Disclosures, risk assessment becoming vital for wealth management


The growth in wealth around the globe, coupled with demographic changes, has resulted in the emergence of new avenues for growth and diverse high net worth investor (HNI) behaviour, demands and expectations. While the percentage of HNIs or ultra-HNIs (UHNIs) in India is small compared with developed countries, forecasted growth projections point toward a very high potential for wealth accumulation over the foreseeable future. India has the key ingredients of a high-growth wealth management industry and the Indian government’s push to curb illegitimate leakages; an increase in the wealth of Indians abroad; and tightly regulated markets would all lead to a growth in this segment.

The wealth management industry is in the midst of significant change: a new generation of well-informed investors, whose expectations and preferences have been shaped by technological advancement and by their experience through the last financial crisis, have brought new standards to the industry in terms of how investment products and advice are being delivered. But as the industry evolves, the fundamentals of asset gathering, client servicing, and investment choices are shifting. Institutions need to be aware of all important trends and use them to their advantage as they forge their strategies for the future. Here are some key trends segments that are having an effect on investments: demographic trends, industry trends and market trends.

Demographic trends

The millennial population is the largest segment that is likely to grow its wealth significantly in the coming years. Certainly most of the millennial are still in the phase of creating wealth but there is going to be massive shift in the future, driven by major trends.

Being self-employed as an entrepreneur is a key aspiration for millennials and this will accelerate the increase of assets. They will benefit from the wealth of their baby boomer parents. This new age of HNIs is quite tech savvy and the exploding arena of technology has made access to a gamut of information at one go.

Most of the wealth in India has been created post-liberalization and that generation is now aging and passing the baton to next generation. Also, not only has the wealth at stake increased substantially, given real and financial asset boom over the last two decades, but the number of claimants to the wealth has increased as well. Add to it the complexities in relationships in today’s world and estate planning, family governance, succession and inheritance planning have become imperative for UHNIs. Due to this trend, estate and succession planning form a core part of wealth management.

With time, clients’ knowledge of financial products has increased. Competition in the space has also contributed to client’s awareness. Investors now tend to be more cautious than in the pre-financial crisis years and hence disclosing and discussing the risks associated with an investment becomes more critical, and is more valued by clients. Apart from these, increased awareness, competition and regulations have made clients more cost-sensitive and transparency is demanded.

Industry trends

While earlier, clients had a higher preference for more traditional channels such as personal interaction and offline modes of investing, the emerging trend is to go online and use technology to the extent possible, be it for advisory or transactions or insights about the portfolio. Wealth management companies are upgrading capabilities of their online platforms to meet the rising digital expectations of the client.

An emerging trend in the industry is the changing investment preferences of UHNIs—from vanilla investment products like mutual funds, stocks and bonds, to more exotic and alternate investment categories. Fund ideas based on real estate, structured debt, long-short strategies, special situation trades, private equity or venture capital have been able to generate significant interest among the HNI and UHNI segments. Product innovation in a crowded market place has become important to differentiate offerings.

Market trends

The investment environment has been volatile over the past several years due to various global (US Federal Reserve rate hike, US election, EU crisis, Brexit, Yuan devaluation, and others) and domestic (demonetization, slow pace of reforms such as goods and services tax, monsoon, changes at the Reserve Bank of India) factors. Volatility is likely to persist for at least the next couple of quarters as markets adjust to new norms post-demonetization. Considering the uncertainties, there has been a trend to move towards safer asset classes and also seeking active portfolio advisories. Also, the savvier clients have already started to enter equity in a staggered manner.

Contra buying is becoming popular in this segment, as is value-buying. Also, especially in equity, there is a clear preference for concentrated strategies over diversification. In debt, the hunt for yield is still on but the asset class of preference has shifted from real estate-based debt to structured corporate debt in non-real estate sectors.

There is also a calculated risk allocation being placed on products based on tax considerations. A case in point is equity-linked defensive mutual funds being preferred over pure debt funds, if the investment horizon is less than 3 years; structured products or listed debentures given favourable long-term capital gains taxation treatment over debt mutual funds, and others.

Fee-based advisory is another major trend in the UHNI segment. With greater alignment of interest- and price-conscious segment, this is one segment that’s growing at a rapid pace. There is also a trend to move from physical assets to financial assets. Given the existing large allocation to real estate, there would be opportunities to monetise and move this money to financial assets. Within the real estate investment sphere, commercial real estate will find favour with UHNI clients, given value buying opportunities and attractive yields.