Relationships do not connote “squishy-soft” aspects, they are strengthened on the back of consistency and getting the job done, quarter after quarter.
Raghav Bahl, whose portfolio is also managed by IIFL Wealth, articulates the relationship sentiment and the extent of its scope well. ‘The ultimate benchmark of the relationship is definitely performance. It hasn’t happened to me yet but I reckon the relationship premium for me would be one percentage point or so on one’s expected rate of return over a couple of quarters, but not beyond that and not sustainably so. You can give your relationship managers the benefit of the doubt for a couple of quarters if they tell you honestly there was a problem and they’ll try and fix it,’ he says.
An aspect of the relationship that most clients stress upon is the expectation they had of their wealth managers maturing into advisors, not just remaining someone who executed on their behalf. It was important, they said, to see that the person had, over time, built the credibility to occasionally challenge them and tell them that something didn’t make sense. It was this facet that deepened trust and cemented relationships more than fancy gifts and posh events.
For an advisor, it was important to be able to occasionally look their clients in the eye and fault their logic without offending the person. Interestingly, in the changed dynamics of the wealth management industry, where clients demand to know more and have a less long-term view of the relationship, they’re eager to work with wealth advisors whose guidance they value and whom they respect as individuals.
‘I actually test my relationship advisors by giving them a very stupid idea once in a while and see whether they’ll tell me it’s wrong. Also, it’s good to have two different relationships so you get more good ideas to think about, and to use them as counsel and sounding boards for each other’s ideas,’ a Gurgaon-based chief executive officer of a pharmaceutical company whose annual compensation is upwards of 2 crore ($300,000) tells me.
The concept of independent advice is still evolving in India, where clients pay someone who has no vested interest whatsoever in the investments they make. Even leading private banks and wealth management outfits in India make a vast quantum of their money from providing clients a service, not advice.
In India, revenue from data and advice is hard to come by, not just in financial services but in myriad industries such as media, market research and knowledge services. The advent of Google had given people, says an entrepreneur who runs a business analytics firm, the illusion that data was “free and asking money for it, however specialised it might be, was highway robbery.”
Some wealth mangers are likely to concur with this: Many say they struggle to get clients to pay for advice. It’s a chicken-and-egg situation, though. A Singapore-based management consultant with several private banking clients says financial advisors and product sellers should examine if clients weren’t prepared to pay for advice at all or didn’t do so because they did not consider what they had received to be advice.
In any case, it’s interesting that when it comes to managing their wealth, there are few places where India’s wealthy actively go to for advice. Interestingly, places can play a strong role in their relationships with their advisors.
The mathematics of geography
In 1899, Mark Twain, the famous American author of classics like The Adventures of Tom Sawyer, wrote about the differences in the cultures of the three largest cities in the American Northeast — Boston, New York and Philadelphia. ‘In Boston,’ he wrote, ‘they ask, “How much does he know?” In New York, “How much is he worth?” In Philadelphia, “Who were his parents?”’
Twain’s insight into these cities hints at the core attributes that matter for success in these different places — academics, wealth or pedigree. Through interviews for this book, I also found that much as pace, source and generation of wealth influence attitudes where they live often impacts how the wealthy think, behave and invest as well. Local context can shape us in dramatic ways. Stereotypes do fly thick and fast about cities, in general. Several of the wealth managers I spoke to confirmed some of these myths and debunked some lazy generalisations.
For most large wealth management outfits, whether pure-play firms or HNI arms of large banks, Mumbai and Delhi make up a disproportionate chunk of their business — both in terms of the number of clients and value of assets. In Delhi and Mumbai — India’s two major hubs for business and entrepreneurship — a newcomer with a smart idea who demonstrates value can still get new clients.
Within the two, of course, the stereotypes do manifest themselves, says a senior Delhi-based wealth manager. ‘Delhi is slightly loud and voluble. They are also more relationship-driven and we need to try hard to build those relationships, to strike that intimacy. To be honest, I like the market in the west of India because it is the most value-driven; all they look for is whether you’re adding value,’ he feels.
Kolkata and Ahmedabad are largely trade-driven markets; clients there are supremely price conscious, and decisions often stop at price. Smaller cities such as Ludhiana, Mysuru and Panipat are the new frontiers of growth for the industry but in these towns the task is cut out for wealth managers; quite simply, making clients in these cities see value in advisory services remained “very, very difficult” and because they saw their advisors as nothing more than product pushers, they are extremely fee-sensitive.
Surprisingly, wealth managers say, Bengaluru — considered India’s most dynamic crucible for innovation and entrepreneurship — is most resistant to new players. Here, as in Pune, client-advisor associations are purely relationship-oriented, not fee-driven. Clients are more likely than not to use Independent Financial Advisors (IFAs) and are almost unwilling to even get into a conversation with a new player, let alone switch advisors.
Pune and Bengaluru are probably the two toughest markets in the country for fresh entrants, even those that represent firms with proven track records. With clients here, several advisors say, you could often draw a blank, not just in your ability to convert them but in your complete inability to even engage them in a conversation.
In Bengaluru, more than in any other hub of wealth creation, the family office — essentially having financial advisors in-house rather than working with external wealth management firms and private banks — has become more the norm for even the first-generation wealthy.
Bengaluru was the main hub for the creation of first-generation riches, ushered in by the professionals-turned-entrepreneurs of IT services. Usually, family offices are the preferred model for the traditionally wealthy families who manage their wealth in-house.
The IFAs enjoy a loyalty premium so high that clients in these cities aren’t worried about missing out on ideas for new products and investment options. Familiarity with, and trust in, their financial advisors — most of whom have been with them for several years — is a much more important filter than engaging firms which, because of their size, might be able to offer them more adjunct services, better technological abilities and a wider array of investment products.
Private bankers say that in working with IFAs who they might have been acquainted with for years, clients in these cities decisively demonstrate that knowing a person, and their objectives and motives, is critical to the formation of the relationship. They seem to follow what celebrated American investor Warren Buffett is known to have often said, that one “never succeeded in making a good deal with a bad person”.
‘If you look at the south of the country in general, it is very conservative. Those in the South feel that they need to trust the person more than the proposition he delivers because if a person is right, he will do right by you. But if the person is wrong, even the right thing will be wrong. Even with new money in Bengaluru, for example, it’s not going to be possible to make inroads if you weren’t around exactly at the time of the transaction, or while the wealth was being created. Timing is critical,’ says Girish Venkataraman, CEO of IIFL Investment Adviser and Trustee Services.
; Don’t show, don’t tell, don’t ask
In the last few years, there have been growing opportunities for business builders to talk shop. In the entrepreneurship ecosystem, in particular, there are endless business conference formats, events and groups for peer learning and sharing. These include associations like the Entrepreneurs Organisation (EO), Young Presidents’ Organisation (YPO) and industry bodies such as the Federation of Indian Chambers of Commerce and Industry (FICCI), Confederation of Indian Industry (CII), and their state chapters.
Entrepreneurs, especially, say these are important forums for building networks, cross-industry relationships, learning from and interacting with peers. Even as the wealthy hold discussions on how to grow businesses and making money, which results in frank discussions, managing personal wealth is purely a DIY (do-it-yourself) operation, out of the ambit of polite conversation at industry forums and other social settings.
Nearly everybody interviewed said they were not comfortable discussing their wealth and investments socially at all. Many said they had never met anybody who made oblique references to their wealth at these social settings; at best, people might discuss and seek information on certain sectors and industries they could be interested in — to make angel investments, for example — but amounts and numbers were never brought up. It is interesting to note while people were extremely comfortable discussing how to make money, talking about their personal wealth seems almost taboo.
“Your wealth is your problem” seems to be the gist of most conversations. People say that, at most, they could ask seniors in the ecosystem, or former bosses, and maybe their investor, for references of tax planners or wealth managers. All in the hope that it isn’t too indelicate.
Others said these discussions are a no-go area because one is never certain about a person’s objective in bringing the subject up. ‘I wouldn’t want anybody to think I am showing off, pushing my advice, or selling my wealth manager to them, not that I have one,’ says Infibeam’s Neeru Sharma.
Bain Capital’s Amit Chandra who has spent several years building the investment banking and global markets wealth vertical at DSP Merrill Lynch (now, Bank of America), says he found it odd that, despite his background, very few of his friends have ever sought his advice on managing their wealth.
On the occasion of new year, he has often written about his thoughts on financial planning to some of his close friends. He’s been undeterred by his wife who has told him people would stop reading his boring messages and by friends who have rolled their eyes, although ‘one or two have started engaging in this issue’, Chandra tells me with a laugh.
He is often surprised, he says, by the shockingly low level of financial literacy amongst senior professionals and the lackadaisical, unscientific way in which he has seen even well-educated friends approach money management and retirement planning. Few people really think about their investment decisions with any rigour is what feels.
Interestingly, the new Indian wealthy don’t seem to soak up advice on managing their wealth from experts either.
In the absence of learning from others, books might have been their preferred recourse to understanding attitudes and philosophies. But, less than two in ten, for example, said they had read any books on the subject. Not even the usual choices, such as Berkshire Hathaway chairman Warren Buffett; fewer still said they read websites such as Morningstar, Investopedia or the Morgan Stanley blogs, usually considered the best repositories of investor advice.
Not one person pointed me to a book that they felt had changed the way they had approached investing. Neither could any of the people interviewed think of one person who had influenced or inspired the way they managed their wealth — no senior colleague, an elder family relative, or business associate. The main source of information for market intelligence, essentially limited to news and trends, remained business newspapers and television networks for them.
There may well be a lot of literature out there on investor psychology, as well as the consequences of cognitive biases and behavioural predispositions that decisively shape how individuals manage their wealth. But, it wasn’t information that India’s wealthy had found need for yet.
Entrepreneurs not only want to build companies but also continue to grow their wealth. Never before have so many people been confident of being able to do this by themselves — within decades, if not years.
India’s new affluent want to use their reserves as a vehicle to establish lasting legacies, to redeploy and reinvest their assets in multiple businesses and to continue to create wealth for themselves in a country that is throwing up so many avenues for growth.
Much like other industries in India, a new appetite for risk and bold dynamism has created new markets and expanded the scope of the wealth management industry as well.
In such a rapidly changing world where fortunes can be destroyed as swiftly as they are built, for a company to be successful requires agility, far-sightedness and perseverance in equal measure.
It is in these swirling waters of changing fortunes that the founders of IIFL Wealth have been able to make a mark — by proving themselves to be, above else, a new species of wealth managers.
Part 4
The Rainmakers
Chapter 13
A game of odds
Mumbai, April 2010
It was a typical Wednesday evening for a group of IIFL Wealth employees. About twelve of them were at founder and CEO Karan Bhagat’s forty-fifth floor penthouse in Mumbai’s Mahalaxmi area, with a view of the Haji Ali mosque and a wide expanse of the city’s skyline.
However, the panorama through the floor to glass ceilings faded in comparison to the green of a poker table with its tiny stacks of shiny red and black plastic circular chips that had them riveted.
It was poker night; a weekly ritual started by Bhagat, an avid poker player, bringing together both enthusiasts and colleagues who were more recent converts to the game.
Bhagat plays a mean game of poker, his colleagues say. His head for business and a natural tendency for aggressive albeit calculated bets is on full throttle during poker, as is a competitive instinct that might not be immediately apparent.
On this particular evening though, things took a turn for the serious, a calculation that went beyond just winning a big hand at a friendly game. Not that one can call a poker game with Bhagat friendly — he might not bother to negotiate down the last 5 per cent at work but will “fight hard for pennies” at poker, a colleague told me.
Yet, this evening became more serious than others. Halfway through the game, a senior relationship manager of the firm wondered aloud about its valuation and whether stock options for employees like him would ever prove to be any good. Or would their stock options, in other words, end up as those things usually do in start-ups: A hook to hire people but often failing to live up to the promised upside.
A tad piqued at his colleague’s scepticism, Bhagat offered to personally buy out his shares. The relationship manager dismissed his boss’ offer as a joke but Bhagat didn’t let the conversation die and asked his colleague to figure out what he thought the company’s valuation was likely to be, to settle on a sale price.
The company had just breached 50 crore ($7.4 million) in annual profits and stood at a hundred employees. A valuation of 1,200 crore ($178 million) was his best guess.
Bhagat offered to buy his employee’s share at a premium — at a valuation of 1,400 crore ($208 million)— and gave him fifteen minutes to mull over his decision so they could close the deal. His colleague made a few more frantic calculations, and bumped up the company’s valuation to 1,500 crore ($223 million), a number to which Karan agreed.
Next morning, when the relationship manager came into work, he found a cheque of 1 crore ($ 149,000)— the approximate value of his shares — waiting for him at his desk.
He’d forgotten about the deal made the evening before, having dismissed it as a flippant discussion at a poker table. Foxed by Bhagat’s move, he spent the ne
xt two days anxious and confused, not knowing whether his boss was playing a prank on him or whether he had signed away his stock options in the company. Was it a lucky exit or a bet gone wrong?
The story about the cheque was fervently talked about on email and SMS over the next two days and became coffee break gossip for the Mumbai team.
Bhagat was ready to play the game till the end. On the morning of the third day, he told his colleague that as far as he was concerned, the deal was done. A cheque had been signed and the man could simply transfer the shares to complete the transaction — offering him time to think about it till 11:00 p.m. that night.
Bhagat chuckles at the memory saying, ‘If he decided he didn’t want to sell his shares, I would take my cheque back and reverse the transaction only if he paid me 10,000 ($149) for the board of my pool table and apologised for having doubted the value of the company.’
Oft-recounted versions of the incident have made their way into the company’s folklore. ‘A good laugh aside,’ Bhagat says, ‘It was a good confidence booster for everybody because they saw I was confident enough about the company to buy the shares myself.’
Knowing when to call a bluff is a key trick for success in poker; Bhagat successfully put it to business use. Eventually, it was his colleague who turned out to be the smarter player for not selling his shares that day. Only a few years from that Wednesday evening poker game, the 1,500 crore valuation of the company in 2010 would prove to be much too conservative.
New York, September 2015
On a perfect late summer Sunday, five years from the poker game, The New York Giants were playing against The Atlanta Falcons in a National Football League (NFL) match at the popular MetLife Stadium in New Jersey, the team’s home ground. IIFL Wealth’s founding team — Karan Bhagat, Yatin Shah and Amit Shah /– didn’t know much about football but were enjoying this most American of weekend sports — outfitted in the Giants’ bright blue and red hoodies and caps.
The Wealth Wallahs Page 13