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presents its article series Fin Sight. In each issue, we discuss a topic impacting this sector. We draw upon the Groups 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
Sameer Kamath, Chief Financial Officer

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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 Indias 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
Fig 1: Indian HNI's 5 yr CAGR has been relatively strong HNI Count (Th) 2006 2011 CAGR India 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%

Nevertheless, a growth market has its set of challenges. Volatile markets since 2011 have played Source: Merrill Lynch-Capgemini Global & Asia Wealth reports havoc with asset values. Clients focus is now shifting to low-risk products, with expectations of Economic and income growth boosted higher service levels at competitive prices. This poses a challenge, as WM players need to reorient scope for WM, but volatile markets and growth slowdown have posed challenges their operating models to maintain their share in a competitive and evolving market

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Size and structure of the WM market in India

As per Capgeminis 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, Indias HNI count dipped from 153,000 to 126,000 and HNI wealth slid from US$582bn to US$477bn in 2011 Indias market is fragmented, with organized sector (independent firms, banks, brokers) battling unorganized sector (private advisors, CAs). Celents research says a shift is seen towards organized sector as the market evolves, whose share is still just half that of unorganized players Indias 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

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Experience of a similarly evolving market like China shows that as Indias 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
Fig 2: HNI count/population ratio in India is still much lower than both mature markets and emerging peers
0.85% 0.98%
2004 2011

Emerging markets

Mature markets

0.92% 1.17%

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
Avg of HNI Wealth/GDP (2006-11) Avg of GDS/GDP (2006-11) 48% 52% 34% 34% 15% 31% 34% 31% 6% 11%

Fig 4: Emerging economies allocate a smaller proportion of household personal financial assets towards equities
Others Deposits Currency Insurance & Pension Reserves Mutual Funds

912 10% 42% 13% 16% 6% 14%

India

4,917 0%

38,225
12%

0.69% 0.70%

0.15% 0.30%

CAGR of HNI Wealth (2006-11) CAGR of Per Capita GDP (2006-11)

21% 17% 9% 9% 7% 3%
China Indonesia Korea

64%

17% 2%
30%

Direct Equity

7% 11% 10% 8% China

0.007% 0.011%

0.02% 0.04%

0.05% 0.08%

13%

26%
USA

India

China

Brazil

Korea

USA

UK

Germany

India

China

Indonesia

Korea

India

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

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

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

Comparing Asias 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 Kotaks 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 didnt 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

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

71%

Growth in HNI Wealth

46% 20% 14% -2% -25%

2007 2008 2009 15%

-8%
2010

-10% -16%
2011

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 Email us on
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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
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
2009
North America Brokers

or sourajit.aiyer@motilaloswal.com ; or call Sourajit

27%

Aiyer

2011
Asia Pacific ex Japan

13%

0.62% 0.76%

14%

YoY AUM growth

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Rev per Client Assets

Pretax Profit Margin

YoY AUM growth

Rev per Client Assets

0.66% 0.62%
Pretax Profit Margin

5%

Source: ML-Capgemini Asia Wealth reports, Own analysis

Fig 7: Operational efficiency in terms of cost control has picked up globally across all major cost heads since the last 3 years
78% 77% 75%

1%

2009

2010
41%

2%

2011
39% 37%

15% 15%

13% 14%

Total Cost to Rev%

Staff, Accnt, Ops and IT Sales and Marktg Costs Costs to Rev% Front-end to Rev % Costs to Rev%

9% 9% 9%

13%

Other Costs to Rev%

Source: Boston Consulting Group Wealth reports

15%

16% 15%

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Firms are also focusing on sticky products that are difficult to replicate or shift, like funds of High-margin fees, cost control and a leading managers, specialist investment products and tax related investments more segmented client approach are A more segmented client approach is gaining precedence, as client retention becomes an issue. increasingly the focus of global WM firms 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 BCGs global wealth report, gross revenue margin from discretionary mandates is ~2x that from execution-only mandates
Fig 8: HNI wealth growth ratehas matched or exceeded GDP growth whenever GDP growth picked up or market performance saw an uptick
10x 5x 0x 2007 -5x
India Global 114% 20%
India: HNI Wealth Growth/GDP Growth Global: HNI Wealth Growth/GDP Growth

2008

2009

2010

2011

Market Cap Returns % -64% 104% -47% 47%

30% 17%

-38% -14%

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

Fig 9: Criticality of high-margin discretionary products is seen as higher % of discretionary mandates in AUM boosted ROAs in mature markets
2009 2011 87 94 73 65 36 15 16 2 4 ROA% Discrete%* ROA% Discrete%* ROA% 45 84 90

Asia Pac ex Japan

European Offshore North America Banks

Discrete%*

Source: BCG Wealth reports

Discrete%* is Discretionary Mandates as % of AUM

Integrated firms like banks and brokers benefited from synergies gained from sharing of Fee-model firms stress in client pitches that they get salaries, not commissions infrastructure/fixed costs and existing client and distribution network for WM client acquisition Meet our Management: Please email us at
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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. Kotaks wealth survey showed that many HNIs did not plough it back into the primary business, due to subdued industrial climate Clients awareness of WM is still low, hence its 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 dont understand as complicated, making it difficult for advisors to sell them Most Professionals are first-time HNIs and dont 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

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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 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 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 selfdirected 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 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 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 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 Accentures 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 Indias 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 IMFs 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 Join our Investor Relations Mailing List: Log on to our IR website http://www.motilaloswal.com/investor_relation/

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
139,504 129,001 129,856 781 Projected HNI Count Projected HNI Wealth (US$ Bn) 2014 2015 2016 2017 141,898 138,899 842 141,201 952

728
631 589

2012

2013

Source: IMF data, ML-Capgemini Asia Wealth reports

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