COVER STORY
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Wealth Management Emerging Opportunities Pankaj M Madhani*
Wealth Management is fast gaining popularity in India as more and more Indians are joining the millionaires’ club. Rising salary levels and the booming economy are further expected to churn out more millionaires. However, managing the moolah on his/her own is not possible for every millionaire. It is here that the services of a wealth manager can come handy. Wealth management with a market size of $20 bn has been increasingly recognized by Indian financial services sector as a lucrative business. With the emergence of wealth management as fast-growing and dynamic career opportunity, leading educational institutes of India have started offering courses on the subject.
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raditionally, wealth management services were the preserve of the very rich, who needed help to manage substantial sums of money. However, the world wide web has opened up the world of financial management to a much wider audience and one doesn’t have to be a millionaire to take advantage of these sorts of services. Other than managing stocks and shares portfolio, wealth manager can also help the clients to pick and choose between different collective funds in which they may be interested. He can also help the client in selecting from a range of wealth management plans, tailor-made to the needs and criteria of specific individuals. One may choose to invest purely for the purpose of increasing long-term capital or wish to take a more balanced position between long-term gains and immediate income. In addition to advising clients on managing individual portfolio, a wealth manager may offer independent financial advice about a range of personal finance products. He could also help with tax planning, including minimizing potential *
liabilities such as capital gains tax or inheritance tax. A wealth manager should be able to help clients to unlock money in current investment in assets, continually monitoring the breadth and direction of the markets to make quicker adjustments in investment portfolio. Some wealth managers also provide online research tools, investment calculators and access to wealth management reports. Wealth management is all about managing investment returns and risks for well-endowed clients, both individual and institutions with investible funds. It requires the wealth manager to have both breadth and depth of the financial markets, the instruments, the players, as well as the environment.
A Renewed Focus Global wealth is increasing continuously at a rate of over 6% annually, with Asia, especially India and China, seeing the most vigorous growth globally; the needs of clients are becoming forever more sophisticated, requiring new exciting service offerings extending far beyond the old stock
Faculty Member, The Icfai Business School, Ahmedabad. The author can be reached at
[email protected]
© 2007 The Icfai University Press. MBA All Rights Reserved. Review 21 July-07
Electronic copy available at: http://ssrn.com/abstract=1507649
COVER STORY
picking approach. And the globalization of clients, both with respect to their domicile and their wealth management outlook, combined with new technical possibilities, has made the wealth management industry one of the most preferred global industries in the world. Opportunities to increase revenue are scarce in the current economic environment, leading many financial institutions to contemplate forays into wealth management as a way to generate new topline growth. Investors today face mystifying choices about what to do with their money. As market conditions change and new financial products appear and disappear, making sense of information and innuendo about effective ways to manage wealth, can be extraordinarily difficult. Factors like increased volatility and uncertainty, the growing number and complexity of financial products available, and increased personal responsibility for retirement planning, have made many previously confident investors realize that they do, in fact, need advice.
Diversify but Keep Focused Diversified but focused strategies are fundamental to the pursuit of wealth management. Diversification and focus combine the best of both the worlds. With diversification you achieve risk mitigation, and with focus comes dedicated effort and sharp intensity. Diversifying your wealth management is fundamental to prudent risk control. Wealth is created most quickly and most often through success in a single business. However, wealth is also most quickly lost by investing it in only one or a few wealth management. So, in order to protect wealth, it’s best to diversify it. In India and around the world, capital markets are becoming more and more competitive. Achieving competitive advantage in the deployment of capital—a critical component to growing diversified wealth—is very difficult to achieve. Without the focus to develop wealth management skills that are superior to most professionals, you won’t add value to your wealth management portfolio. The principle of diversification applies in other ways as well. Most individuals have both taxable and tax-deferred (retirement and deferred compensation plans) MBA Review 22
wealth management portfolios. Some have life insurance savings plans with tax exemptions. A few people also control corporations. Each of these entity types receives different tax treatment. Because tax rates of all the rpoducts and services don’t rise and fall at the same time, it makes sense to diversify the tax treatment of your assets. Asset allocation and diversification are the cornerstones of modern portfolio theory, which is based on the notion that investors want to maximize returns and minimize risk in their portfolios. The essential idea is that holding assets that are correlated to one another (that is, assets that tend to move in the same direction at the same time) increases the risk associated with a portfolio, while holding assets that are less correlated to one another decreases the risk associated with a portfolio. Risk and return are two sides of the same coin, and investors must determine how much risk they are willing to assume to generate the kind of returns they hope to achieve.
A Strategic Plan Wealth management strategic plan provides a framework within which to work. With a plan we can map out where we are and see where we can expect to end up. A good battle plan also takes into account the enemy. In the case of wealth management plan, there are mainly two enemies: inflation and taxes. Effective wealth management strategy has to successfully manage the impact of inflation and tax structure on redeemed assets at maturity. Wealth management is about investment strategy. And, with so many wealth management instruments available on the market, it is also about sound advice. Before recommending a wealth management strategy, the advisor should consider clients’: • Goals, return objectives and risk tolerance. • Availability of opportunities in country of residence. • Wealth management time horizon. • Present and future need for liquidity. • Current lifestyle requirements. • Exclusive needs and circumstances. • Unique position to factor in the effects of inflation as well as income taxes. In today’s competitive market, wealth July-07
Electronic copy available at: http://ssrn.com/abstract=1507649
COVER STORY
Box 1: A Five-Step Process for Wealth Management Step 1 – Understanding the Client: It is mainly focused on learning about client. Knowing what is important to client, is first and foremost important task. Wealth management process begins with an understanding of your current goals and future objectives. Wealth management advisor should be able to translate these goals into rupee objectives and to maintain an inventory of what you have. This step determines where you stand now, in order to guide you towards where you want to be in the future. Step 2 – The Blue Print: The wealth management policy statement is the blue print or conceptual framework designed to build and protect clients’ wealth. It’s based on detailed analysis of customer’s financial position and goals. By having a thorough understanding of clients’ situation and future scenario, the wealth management policy statement will be the guiding principle for implementing wealth management strategy. Step 3 – Implementing Investment Plan and Recommending Portfolio: The next step is to put wealth management plan into action, i.e., building investment portfolio. Using firm wealth management policy statement as a road map, the wealth management advisor will then recommend the most appropriate wealth management plan(s) for client’s portfolio. Step 4 – Monitoring the Performance of Client’s Portfolio: The wealth management advisor should continuously monitor client’s portfolio to ensure that it stays on track with the initially stated objectives and client’s personal situation. He should have a process in place to review overall progress on an ongoing basis. Step 5 – The Result: A customized portfolio designed to achieve client’s specified objectives and maximize his return based on his risk level.
management advisors are finding it increasingly difficult to differentiate themselves and become the trusted, primary advisors for their clients. Clients themselves have become far more discerning, demanding increased sophistication in the services their advisors offer them. Competitive global markets have forced many wealth service providers to be more client-oriented. Clients of a wealth manager have more choices today than ever before. To meet the needs of an increasingly sophisticated client base, many financial services firms have had to innovate, creating new financial instruments and asset types. Clients are able to allocate their wealth to a variety of asset classes: cash, fixed income, equities, derivatives, private equity, venture capital, mutual funds as well as hedge funds.
Building Competitive Advantage Wealth management is an integrated set of products: cash management, asset management, protection, credit, retirement and estate planning and tax planning. While a product-centric approach to wealth management is reasonable in some respects (as products drive profit), this approach fails to address a large portion of client’s needs. Given that most wealth management products are commoditized and nearly equivalent, regardless of who offers them; clients are less interested in product specifics—assuming they meet certain basic requirements—than in the elements of service that surround the products. MBA Review 23
Indeed, while firms target customers with a range of products as solutions to individual wealth management needs, customers see their personal wealth management strategy as a lifelong endeavor that influences every financial and practical decision they will make from the immediate to the distant future. Even customers who fail to grasp their bigger financial picture are driven by the need to plan for specific monetary events that will impact their lives. In both these contexts, superior customer service, sound advice and an advisory relationship are the valued features that are not easily copied by competitors. The following five competencies address customer needs that enable firms to create sustainable competitive advantages.
Advisory Relationship The core of any successful wealth management offering is the relationship developed between the advisor and the client. Successful advisors develop a relationship with clients by demonstrating that the clients’ interests are of paramount concern to the advisor. In the context of an advisory relationship, the wealth management firm can work with the client to develop, implement and monitor a comprehensive wealth management strategy. Integrated Information Very few clients maintain all of their accounts with a single provider; an integrated view of their overall financial picture is critical if clients are to July-07
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Box 2: Career Opportunities Wealth management is emerging in India and has promising outlook. With substantial increase in individual wealth and disposable income, wealth management sector is growing at a very fast rate. It is not only for the wealthy, in fact, it’s for every one. There has been significant growth in wealth levels over the past few years. Wealth management with market size of $20 bn has been increasingly recognized by Indian financial services sector as a lucrative business. A booming domestic economy, excellent performance of corporate sectors, rising stock market index and increase in wages, salaries and overall family income, have turned this nascent sector into sunrise sector of financial services. Wealth management has tremendous growth potential as Indian GDP is growing at a rate of 8.5 % and with growing income level, Indians seek diverse means and ways to earn higher returns on their wealth. In the current macroeconomic environment of outstanding corporate performance coupled with higher GDP growth rate more and more individuals are seeking help and advice of wealth management service providers for professional management of their wealth. According to Merrill Lynch-Cap Gemini report (2006) on Asia Pacific wealth, there are 83,000 Indian millionaires. Wealth management is the most profitable and fast growing niche in financial service sector. Financial services accounted for 9.7 % of Indian GDP in 2005-06. Although recruitment in financial service sector has increased manifold, firms in India are still facing difficulties in recruiting the right people with right skills. Along with subject knowledge of investment and portfolio management, the essential soft skills and behavior skills required by graduates joining domestic and global financial services include team work, communication skills, client relationship management, customer services, business and macroeconomic environment awareness and problem solving skills. With the emergence of wealth management as fast growing and dynamic area of career opportunity, leading educational institutes of India have started offering courses on wealth management. ICFAI provides the following programs with specialization / electives on wealth management. • CFA Program • MS (Banking) • MS (Finance) • IBS PG Program ICFAI develops course programs in collaboration with leaders of financial services industry. Wealth management course of ICFAI is developed jointly with ICICI bank.
be able to make informed decisions. Wealth advisors, too, should be able to access and analyze customer data efficiently. When information is automatically integrated across accounts and institutions, Wealth advisors can concentrate on helping customers make fact-based and insightful wealth management decisions, rather than focusing on more mundane tasks like assembling statements from multiple sources.
Multi-channel Access Customers want the ability to access their account information when they want, how they want and where they want. The combination of integrated information and multi-channel access empowers them by enabling them to access constantly updated, accurate information, whether in person, over the telephone or online. Perception To win new customers and retain existing ones, wealth management firms must be perceived as competent, dependable and empathetic. Clients must also perceive that they are paying a justified price for the value they are receiving. Client opinion is formed through a combination of personal experience, word of mouth and marketing. To compete effectively, the firm must have a brand that is firmly associated with the qualities demanded of a wealth management institution. Personal Touch A major component of successful wealth management offerings is human touch. Clients MBA Review 24
respond to charismatic guidance and a high level of attention; they feel valued when their queries are addressed promptly and personally. Firms that go above and beyond expected levels of service will reap substantial rewards. The key consideration as firms extend wealth management offerings to customer segments with fewer assets is balancing the cost to serve with the revenue opportunities associated with a particular client.
Conclusion Wealth management is both an art and science. It involves understanding the client very well. In recent years, the proliferation of wealth management products and innovative financial services have contributed to the steady growth of wealth management as an attractive and lucrative service sector within the financial industry around the world. The constant forward march of technology is opening new markets in wealth management. The automation of business intelligence, an increasingly connected distribution network and advances in Customer Relationship Management (CRM) are reducing the cost to offer clients comprehensive wealth management services. At the same time, rapid product development and changing needs of the clients and globalization of businesses are posing new challenges for the professionals in wealth management. Reference # 16M-2007-07-04-01
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