The Wealth Wallahs

by Shreyasi Singh

  Along with Citibank, Merrill Lynch and Kotak Wealth, the clear market leaders around that time, domestic entities like Anand Rathi Financial Services, Motilal Oswal, Client Associates and Edelweiss Broking were already active in the wealth management space.

  In fact, as IIFL Wealth was starting out in early 2008, the Indian wealth management industry — although still quite small — was already splintered and fragmented.

  From 2007 to 2009, India saw hectic activity in the wealth management space. Several new players entered the fray. Motilal Oswal Securities launched its PURPLE offering in October 2007 and Reliance Money dived in with its “cradle-to-grave” wealth management services in July 2008. Global players such as Barclays launched their private banking services in the country in the first half of 2008. A little later, in January 2009, Religare Enterprises and Australia-based Macquarie Group tied up to offer active wealth management, targeting HNIs in top Indian cities.

  There was a clear market opportunity to offer wealth management services to the nation’s burgeoning millionaires in a growing economy. For domestic brokerage firms, the wealth vertical was fast becoming a possible frontier for growth as a volatile stock market made revenues from broking operations unstable.

  Local edge, global ills

  By 2012-2013, global players were finding it increasingly untenable: The cost of doing business and the complexities involved had made their operations unviable. What followed was a series of exits, retreats and resizing of business plans and strategies.

  In May 2013, Morgan Stanley sold its Indian wealth management business to global major Standard Chartered. The very next month, Swiss bank UBS AG started to wind down its wealth management and commercial banking businesses in India. In September 2013, Macquarie Financial Services (Asia) decided to exit its wealth-management operations in India by selling its entire stake in the business to joint venture partner Religare Enterprises. The two firms had an equal joint venture, Religare Macquarie Wealth Management that had been formed in 2007.

  The exits have kept up a steady pace since then.

  In November 2015, HSBC announced it was shutting down its private banking unit in India. Earlier in 2015, the Royal Bank of Scotland sold its wealth management business to Sanctum Wealth, who was heading the business, in a rare management buyout. There were also firms that had procured licences to set up wealth management businesses in India — such as EFG International, a private bank and asset manager, headquartered in Zurich, Switzerland — but gave up their India plans even before getting started.

  Out of the twenty eight wealth management firms that were active around 2010, ten have shut shop and resized, and all of them are global players.

  Along with the above reasons, business in India posed two additional challenges for these players. First, big private banks used to differentiate themselves by their lending book or the fact that they could provide loans to their clients at a cheap rate. In India, given its high interest rates, lending wasn’t something firms could differentiate themselves on.

  Second, adding to the limitations that regulations already posed on money going out of the country, few Indian HNIs were taking large amounts of their wealth outside the country. Globally, there are few markets that are as attractive investment destinations as India. Returns here have been higher than anywhere else in the last few years. Global banks are a compelling choice when the motivation is to access different markets. They make less sense when that isn’t an objective — or a need.

  This was not specific to India. The churning that global private banks went through in India was similar to what they had been through in other markets as well, especially in Asia where the competition to manage the wealth of emerging entrepreneurs has been intense.

  It’s a trend that continues, says Lonnie Howell, the co-founder and former CEO of EFG International, in an article in a handbook for Asian Wealth Management, produced by Hubbis41. More global private banks are likely to further streamline operations, he writes.

  ‘Global private banking, in its current form, is an outdated business model that only a handful of the largest or most specialised players are capable of or even interested in making it work. The largest global wealth firms like Credit Suisse and UBS, along with more specialised firms like Julius Baer, for example, have become the exception rather than the norm for their seemingly robust and sustainable strategies. This is more than just an identity crisis for this 300-year-old industry. Banks need to either refocus or get out of the industry,’ writes Howell, who is now a chairman of UCAP Asset Management, a Hong Kong-based independent asset manager.

  Many global players have had to pull out of these markets or downsize their business substantially. For example, in October 2014, Singapore-headquartered DBS Bank, Southeast Asia’s biggest bank by assets, acquired the Asian private banking business of French bank Societe Generale in Singapore and Hong Kong, as well as select parts of its trust business.

  In any case, Network18’s Raghav Bahl, says that he works on a simple philosophy when it came to domestic players versus global firms: All others things being equal, for him, Indian entrepreneurs usually brought more to the table than global players.

  As a media owner who worked in joint ventures and content partnerships with a clutch of leading foreign media brands, including Forbes, History Channel and Viacom, he believes Indian wealth advisors were as good as their global counterparts.

  Moreover, a shared cultural prism, helped in appreciating the unique personal predilections, constraints and special family situations that can come up. There is also the element of bhaichara, he says, which can be quite useful.

  ‘The way Indians work, we manage to bring in a little accommodation that a process-driven global player might not be able to. You do this because you have a long-standing relationship, or because you understand a specific personal situation. Somehow, we are able to offer this quite well without compromising on quality,’ Bahl told me.

  As part of the trend, the new model for private banks has moved towards being decisively local to cater to a wealth that has been created and must be managed locally. Even with global players beating a retreat, it hasn’t been easy sailing for the local ones. One of the biggest challenges posed has been the need for flexibility and the ability to constantly adapt to the many changes. The regulatory environment for private banking has changed more rapidly in the past five years, than in the thirty years before that, bankers across firms and cities say.

  Adapting to surprises the regulators threw at them required agility and nimbleness. A young, local player could respond more decisively and promptly. Firms headquartered outside of India would need to constantly check back with regional and global headquarters in Geneva, Hong Kong or London as they set up new processes, compliance mechanisms and fresh strategies.

  Where IIFL Wealth stood out was their ability to back up the agility with strong execution. ‘They beat the local firms on execution and global firms like mine on agility and risk-taking,’ the head of a foreign private bank admits frankly, although he refused to be quoted.

  Having been through the grind of so much change in such a condensed period of time, Karan says, has made them somewhat immune to changes in the external environment or the regulatory framework — even those that affect them adversely.

  In FY2014-2015, their revenue from mutual funds was 286 crore42. According to AMFI, the nodal association for mutual fund companies in India, IIFL Wealth was fourth in the country as per income from mutual fund for FY2015. HDFC was the largest mutual fund distributor for the period by earning an income of 329 crore. Axis Bank ( 304 crore), NJ IndiaInvest ( 303 crore), IIFL Wealth ( 286 crore) and Kotak Mahindra Bank ( 255 crore) made up the top five industry spots.

  In March 2015, AMFI had issued a circular to all fund houses urging them to put a cap of 1 per cent on the upfront commissions to distributors. The industry body further said that fund houses should not pay in advance the trail commission of future years; also trail commissions of futur
e years was capped at the level of trail commission that a fund house pays in the first year. This would impact the revenue of distributors like IIFL Wealth43. At the end of 2015, SEBI wrote to all mutual fund houses to ask if they were abiding by AMFI’s guidelines. By all indicators, regulators seem intent on changing the way mutual fund houses reward their distributors.

  With the new rule, IIFL Wealth’s revenue from their mutual fund sales — had the rule existed in 2014-15 — would have dropped to 144 crore ($21.6 million), a big hit on the firm’s balance sheet. After this was announced, there was much unrest in the distribution industry. Firms talked about coming together to see if they could fight or challenge the provisions.

  IIFL Wealth decided it would be unwise to spend time fretting over something they had no control over. Instead, the focus was diverted to thinking new ideas and products that would fuel its growth, and make up for the hit the balance sheet would take.

  ‘We recover very fast,’ says Karan. ‘We slept on it on Friday and by Monday; we were on to something new. There is always something else to do as long as your overall market is expanding, which it is.’

  The rapidly changing landscape of the industry might have been a conducive playground but the quantum of their success has certainly become a talking point, says a mutual fund manager. Its success is unique because non-bank firms face significant competition from banks, he adds.

  Whether it is wealth that comes in as part of a large transaction or the wealth of professionals that is gradually amassed, the first destination for any money is a bank account.

  Banks track inflows every day. Every time an IIFL Wealth client invests through the firm, they have to do so by withdrawing money from their bank accounts. A bank would definitely try to prevent that from happening.

  ‘The competition is fierce and to be able to fight banks to get a disproportionate amount of the wealth is outstanding,’ says a senior banking industry stalwart, adding that he has urged his private banking executives to look at how IIFL Wealth is doing what it does.

  There are reasons aplenty why the global players have not been able to scale up. But what lies behind the inability of the many domestic wealth management firms that started out around the time of IIFLW, or even earlier, to grow the way they have? If the larger, global players had ceded way, why didn’t others convert these advantages to build a business as successful?

  Domestic banks do not occupy a lion’s share in the wealth management space because according to GA’s Sandeep Naik, the reality is, banks know that the premium of their business comes from the retail arm, not their private wealth book. He gives the example of HDFC. ‘It’s one of the biggest banks in India but it’s tiny in the wealth management space,’ Naik points out.

  The non-bank domestic wealth managers largely fall into two categories: Brokerages that also offer wealth management services such as Edelweiss, Religare and Motilal Oswal, or strong local city firms such as Client Associates and Wealth Advisors.

  The first category of companies was very similar to IIFL Wealth, part of brokerages that brought the advantages of an NBFC and equities research to their wealth management offerings. They could also be nimble and agile, much like IIFL Wealth was, helmed as many of them were by first-generation entrepreneurs.

  Yet, their growth has possibly been stymied by a lack of focus on wealth management alone, Yatin reckons. People missed out on the fact that there was a huge market in focusing on wealth management alone.

  From fluke wins to grudging respect

  So, at more than $12 billion ( 86,00 crore) in assets under management now, IIFL Wealth’s current market share in the organised wealth management space was by no means a likely eventuality at a time when so many new ventures were also pitching in their tents.

  There are no established league tables in India’s wealth management industry. Wealth management companies, in fact, differ even on the definition of assets under management (AUM). Some include promoter assets, credit given to clients and inactive assets that they don’t really manage. Since the AUM is a self-declared figure, and one that each company tabulates on its own, it is difficult to be certain how the companies stack up.

  Over the years, there is high concentration at the top and most private bankers agree on a rough pecking order although exact numbers are difficult to come by: IIFL Wealth and Kotak Wealth Management make up the top with more than 80,000 crore ($11.9 billion) in AUM each, followed by Julius Baer (India) at about 25,000 crore ($3.7 billion) reportedly. The third level is made up of Anand Rathi, Edelweiss, RBS, ASK, Client Associates, all of which have approximately 10,000 crore– 20,000 crore ($1.4-2.9 billion) in AUM.

  IIFL Wealth’s current success was little more than a slim outside chance as they were starting out. Of all the other players that started out around the same time, few would have placed their bets on a young, breakaway team becoming the market leader. There was enough business for niche firms to survive on, as there has been for Independent Financial Advisors. At best, the market had pegged IIFL Wealth as yet another player.

  The company’s early success was dismissed by the larger wealth management industry. Akin to talk about the e-commerce bubble, the more established firms believed that IIFL Wealth’s too-good-to-be-true tale was inherently poised for self-destruction or a certain fizzling out.

  Yet, as their client base grew and references became easier to get, negative perceptions proved to be less of a problem, says the IIFL Wealth team.

  Ironically, during those years, the company also began to get noticed and win awards, most notably those given out by the magazine Euromoney that has an annual ranking for private banking and wealth management firms.

  The voting is based on a wide range of categories such as innovation in technology, research and asset allocation, equity portfolio management, commodities investment and relationship management, but what makes the awards special is industry peers voting for each other.

  Each company — from about hundred wealth management firms and asset managers for India — gets only three votes each. In the last three years, IIFL Wealth has won the Best Private Banking Services Overall category for India twice, in 2014 and 2016.

  Private bankers say that more than other awards; the Euromoney ranking is possibly the most competitive because there is no way for companies to influence the decision.

  We have always been the “bad boys” of the industry, people don’t love us for a million reasons but it’s good that when they sit in front of a computer, they are willing to vote for us, Karan says with pride.

  ‘We’ve actually moved from the seventh rank five years back to consistently being towards the top. They might be judging us in public but it does demonstrate grudging respect,’ he adds.

  Whatever be the height of their success, their approach has worked for others as well. Within the financial services industry in India, and for non-bank groups, the benefits of zeroing in on a niche area and having complementary verticals to strengthen that specialty seems to have emerged as the model for success.

  For example, Edelweiss, has emerged as a strong credit-driven financial services group with nearly 55 per cent of its 23,000-crore balance sheet coming from credit (as of December 2014). The company also offers asset management, commodities and insurances services.

  Avendus Capital, founded by Ranu Vohra, Gaurav Deepak and Kaushal Agarwal in 1999, is another good example of a financial services firm that picked a niche to build a high-quality business. Avendus is well-recognised as one of the country’s best investment banks, with strong expertise in first-generation Indian businesses, especially in the internet commerce and technology segments.

  Interestingly, it’s worked on deals like the Freecharge-Snapdeal acquisition and Ola Cabs’s purchase of TaxiForSure, incidents that led to the founders of these companies becoming IIFL Wealth clients. With IIFL Wealth, Avendus shares another striking similarity. It too has trumped its global peers in the investment banking space in India, emerging as one of the top
three players in the league tables with several high-profile deals in its kitty.

  Chapter 17

  A blueprint for growth

  Loud, rhythmic beats resounded from inside a cavernous hall. The jingle of hand-held tambourines and the deep bass of percussion tubes rose and waned in a high-energy composition. The music was part of a therapy workshop at IIFL Wealth’s seventh annual offsite, in Goa, in April 2015.

  The upbeat tunes matched the company presentations that followed later in the day. They had recently breached 75,000 crore ($11.2 billion) in assets, and the “opportunity of a decade” awaited them, said Karan in his address to the 350 people packed into the large conference area.

  The enthusiastic self-congratulations was echoed in the confident theme for the year’s retreat — Bond Hain Hum (We are Bonds), to mark seven years.

  Yet, as people spilled out from the session into a leafy courtyard, Karan seemed almost flummoxed by just how many people there were. In the three months up to the offsite alone, they had hired more than eighty people, taking the headcount to nearly 400.

  Till the year before, at these offsites, Karan told me he knew everyone by face, at least, even if putting names to the faces was becoming a challenge. ‘Now, I don’t recognise four in ten people — I wouldn’t know they worked in our company if they sat next to me on a flight.’ A year later, in April 2016, that number had gone up to over 500 people across twenty two offices in eight countries.

  Those looking in at IIFL Wealth from the outside share Karan’s disbelief.

  There are enough companies that, despite being in the right place at the right time, have blown the chances because they have been unable to create processes, systems and a company DNA that they can thrive on. But beyond the favourable convergence of external forces that IIFLW was fortunate enough to tap into, how did it capitalise on the opportunities?

  When I posed this question to the company’s leadership, regardless of how many different ways in which I tried to frame it, it was difficult to avoid hearing the three Ps — product, platform, people — that they consider to be at the core of their growth.