India's Growing Wealth Belt Spawns A New Breed Of Managers

The Deutsche Bank representative who called Venkaswamy helped him work on a plan to recharge his finances. “He held up a financial horoscope for me,” he says. “If I needed to survive, I had to change my habits.” The planner also offered an array of options that, among other things, helped him ensure his family’s financial security and steadily build an asset portfolio. “In six months I had recovered everything I had lost,” says Venkaswamy, who today is managing director of Indian operations at Juniper Networks in Sunnyvale, Calif.

Until recently, wealth management for high net worth individuals was an almost unheard-of concept in India. Rising incomes and the unlocking of wealth from closely held businesses have created a whole new generation of individuals that constitutes a credible market opportunity for asset managers, private bankers, financial advisors and others. Simultaneously, new options for investing are emerging as well, including art, overseas investments and real estate venture funds.

“The wealthy Indian has just recently started waking up to the concept of private banking,” says Sutapa Banerjee, senior vice president and head of Indian private banking at ABN AMRO Bank. Previously, most high net worth individuals (HNWIs) invested in a few asset classes, using their local brokers, chartered accountants or tax consultants. For wealth managers, “it is an extremely challenging task to break the traditional mindset” and convince HNWIs to embrace “an asset allocation methodology through a professional wealth manager,” she adds.

“Traditionally, the wealth management market in India was served by those that cross-sold mutual funds and broker/banker products to mass affluents,” or individuals with liquid assets of between $50,000 and $300,000, says Leo Puri, managing director at private equity firm Warburg Pincus in New York City and a former director at McKinsey & Co. in Mumbai. “A true [wealth management] market is just beginning to develop.”

Banerjee attributes the increase in the number of wealthy Indians to a combination of factors. For one, many are invested in the equity markets and have benefited from strong corporate results in recent years. Stock market earnings multiples are also riding high, and so is sentiment in the market for initial public offerings, she says. Promoters of Indian companies have also been able to unlock significant wealth through mergers and acquisitions, she adds.

The ‘Wealth Belt’ Expands

According to a report titled, “State of the World’s Wealth: 2006,” published by Merrill Lynch and French consulting firm Capgemini, the number of high net worth individuals in India grew 19.3% between 2004 and 2005 to 83,000, whereas the global average was 6.5%. The report also found that only 0.01% of India’s adult population is made up of HNWIs, which is a tenth of the Asia-Pacific average.

By Puri’s estimates, India now has roughly 20 million urban households that earn $5,000 to $10,000 annually. Another six or seven million households earn between $10,000 and $100,000. Wealth managers are actively developing products and strategies to tap into those markets, says Puri. India has fewer than 100,000 individuals with a million dollars or more to invest, he says, using the international definition for HNWIs.

But international yardsticks don’t lend themselves easily to the Indian market, says Kanwar Vivek, head of private banking at ICICI Bank, India’s largest private sector bank. “Inheritance is not a vital wealth forming segment here yet, unlike Europe which has been rich for 250 to 300 years,” he says. “In India, the people who are rich are those who own SMEs (small and medium enterprises) or LMEs (large and medium enterprises). It’s a booming market. The opportunity lies in increasing their wealth. We want to catch the group of clients who will be in the Rs. 4 to 5 crore ($1 million to $5 million) bracket tomorrow.” ICICI assigns a wealth manager to each client with an investment size of at least Rs. 1 crore (about $240,000).

Deep-rooted cultural moorings – such as keeping money matters strictly private – are also giving way. “In India, money does not have sinful connotations anymore,” says Pradeep Dokania, managing director and head of the global private clients group at DSP Merrill Lynch. “India has always had a lot of enormously wealthy people such as landlords, royalty, rich farmers and traders,” notes Abhay Aima, head of the wealth management practice at HDFC Bank in Mumbai. “However, they traditionally did not discuss their assets with financial institutions.”

Emerging Asset Classes

Indian HNWIs are beginning to explore investment opportunities beyond the traditional capital markets, migrating to newer asset classes such as art, real estate and overseas investment opportunities. Wealth management firms are targeting specific niches among them to avoid the clutter of competition. HDFC, for instance, is looking to service mass affluents, high net worth individuals and ultra high net worth individuals, but its focus is mainly on the first two. It is also pitching its services to wealthy non-resident Indian (NRI) investors who have done well overseas and are now looking to invest in a booming home economy. These investors are typically based in Singapore, Hong Kong, the U.K., the Middle East and the U.S.

Smaller shops, too, have made a specialty in servicing overseas clients. Govind Pathak set up Acorn Investments Advisory Services three years ago and has formed a niche among U.S.-based high net worth clients. “All my advice is India centric,” he says. “People want alternative or supplementary advice that is not coming from product sellers such as banks and insurance companies.” Acorn’s minimum requirement for a client’s investment check book is Rs. 25 lakh, or about $60,000.

ABN AMRO currently provides consulting services for assets totaling $800 million, and its clients are mostly owners of small and medium enterprises. “We are very strong as a diamond financing bank, and diamond [industry] clients are automatically our target clientele and constitute a substantial portion of our business,” says Banerjee.

Vallabh Bhansali, director of Enam Financial Consultants, a financial services firm based in Mumbai, believes the concept of wealth management is often misunderstood in an emerging market like India. “Income and wealth are different as far as our understanding is concerned,” he says. “Many banks offer transaction-driven services. That is not wealth management. We tell our clients to give us all their worries, and think wealth. Serious wealth management requires that the wealthy should really think wealth seriously.” Enam accepts clients with a minimum of $1 million in assets and employs three wealth managers to service them.

Dokania of DSP Merrill Lynch is working out hybrid models to attract the right clients. “Create a product proposition that is all pervasive – equity, fixed income, debt, advisory – and you have a relationship that is not just transactional,” he says. His firm’s threshold for taking on asset management clients is $500,000 in financial assets, excluding the value of home equity or jewelry. He says his firm’s clients average a portfolio size of $1.5 million.

As the wealth management market evolves, wealth managers are preparing to offer more and more sophisticated financial products. “Real estate venture funds are the new fad in the market, given the superlative returns real estate investments have been offering in the last few years,” Banerjee says. “Soon we can expect the introduction of REITs (real estate investment trusts) and real estate mutual funds.” Puri feels alternative markets for assets like art will become much bigger, especially with the presence of a dedicated fund, both in India and overseas.

Regulatory Constraints

While the wealth management market is expanding, regulatory constraints prevent banks from offering a wide range of services. “There is a host of products which a bank can’t sell and provide to its clients,” Banerjee says. “Until recently, banks were not allowed to sell real estate venture funds. Similarly, banks are not allowed to run a portfolio management scheme for clients.” Banks can offer such services only by setting up separate non-banking finance companies, “licenses for which are also very hard to come by.”

As a result, ABN AMRO offers its clients investments in debt, equity, mutual funds and insurance through the mutual fund route and a variant of portfolio management services, she says. It has also put in place third party arrangements to help its clients invest in newer asset classes such as real estate and art. ABN AMRO currently has about 700 client groups with assets totaling some $800 million. Banerjee hopes to increase that figure to between $2 billion and $3 billion in the next few years.

Banerjee predicts that the regulatory establishment will eventually loosen up, with India moving towards full convertibility of the rupee on the capital account, which essentially will allow its unhindered flow to foreign markets. By 2009, “the regulatory regime in India will be more conducive for foreign banks to do business in the country.”

Dokania and Puri point to recent moves in that direction by India’s central bank, the Reserve Bank of India. Indians can now remit up to $50,000 overseas in a single year, and that cap will be raised to $200,000 by 2009. Banerjee notes that these measures will open more opportunities for banks like hers to offer clients international investment products.