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How the wealth management industry is evolving with changing customer needs

The majority of incremental market growth in future will go to 'WealthTech' enterprises with a 'phygital' (physical + digital) model that goes beyond traditional firms, say experts.

December 31, 2021 / 10:10 AM IST
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Representative Image

The Wealth Management services industry in India is still young but has been growing with the rise in the population of high networth individuals (HNIs) and ultra high networth individuals (UHNIs).

Rising per capita income, aided by growth in the Indian economy and increasing urbanisation, is also aiding the growth of the wealth management industry.

The affluent middle-class population is growing, and per the estimates of the World Economic Forum, 80 percent of India’s population is expected to be in the middle-class segment by 2030, up from about 50 percent in 2019.

According to IBEF (Indian Brand Equity Foundation, an Indian government export promotion agency), the HNI population in India is expected to grow by 75 percent, from 3.50 lakh in 2020 to 6.11 lakh in 2025. The number of UHNIs in India is expected to increase by 63 percent, from 6,884 in 2020 to 11,198 in 2025.

Latest Trends in India's wealth management industry

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There are several interesting investing trends that have either emerged or gained momentum over the last year.

One is the increasing interest in international investments, especially in purchasing real estate abroad. “The increase in the Liberalised Remittance Scheme (LRS) limit in India to $250,000 per Financial Year (April-March) and the transparency in developed countries’ real estate have made it easier for individuals to invest in international real estate,” said Vinay Ahuja, Executive Director, IIFL Wealth.

The other trend that has emerged is an inclination to participate in the tech startup space. “Investment in unlisted companies has become an attractive option for investors with a higher risk appetite and a long-term horizon,” said Ahuja.

“HNIs maintained a cautious but optimistic outlook, increasing their investments in equities, with ETFs and index funds being the preferred options,” Abhijit Bhave, CEO, Fisdom Private Wealth, told Moneycontrol.

Passive investing through low-cost ETFs and index funds has gained traction and favour among sophisticated investors in recent years as most active fund managers have failed to beat the benchmark, Bhave added.

HNIs also migrated to privately managed portfolios through AIFs (alternative investment funds) to achieve alpha while safeguarding their overall wealth. This was evident by the growth of AIF commitment values exceeding INR 5 lakh crore, a leap of over 20 percent (YTD).

“Real estate investments were also made through instruments like REITs and InvITs, while gold ETFs and SGBs showed a rise in allocation,” said Bhave.

Growth Drivers

Over the last few years, there has been a significant rise in the number of HNIs/UHNIs in India. This is driven by “several factors such as the burgeoning startup ecosystem, the number of unicorns being created in the country, and the increasing share of the organised sector in the economy owing to various reforms,” said Sameer Kaul, MD & CEO, TrustPlutus Wealth (India) Pvt Ltd.

"We also believe that digitisation will ensure ease of access to information and financial products, which, in turn, will broaden the investor base and allow HNIs based in Tier II and Tier III locations to access capital markets," Kaul added.

Digitisation in the wealth management industry is enabling wealth managers to reduce costs, improve portfolio analysis, and provide clients with a seamless and holistic experience.

“Winning wealth management firms will be able to successfully straddle the human and technology element of wealth management,” said Ahuja of IIFL Wealth.

The other growth driver will be the growing need for innovative investment products based on individual needs, which can help improve risk-adjusted returns.

“Favourable demographics and rising per capita income, if harnessed correctly, could act as catalysts for several more individuals to enter the HNI/UHNI segment,” Kaul told Moneycontrol.

Digital Wealth Management

A key element in the business of wealth management is trust. “Relationships with clients are fostered over a long period, often running deep and through generations. Thus, people will always remain in a position of strength in this industry,” Ahuja told Moneycontrol.

At the same time, he added, the future of the wealth industry is likely to be bionic, where humans optimally harness digital solutions to add value to customers by enhancing processes, analysis and communication.

WealthTech businesses are disrupting the way HNIs invest by increasing transparency, cost-effectiveness, knowledge dissemination, and access to a larger range of investment products.

“The majority of the future incremental market growth will go to "WealthTech" enterprises with a "phygital" (physical + digital) model that goes beyond the traditional firms as well as “Technology-only” wealth management firms,'' added Bhave.

Product Preferences

Traditional investment avenues such as fixed deposits, direct equities or pooled vehicles like mutual funds and physical assets like gold and real estate have always been used by HNIs as effective investment tools for many years now.

“A paradigm shift in investment patterns is visible in recent years, as money has begun to flow into alternative asset classes that follow non-traditional patterns such as long-short strategies, pre-IPO unlisted stocks, structured products and international investments to diversify their opportunity set and earn additional alpha,” said Bhave.

HNI portfolios have always had high exposure to real estate investments. However, over the last few years, it has been observed that such exposure is reducing. “While real estate continues to hold sway, the vehicle of allocation is changing. Instead of direct real estate investments, HNIs are increasingly investing in Real Estate Investment Trusts (REITs) to gain relevant exposure,” said Ahuja.

InvITs are an attractive vehicle to invest in infrastructure assets. The Liberalised Remittance Scheme and rupee denominated funds of funds are an attractive way to diversify the portfolio.

“Last, but not least, ideas such as pre-IPO investments, venture debt, private equity and hedge funds are also finding takers from within the HNI/UHNI community” said Kaul of TrustPlutus Wealth.

Challenges Faced by the Industry

The industry faces its biggest challenge in regulatory compliance and maintaining a solid risk management system at both the execution and customer data levels.

“The sector will continue to be disrupted by constant innovation and new ways to connect with end customers,” said Bhave of Fisdom Private Wealth.

The maintenance and training of an adequate workforce with requisite domain knowledge, including an understanding of behavioural patterns of various cohorts of investors, is also a big challenge for this segment.
Gaurav Sharma
first published: Dec 31, 2021 10:09 am
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