Wealth managers say it isn’t unusual, in fact, for some clients these days to invite three or four potential or existing advisors to a joint pitching session, and have them debate product ideas, or pick holes in each other’s approaches. An advisor with a global wealth management firm, who didn’t want to be quoted, said the format is, something between a swayamavar and a school debate. ‘Clients have become very smart. I think they also have a bit of fun, to be honest.’
Most people who create wealth themselves are inherently super smart to begin with. Besides, they are aware that they are smart and often believe they know it all — know how business works. ‘They are very, very tough customers. We have to be sharper, smarter, faster than ever before,’ a senior wealth manager who leads a large global bank’s wealth arm in India confided in me.
The first-generation wealthy are also usually better educated so they pick up the thread faster even if they have built businesses in fields vastly different from financial services and started with little understanding of investment products and approaches.
When recommending a stock or examining their portfolio, clients will have valid questions about price-to-earning ratios and ten-year industry averages, something that definitely didn’t happen upto five years ago, says the equity research head of a domestic private bank. She admits that during 2006-07, her team could just call up clients and tell them to buy a particular stock without being questioned on the “why” and “what” of it. Today, even if clients have a trading mindset that allows them to take riskier, short-term bets, they will ask what the stop-loss would be and why their advisors were recommending a particular trade.
She further adds here that the ripple effect of a few aware, educated clients is huge because when they speak with confidence backed by data on these issues, it serves as a motivation for others to self-educate themselves as well. Entrepreneurs, used to charting new paths for their companies, take to this kind of learning especially well. But, in clients across all segments, education has spiralled upward very fast, she tells me.
‘Sometimes, after meeting an HNI client, we realise we didn’t need to talk at all. The customer was holding fort — on the Chinese economy, government reforms, currency trends and commodity price movements,’ laughs HDFC Mutual Fund’s Milind Barve although he worried about the flipside of everyone believing they were experts.
We live in an age where information is available to everyone and it’s no longer possible to hide. The new wealthy, especially those who have forged their fortunes in the past decade, enjoy another benefit — one that is not of their own making.
The spoils of war
Darshak Shah spent a hot day in April 2013 at a Bhavnagar hospital, waiting for the birth of his second child. But the phone wouldn’t stop ringing. Shah is the joint managing director of Madhu Silica, a manufacturer of precipitated silicas (a compound used in toothpaste, pharmaceuticals, paints and rubber production), and as he was pacing the hospital corridors, business channels broke the news that Hindustan Unilever Limited (HUL) was acquiring the 74 per cent promoter stake in their joint venture, Aquagel Chemicals.
Shah remembers being besieged by more than two dozen phone calls that day — retail bankers, investment advisors and wealth managers who kept his smartphone busy.
Following the deluge that swamped him that day, the Shah family eventually decided to work with IIFL Wealth, mainly because the company’s senior leadership team travelled to Bhavnagar several times to have in-person meetings. For a family not used to working with a wealth manager before, face time was critical in building trust. But what Shah remembers most is the madness of those few days and the sheer number of people who wanted to manage his newfound wealth.
Over the past few years, the wealth management industry in India has become hyper-competitive: Large banks, brokerages with portfolio management systems, independent financial advisors, boutique firms and pure-play wealth management outfits have all emerged to participate in the opportunities new wealth and the new wealthy have put to offer.
In the metros and large business hubs, almost every potential and existing wealth management client I met complained bitterly about being bombarded by cold calls from what a Bengaluru-based entrepreneur described as “a formidable, can’t-be-swatted-away battalion of cold-callers, emboldened by every rejection, encouraged every time the phone is hung up on them”.
It certainly is a far cry from the careful discretion of the private banks of nineteenth and twentieth century Europe. An entrepreneur’s caustic sarcasm and annoyance aside, the fact is that wealth managers in India now have to live with intense competition and an aggressive client acquisition style.
Does the competition, strangely reminiscent of the deep-discount and high-visibility model adopted by e-commerce firms to win customers, mean that wealth managers in India have to deliver more to both acquire clients and retain them?
Free markets believe more choice usually means better services. But has the competition benefitted clients, not only giving them a choice but compelling existing players to do a better job? Newer clients are also more demanding of transparency. Most question their advisors on the incentive structures that relationship managers work with, or the product commissions the firm gets.
Transparency, the new hook
Before the global financial crisis, transparency like this was neither demanded nor offered. It was a global trend and the financial crisis of 2008-09 served as a possible catalyst for this trend.
Regulators in countries such as the United Kingdom have led this initiative by introducing rules that made it necessary for financial advisors to distinguish between the commissions they got from distributing products, and the fee they were charging the client for a service. It fell on the financial advisor, not the client, to make sure that the exact details of the fees and the consequent services provided were well understood.
Financial regulators in India have taken steps towards ensuring such transparency, although the scenario here is far from the maturity level prevalent in the UK market.
Indian wealth managers say that India hadn’t been much at risk from the global turbulence even in 2008. Investors lost money because of shoddy churning of products. There were mutual funds that were allowed to collect upfront commissions and wealth advisors would churn these, change from one product to another to make commissions of about 2 per cent each time they reinvested the same capital.
Much of that has stopped now. In the past five years, when it comes to capital markets-linked regulation, India has taken steps that senior journalist Monika Halan hopes would eventually take them towards becoming a “seller beware” distribution model.
‘The only sustainable model is in trail; there the distributor is incentivised to offer me products where I make money because only if I make money, does he make money. He’s sitting on a trail commission and it works for the producer because he gets sticky, long-term assets, and he makes more money if his funds do well. The capital market regulator gets it, we are nearly 90 per cent there, and in mutual fund regulations, we are ahead of several developed economies,’ she says.
Wealth management firms and private banks have also slowly begun to see the premium attached to transparency and how it can act as a powerful hook in winning a client. The competition has necessitated this as have clients who know they can demand more.
MapmyIndia’s Rakesh Verma believes transparency is improving because investors like him probed more now — whether it is a global firm or an Indian one. Wealth managers want to make money too, he said. While that is obviously a legitimate objective, Verma says he’s been upfront with his two primary advisors by asking them to tell him how much they make on each product he buys from them.
‘Is it a one-time commission, a recurring incentive or a percentage-based payment scheme? I’d like to know. I don’t grudge my wealth advisors higher commissions on a specific product that I’ve chosen but I do expect even better service when it comes to a product like that,’ Verma
admitted to me. Getting this information is an important way to build confidence.
To his surprise, he reveals, and possibly because the competition in the wealth industry has become so intense over the last couple of years, most people are usually forthcoming about this information. He’s also made it a point to have two or three advisors. In his case, it’s IIFL Wealth and Citibank.
More than keeping each other on their toes, Verma said the more people you work with, the more you learn. That usually leads to smarter, better decisions. Of course, it also makes it easier to validate information. Cross-checking commissions and brokerage numbers and finding that the information his advisors gave him was true has helped hugely to enhance trust.
‘Earlier, there was no professionalism. Your wealth advisors would think they can just come and talk, and you would agree. Now, they have to present data and logic, show why something makes sense over something else,’ says an elusive Mumbai-based investor I spoke to. Now, even when people trust their advisors, they want to understand the logic. The methodology of understanding and selling products has become more refined, he adds.
Sharda Exports’s Gupta says he’s given his wealth managers a hard time — having very clear conversations about their fee and incentive structures. ‘Friends I speak to say one can never really be sure if the answers we get are right so I don’t want to be too sure about how correct they are. But the questions I ask, I do get an answer to,’ he tells me.
The doubt that Gupta’s friends display clearly points to the fact that this journey of transparency is only just beginning for wealth managers. They will have to come to terms with the fact that demanding customers will expect even more. It might be enough for now to tell the clients how much fees they are earning, but soon clients might expect the fees to be linked to specific services provided.
Wise wealth managers will know that they are operating at a time when financial services companies live in a trust deficit. Battered industry reputations take time to reform. To get loyal clients, wealth managers must prove to be trustworthy. Trust would follow once the relationship was entered into. It would have to be demonstrated and earned, slowly — transaction after transaction, month after month.
Senior professionals, especially from the financial services industry, bring an even finer toothcomb to parse through the offers. The India head of a foreign private equity firm says that wealth advisors can’t mis-sell to people like him because he can strip down a product to understand it.
A wealth management outfit needs to understand how it can customise its offering to an 80-year-old widow, a 35-year-old technology entrepreneur and a 55-year-old financial services professional.
Clients understand that the more aware they are, the better they can separate the wheat from the chaff. Because they are more aware, they are also more discerning about the knowledge, insight and subject expertise they expect from their wealth advisors.
If it’s somebody who has sold a business, then he or she has met tax lawyers, investment bankers and private equity funds. This ensures access to various inputs from different parts of the value chain, not confining them to their wealth manager alone for advice.
Wealth managers say that the harsh truth they live with is that they are not the one-stop repository of advice. There is a vast range of experts in niches of the financial services industry to give them competition across asset classes, such as brokers in equities, real estate management firms and banks when it comes to extending credit loans to clients. The competition is not limited to other wealth managers. It is rearing its head from other segments and branches of financial services too36.
There is a strange dichotomy here. Although customers are more inclined than ever to seeking professional wealth management, they are less trusting and more sceptical. When dealing with money, there will always be some doubt.
‘We’ve found that the more we share, the more we’re able to work around the scepticism. Many of our clients know how our commissions are structured, often up to the ninetieth percentile. The last ten percentile is really the only variable. To be honest, even we don’t know while doing a transaction how much that variable will eventually amount to,’ admits IIFL Wealth’s Bhagat.
The world of private banking has settled into making 60-70 basis points as profits on the corpus it manages. This is a third of what some of them would have made in the good times before the global crisis.
Yet, this isn’t a new “normal” that everybody agrees on. Some wealth managers say the pre-2008 margins were an aberration. They reeked of both immaturity and greed. Yet, the downward spiral has squeezed margins to below what should be considered normal. While some say that 60-70 basis points is a mature, adequate number, others believe 80-90 basis is probably closer to the number the industry should work with.
This tussle for margins also has an impact on, and is influenced by, the dynamics of building and sustaining relationships.
Chapter 12
The relationship roulette
In all my interviews, trust and relationship were often used to describe the dynamics between clients and their wealth managers. Most people seem to view wealth management as a relationship game. It is built on a loyalty that comes from expecting the advisor to provide inputs and service that benefit the client’s long-term interests, and also stem from the intimacy established by a client sharing his financial health, wealth objectives and family’s future needs.
On their part, wealth managers say, building relationships is critical because when they acquire a client, it is with the view that they will manage them for several years or, hopefully, even a generation, if not more. The economics of the business also means that the wealth manager only starts making profit out of a client relationship after the first few years. For these reasons, cementing a relationship is crucial to the business.
Yet, as the landscape of the industry has shifted as sharply as discussed so far, what does the relationship really amount to? If expectations have been reset, powers chipped away at and a healthy dose of scepticism pumped into the client-advisor engagement, both the cost of the relationship and the premium that it guarantees, must necessarily have undergone substantial tweaks.
The death of intimacy?
A senior wealth manager in Mumbai, who has been in the industry for more than two decades, tells me that the value of a long-term relationship has certainly diminished where the first-generation wealthy in India are concerned.
It has made longevity in the context of a relationship seem irrelevant, at least, for now. ‘Clients are not evaluating relationships or making new ones with the view that these advisors will be with them for the next fifteen to twenty years. The conversations are more about pricing, fees and being shown smart products,’ says this wealth manager.
Because this is usually a client’s first relationship with a wealth manager, there are greater concerns about the effectiveness of the new partnership. This effectiveness is likely to be measured in monetary terms. The value of the relationship is possibly the next stage of evolution.
There are others who say, in confidentiality, that the concept of a relationship is overstated because the foundation of the engagement is in demonstrating sustained, continuous performance. The bond strengthens from the services offered and a sense of shared purpose; the relationship acts as a binding tool.
If the fabric of performance goes through too many tears, the relationship is unlikely to survive. The personal relationship works only as long as the firm and the client are in a mutually beneficial engagement. It’s a tough balance to strike sometimes, especially while maintaining the distinction between being a client’s wealth manager and not becoming their munim (accountant).
‘Loyalty earns you coffee at best. And, a weaker blend of coffee if the portfolio isn’t doing well. Three cups of coffee can go down to one quite quickly,’ a young wealth manager with a global firm once told me.
More than on any other aspect, wealth managers I interviewed requested not t
o be quoted in this issue. In a business where the words relationship, trust and loyalty are often used, few wanted to admit openly that the value of relationships is sometimes exaggerated.
‘Honestly, the relationship lasts as long as we’re doing a good job with our client’s portfolio,’ said one. There is no loyal client, admitted another private banker, just as there is no loyal wealth manager. There are smart clients and smart wealth managers where it is important to remember that although one might be invited to a client’s family events and parties, the relationship depends on how well the portfolio does.
It is much like hiring, believes a successful manufacturing entrepreneur who had three relationships with three different private banks. People got hired on recommendations, referrals and educational backgrounds but after a couple of years in the system, it didn’t matter if they had a PhD, MBA or had called you for their wedding. The relationship was enhanced by the quality of the performance, or certainly, at the very least, the sincerity of effort.
There are others who say that if wealth managers are speaking this language, even if it is within their firms and out of the earshot of the clients, it marks a welcome change because for too long this relationship has been a wildly irrational engagement.
Ten years ago, in some parts of Asia, for example, some reputed private banks would hire hair stylists to strengthen the relationships with their clients, said Kees Stoute, author of Help, I’m Rich!, a self-help book for the wealthy and how they should optimise their relationship with their private bank.
When friendship isn’t enough
Most first-generation wealth clients are also resetting expectations. While many will talk about the relationship being critical, and say that personal rapport can make a big difference to their engagement, the relationship is built on their advisors’ ability to understand and commit to memory their risk appetite; be available and responsive in terms of communication; execute efficiently, and be able to report and track their portfolios accurately.
The Wealth Wallahs Page 12
