required to offer services, the main requirement is for credibility.” The Ambit team, she says, has a minimum of eight to 10 years of industry experience and an established track record.

McKinsey’s Mr Sengupta dismisses the arguments against foreign players. That brand is no longer their strength, he says, is wishful thinking on the part of the new entrants into the wealth management arena. “Public memory is very short. Look around us. Those firms that were derided only a few months back are still getting business.”

Mr Sengupta in fact opines that foreign banks will in due course dominate India’s wealth management arena. He believes their strengths of brand, experience and processes will help them overcome the disadvantage of not having enough capacity on the ground in the country.

Despite the crowded marketplace, Mr Sengupta does not envisage a shake-out taking place in the near-to-medium term. “There is room for a lot of players since India is a growth market.” He believes India will evolve into the European model of wealth management consisting of universal banks and lots of boutique players.

“There will be a lot of boutique players offering niche wealth management services. But I am skeptical about how they will scale up. The lion’s share of the pie will go to those who are able to manage scale,” he says.

One of the biggest challenges for the Indian wealth management industry today, he points out, is talent, something Ambit’s Ms Banerjee agrees with. “There is a need for well-rounded private bankers,” she says. “While the base has expanded due to those who, after gaining experience abroad, have returned to India, or people from other financial services that are good in relationship management joining in, the demand far outstrips supply.”

Nitin Jain, head of wealth advisory and investment services at investment banking firm Edelweiss Capital, which has recently refocused its efforts in the wealth management space, echoes her point. The industry has suffered in the past because several firms appointed young B-school graduates without enough experience as relationship managers, he says. As a result, the quality of advice was not up to the mark, which contributed to the loss of trust among customers when the market crashed.

Mr Jain says equity remains the key area of interest for customers along with structured solutions and advisory on mutual funds. “There are large numbers of assets tied to fixed income and real estate, however there aren’t enough platforms for these investments as in mutual funds, therefore there is no advisory service that can be given to clients in these areas.”

An interesting trend, he says, is HNWs looking at diversification outside India. The biggest constraint with this is that India and China are the two key growth markets. “There is a clear demand in the market to look outside India, but there aren’t too many avenues offering similar or better growth opportunities as of now.”

If the trend of clients looking for diversification becomes more mainstream, then the wealth management firms will have to build the skills to service them. McKinsey’s Mr Sengupta sees global players scoring over their Indian counterparts in their ability to service clients outside India as a result of their global network. “As Indian consumers get more sophisticated and get access to overseas products, the biggest challenge for domestic wealth management players will be their ability to meet the needs of the global Indian.”

For non resident Indians (NRIs) especially, Mr Sengupta says, the access to products and services across the world is a huge positive and with NRIs accounting for three quarters of the entire population of wealthy Indians globally, no wealth management firm can today afford to ignore them.

Sutapa Banerjee, Ambit Capital