Hedging your bets
India’s traditional wealthy, in the absence of limited asset classes being available to them, had been disproportionately invested in real estate and gold32.
Because their wins had come from selling ancestral properties and other real estate investments, says Poonam Raghuvanshi, director of Anand Rathi Advisors, till even a year back it was difficult to convince them to look at other investment opportunities even when there was enough data piled up to suggest that their preferred asset classes might weigh down their portfolios going forward.
‘It isn’t about preferring one thing to another but understanding that it is asset allocation that needs to form the core of your investment strategy. Every asset class has a cycle,’ Raghuvanshi argues.
‘Equities have always done well in the past — over the long term — but rarely do we talk about it in the multiples that it has generated. Today’s smart investors should want to balance their portfolios to reduce real estate and increase equity,’ she reasons.
The first-generation wealthy are able to do this better. Because their wealth has largely come from business ownership and the value of the equity in their company, they have greater faith in financial assets. They don’t have a psychological preference for seeing their tangible wealth in physical assets, both gold and real estate.
Economists believe the shift to financial assets is welcome for the country because well-developed and well-monitored financial markets help to efficiently direct the flow of savings (from households, companies and institutions) in ways that facilitate the accumulation of capital and the production of goods and services. The capital gets invested in companies.
India currently has one of the lowest penetrations of financial assets in the emerging economies. Assets under management (AUM) as a percent of the GDP for India was 5 to 6 per cent at the end of FY 2013, significantly lower than some other emerging economies, for example, 40 per cent for Brazil and around 33 per cent for South Africa. It appears important to bridge this gap.
The Indian distaste for financial markets comes from the perception (often overstated) that physical assets such as gold and real estate are safer bets, and that financial assets are risky. Gold and land also come with strong social and cultural aspirations. Also, loans against gold and land are easier to access, another reason why people have faith in them being implicitly more dependable avenues for investment.
A few high-profile stock market scams in the 1990s have served to validate the risks that lurk around financial assets. Interestingly, ownership of Indians, excluding promoters, in Indian companies (equities and mutual funds) has steadily declined over the last two decades33.
In a May 2015 report, Morgan Stanley research estimated that Indian households will invest $300 billion ( 20,03415 crore) in the local equity markets over the next ten years, versus the $50 billion ( 3,33,902 crore) and $134 billion ( 8,94,858 crore) that households and financial institutional investors, respectively, invested over the last ten years. Some of that movement is visible. In 2000-2001, India’s mutual funds industry had assets under management of about 1 lakh crore (or $15 billion)34. In April 2016, the AUM crossed 13.58 lakh crore although it has a long way to go. It’s still roughly one-eighth of the total volume of bank deposits in India.
Playing catch up with equities
The equities market has been misunderstood for too long. To change perceptions, financial planners say we need to change the way people think about risk. Across asset classes, equities have shown themselves to be a stable, sustainable growth vehicle if investors play the long game. For mindsets to change, it is important to realise that the stock market is a place of slow cook, not a roulette machine, says Mint’s Monika Halan. When treated like a roulette machine, investors can get their hands burnt and swear off the capital markets for good.
The inclination of newer HNIs to go the way of financial assets is encouraging, says Himanshu Vyapak, deputy CEO of the Reliance Capital Asset Management.
In most economies, these are the first adopters since they have access to both the risk capital and professional advice. A little more than one-fourth of the total assets in the industry is contributed by the HNIs, he adds, although the definition of HNIs in this context isn’t necessarily the same as HNIs for wealth management outfits.
‘If I were to simplify it further, the mutual fund industry is divided into two parts: 55 per cent is institutional and 45 per cent individuals. Out of these individuals, almost 60 per cent are HNIs,’ Vyapak tells me.
For the wealthy, the trend has displayed a movement towards playing catch-up in equities, an asset class they realised they were significantly underinvested in. The goal is to have balanced portfolios.
Over the last five years, real estate returns have dipped as well, with major locations showing flat growth and anecdotal accounts that suggest investors are having trouble in selling off land and apartments.
A fund manager in Mumbai feels the change is evident because even till two years back, investors would ask fund managers whether equities were safe. This is in contrast to the present-day scenario when investors are so specific they want to know which equity funds suit them best.
Also, with more regulations in place, such as the Know Your Customer (KYC) norms introduced in 2002, which the RBI directed all banks to implement for all new accounts, there are higher chances that money invested in financial assets is cleaner than the kind of murky funds that used to be invested in real estate.
Of course, wealth managers eagerly pushed for financial assets because the upside on a financial transaction was higher for them. Their business model is often based on the distribution fees earned from these transactions. The crux of their business came from the rich moving to financial assets. Wealth managers have little to do with people buying real estate or gold.
Younger first-generation entrepreneurs are also beginning to understand the difference between personal wealth and corporate treasury, a distinction that an older cadre of promoters did not often make. First-generation entrepreneurs grasp this better, wealth managers feel, and this has helped them to better appreciate the logic of wealth management. Because they’re approaching wealth management as a new discipline, they’re willing to listen to fresh ideas, update their notions and take into account new data.
First-generation wealthy usually have another advantage. Because their wealth is self-made, and is managed only for their immediate family’s needs, motivations and objectives, it gives them greater decision-making freedom. Usually, these wealth creators are the sole decision-makers with, at best, inputs from their spouse. They are able to be more decisive as well as more agile when they apportion their assets into different allocations — real estate, financial assets, direct private equity or other alternative investment vehicles. Several have become angel investors, for example.
The 24X7 investor
This level of engagement, however, has made the first-generation entrepreneur a 24X7 client, somebody who wants to constantly be in touch and in control of their portfolio.
Even with technological advances such as mobile apps that have made reporting easier, the truth was that most clients wanted to be reached more often than the reporting interval they might have specified. A cross-section of wealth managers I spoke to said clients might stress that they did not want to be in touch constantly and would prefer not to be bothered but they didn’t really mean it. Clients might not like to believe it but most are comfortable with a high-touch engagement style. Nine out of ten would like to be called twice or thrice a week.
It was surprising how much time these people took out to review their portfolios or discuss ideas even when they were involved in actively running their business, a Delhi-based wealth manager told me.
IIFL Wealth’s Bhagat says this is a very Asian trait because a large part of the money in this region is new money. ‘In Europe, this level of interaction might be scorned upon. You’re likely to be fired if you call a client this often. He doesn’t want to be dis
turbed after he sets the rules of the management portfolio,’ Bhagat told me.
Because a large bulk of European wealth is inherited old money, investors there are more process-driven, usually have a mechanism that has evolved over years and have given their wealth advisors discretion over most of their portfolio. First-generation wealth builders are unlikely to give discretionary power to their wealth advisors to begin with. Since their wealth relationships are still new, there is a much greater likelihood that they will track, monitor and engage with the management of their wealth more closely.
Senior corporate professionals are different; they seem to have less time than promoters and entrepreneurs, which might be surprising considering that business builders had most on their plates. Professionals just didn’t spend as much time on their portfolios as did entrepreneurs was the general impression from my conversations.
The uneasy burden of succession planning
On another key parameter, the new wealthy demonstrate more open-mindedness than others. The essence of wealth management comes from understanding three main philosophies about the client: What is the return on investment they expect? Whether a safety net has been created for the family, and, most importantly, how has the estate planning been approached?
‘Whether you’re thirty five or eighty five, you need to do this,’ says Anand Rathi’s Poonam Raghuvanshi.
In Asia, broaching mortality has always been a tricky issue for wealth managers, beyond the clutch of a handful of extremely wealthy industrialist families where branches and generations had made it necessary for them to establish trusts, wills and estate guidelines. It’s the same for India.
Few people lay out wills and trusts but the newly wealthy are slowly becoming more open to discussing these issues. They are up for the often queasy, difficult conversations that doing so might require at home. In fact, wealth managers assert that one of the purposes of using financial advisors and private bankers is also to remove the negative impact that serious wealth can have on the family, to ring-fence it from the fallouts of inheritances that aren’t organised and bequeathed properly.
‘I don’t want a situation where the children have to sit and put their heads together to try and figure things out,’ Triveni’s Subodh Gupta says.
It was the responsibility of each generation to make sure the next generation does not suffer any animosity as far as wealth is concerned.
‘In a place like Sundar Nagar in Delhi, half the houses are in the throes of a property dispute. They are sitting on huge wealth but living like paupers because things are so unclear and vague. They are fighting for the last penny. There is no point in my building a corpus and my children fighting over it. That would mean I have failed,’ Gupta admits candidly.
A Bengaluru-based entrepreneur who recently sold his eight-year old IT services company to an American technology major says thinking about making a will at thirty four is a bit daunting. ‘It’s a simple concept, but when you start bringing in the equations you have with people, and thinking about what complexities you’re adding in their lives by making them part of your will, you need to do a lot of thinking. There are so many complexities that occur to you,’ he says.
Chapter 11
Age of knowing more, seeing clearly
The Mahabharata includes the story of how Arjuna’s son Abhimanyu learnt to enter a chakravyuh, an arrangement of soldiers in the form of a wheel, while he was in his mother’s womb. However, because his mother Subhadra slept midway through the strategy treatise by her husband, Abhimanyu could never learn how to come out of a chakravyuh. It’s what led to his death on the thirteenth day of the War of Kurukshetra between the Pandavas and the Kauravas, considered as the turning point in the battle.
Dr Narendra Desai, chairman of the 4,000-crore ($600 million) Apar Group, likens the situation of the marquee wealth management firms during the turbulent phase of the global financial crisis to that of Abhimanyu. They knew how to enter the chakravyuh, had done so aggressively and without fear, but didn’t know how to get out of one. ‘In 2008, it became very clear who had foresight and insight, and who didn’t,’ explains Desai.
‘The last thing you want from your wealth managers is for them to erode your capital. You can live with a dip in returns but if your capital is diminished, it’s absolutely unacceptable,’ he cautions.
The losses led to some swift learning for the Desai family. They have, since then, pruned the number of wealth managers they work with from thirteen to five, all of which are Indian firms. IIFL Wealth now manages a lion’s share of their portfolio, roughly 40 per cent. Kotak Wealth Management has a significant share as well. Desai is quite forthcoming of his mistrust of the global “big boys”.
‘They expected us to just listen to their advice, because they were saying it. You can’t chase Goddess Lakshmi with an ego,’ Desai says.
Desai’s candour and analogies might be uniquely his own but a large part of his disillusionment with marquee wealth management and private banking echoes in the offices of the investors I spoke to across Kolkata, Bengaluru, Delhi and Mumbai.
Even more, it points to a shift in how the client-advisor dynamics function today. Both the structure and tenor of the relationship have undergone a massive change after the global financial crisis of 2008.
The twenty years prior to 2008 had marked the beginning of modern wealth management. In the western developed economies where this emerged, the 1990-2007 period had seen a continued bull run with most asset classes appreciating robustly. Private bankers started taking the credit for the great returns rather than admitting that it was a function of the market. Wealth managers got away without doing their homework on clients.
‘Those years were like a 20-20 match,’ admits IIFL Wealth’s Amit Shah. ‘You could just go and hit, there wasn’t a need to understand or strategise. My young son would have done what we did. Stocks were on a high as was real estate. You couldn’t go wrong,’ he adds.
Both investors and clients were like “hyper teenagers,” quips an equity researcher at a domestic brokerage firm. They were high on adrenaline and recklessness. Attitudes were akin to “drinking until four in the morning at a party”.
This arrogance led to hubris and a self-anointed halo that was rudely snatched away as disappointment and disbelief set in from investments that went awry. It soon became clear that there had been less than optimal regard for risk and client interest.
As clients lost money and their capital got eroded, several private bankers found their reputations severely tarnished. By focusing on its own performance, the industry lost sight — sometimes intentionally — of the interests of both parties that provided meaning to their existence.
A new breed of clients
‘Clients were greedy too; everyone woke up,’ says the head of a financial services association that counts the country’s leading banks as members. It wouldn’t be fair to blame advisors and distributors entirely for the greed and fear cycle the industry went through.
But, at a time when investor anxiety was riding high, several advisors and bankers retreated from their clients in defensiveness, afraid to face them and explain the losses and the calls they had taken. Several people interviewed here said that their wealth managers went missing in action and couldn’t be reached, leaving the portfolio, the relationship and the shared trust in disarray.
However, this has changed to a large extent today and the industry functions differently. The mystery of the investment process and the allure of chasing double-digit returns was, oddly enough, something of a selling point in the heady days35.
The tremors of 2008 changed that as reputations crumbled. Big banks came in for much criticism for having lost the balance between short-term profit seeking and prudent, responsible advice to clients. Across the world, clients started to do more due diligence on who their wealth advisors would be. It was a tectonic change — akin to plates shifting in earthquakes.
Since then, increased competition, lower margins, a m
ore sceptical and aware client base and ease of access to information online has evened out this information asymmetry substantially.
This is in sharp contrast to an earlier period when the client-advisor relationship was based on the latter’s near-monopoly on financial information. For one, investors are better informed than before about markets and expect more transparency in their relationship with their wealth managers.
‘Customers have become very savvy in understanding the market. Many go an extra mile to try to educate themselves to understand what is happening in their industry, what their financial needs are, what advisors stand for and what their competitors might stand for as well,’ says Gurpreet Singh, principal consultant at the Financial Intermediaries Association of India (FIAI).
Many of the new wealthy interviewed for the book didn’t have long-standing relationships with professional wealth managers before the global financial crisis but even without having gone through the loss and erosion cycle, they are now beginning their wealth advisor relationships armed with information that allows for greater probity and scepticism.
HNIs now give their financial advisors less of what in the business is called “discretionary power”. The pace of change in India has been dramatic, a senior private banker told me. ‘It’s like we have moved from going at twenty miles per hour to hundred miles per hour. When change like this happens, you can’t just change your tyres, you’ll have to change your car and build better roads,’ he explains.
Today’s first generation wealth builders in India, especially entrepreneurs, are certainly more savvy and financially literate. ‘In a meeting, it’s easy to tell who has made the money on his own. Anybody who wants to get into more details you know has built his money on his own,’ a senior private banker based in Delhi shared with me. ‘They are the clients who now go through every comma and question mark in detail; they will have these queries lined up for clarifications at meetings. This would rarely happen before,’ he says.
The Wealth Wallahs Page 11