The Wealth Wallahs

by Shreyasi Singh

  Right down the line, from the founding team to their regional heads and senior private bankers, the three Ps were repeated to me in nearly every conversation I had with them across the year I spent interviewing them for the book. Getting the three to work in tandem is the winning combination in wealth management, they insist.

  Simply explained, the ‘platform’ is the combination of having an NBFC (with its ability to lend to clients), equities and research, technology and a brokerage/execution desk.

  The ‘product’ refers to the suite of investment vehicles and ideas that the firm offers to its clients and, quite obviously, ‘people’ refers to the quality and calibre of talent within the firm. The three combined have helped build the framework. ‘You get the right people to build the right platform that in turn will build good products,’ the team avers.

  The inability of other players, such as some of the domestic firms mentioned earlier, to match its growth lies in the balance between the three Ps going wrong.

  Few of their competitors, they claim, have been able to figure this out. Some might have great people but don’t have a platform that can consistently build the right products for their clients. Others, possibly brokerage houses, have the platform but don’t have the brand strength or the inclination to get the right people on board.

  If you look at most companies, one of the three will be missing, says Taparia. ‘In my previous organisations, we had great people but we didn’t have the right platform and thus couldn’t create the right products,’ he says. ‘Getting people is somewhat easier, especially if you’re a marquee brand with money to spend,’ he adds, ‘but refining the platform was the trickiest bit.’

  It’s what had impressed him about the company when he ran into them as a competitor pitching to the same clients in Delhi during 2010-2012. It also made him call Karan to see if they could explore working together when he decided to move out of Citi. The company was not yet the success story it is today, and his family and friends thought he was being foolish in joining a small firm run by ‘unknowns’ when he had offers to move out of the country with much bigger, global brands.

  When Taparia did move to IIFL Wealth in February 2012, he brought in several team members from his previous employer to the company as well. The Delhi team has had a very successful run. Now, they have 11,600 crore in assets under management, up more than five times from when Taparia joined. But, it wasn’t so much the relationships they had brought with them from Citibank that was the reason for growth, it was the new platform they could use to acquire new clients, not merely poach new ones that worked like a charm.

  ‘The funny part about private banking is that clients whom you expect will definitely move with you may not do so while others can surprise you. Several of my clients took a couple of years to move with me and we manage more assets from new clients than old — the ones that the platform, not just the relationship, helped us acquire,’ he says.

  Finding the right fit

  Wealth managers are distributors of products such as mutual funds, government bonds and debt instruments, manufactured by asset managers.

  In most cases, distributors earn commissions from the manufacturers of the mutual funds (companies such as HDFC AMC, Reliance AMC, State Bank of India, IDBI, Franklin India) on the products they sell. In the case of wealth advisors such as IIFL Wealth, they ask their clients to put money in to these products.

  Clients can be ill advised by a distributor or wealth advisor when either or both of these things happen: Distributors aggressively sell poorly-manufactured products because those particular products give them higher commissions; or when the distributor and the manufacturer of the product is the same.

  Also, when short-term interests rule, a relationship manager of a wealth firm wants to maximise commission, and sells an ill-suited product to a client. Indian investors didn’t suffer as much from the chaos of the global markets, as they did from their advisors peddling mutual fund products for easy, upfront commissions.

  Mutual funds had become a product-pushing game. The objective simply was to make a killing. Things began to change only after June 2009 when the Securities and Exchange Board of India (SEBI) came out with a circular that abolished ‘entry loads’ or charges upto 2.25 per cent that an investor had to pay upfront at the time of investment. Till then, distributors would “churn” the products in their client’s portfolio, earning commissions every time they invested in a new product. Subsequent regulations, as mentioned earlier, have tried to negate the greed further.

  A client’s interest and corpus would often be lost in this opportunistic hunger for commissions. This eventually became a self-limiting game; clients began to understand that their returns from an investment were often inversely proportional to their advisors’ commission. Also, few clients were getting consolidated advice on their portfolio as each distributor/advisor they worked with only handled the investment that was routed through him or her.

  IIFL Wealth decided to address that tendency by introducing a fixed-fee advisory model on which it would charge a percentage of the client assets it managed as fee: Considered a best practice model for financial advisory-related businesses, it was rare in India then.

  Things have changed rapidly since then for the entire industry. Recent regulation, including SEBI urging large distributors to become advisors, is a push to the fee-based model.

  This advisory approach — where wealth managers get paid for their advice to clients and not compensated in commission by the manufacturers of products — might soon become the new norm for India’s wealth management industry. But when IIFL Wealth was trying to introduce it, it was a departure from how business was mostly done. Success was not easy.

  During 2008-2010, IIFL Wealth launched an offering called Marquee Clients for ultra HNIs who invested over $25 million ( 167.2 crore) through them. Under this, it would advise clients on their entire portfolio, including the assets they might have with other asset managers, and charge an advisory fee instead of distribution fees.

  This, they hoped, would chip away at the insidious conflict that is at the heart of the advisor-client dynamic — pushing the client to buy financial products that shored up the firms’ revenues but might not be suitable for the client.

  That model has undergone several tweaks over the years with more than 50 per cent of IIFL Wealth clients currently on the fee advisory model today. Yet, that mindset became an important peg to construct its offering on.

  Its core USP, and the backbone of its pitch to clients, was aimed at establishing a research-backed, long-term investment strategy for them. ‘Clients would be surprised that we didn’t talk about products in the first meeting: We were the ones saying, “let’s build a process first, establish a system and figure out a reporting mechanism,”’ Yatin recalls.

  The company introduced documents, including what it internally calls the Investment Policy Statement or IPS, what were essentially a manifesto of the understanding between a client and the firm. It captured details such as the distribution of asset classes and type of investment instruments in a client’s portfolio. For example, what percentage of the overall assets would be invested in debt instruments and how much in equity? What was the client’s overall objective?

  The IPS also detailed the rate of returns the client expected, the model of fees that was agreed upon (fixed, income-based fee or distribution-driven); the frequency with which they would meet; who would be the participants of a meeting; and the managing partner who was to be their skip-level point of contact in case they wished to go beyond their relationship manager. The IPS was first used as a pitching tool when IIFL Wealth bid to manage Piramal Enterprises’ account in 2010 and eventually evolved into the main document for clients.

  Clients’ portfolios were continuously aligned to this manifesto: To check whether the investments they had made or the break-up they had agreed upon (how much to invest in debt and equity, for example) were being constantly maintained. While the IPS itself has
gone through several tweaks, its reworking is still an important event. It indicates a big change — either a shift in the client’s objectives with relation to the set of investments, or the overall philosophy of wealth guiding him or her.

  The way the wealth management industry has changed over the past few years, in response to various regulations, an IPS-style document is being used by most large wealth management outfits today. In those days, however, it was rare, the founders insist.

  The product rolodex

  In May 2008, right after starting out, IIFL Wealth launched an ambitious investment product they called the Nifty Enhancer. The CNX Nifty is a well-diversified 50-stock index accounting for twenty two sectors of the economy. It is used for a variety of purposes such as benchmarking fund, portfolios, index-based derivatives and index funds.

  Nifty Enhancer had a simple proposition: It provided investors with the dual benefits of capital protection and the upside of participating in equities. IIFL Wealth marketed it aggressively to their early clients and managed to collect a corpus of 183 crore ($27.4 million). It was the largest single-day issuance of Nifty-linked capital-protected debentures India’s capital markets had ever seen, IIFL Wealth claims.

  At a time when the market was becoming defensive and investors wanted to stay away from equities — worried about the dips and troughs of the stock market and the fallout of the global crisis — they went with trying to restore the faith of their clients in equities and more importantly, in India. Most of the market was doing the opposite, the trio remembers.

  When it came to equities, the strategy team at IIFL Wealth was given a simple mandate: Buy the company’s stock only if they would be comfortable running or owning the business in the long term, and not just speculating on it.

  It was a tough strategy to follow, especially in 2008, when the BSE Sensex (the Bombay Stock Exchange index) went through several days of massive intra-day crashes. In fact, of the ten highest ever Sensex crashes in India, eight occurred in 200844.

  Problems loomed large a couple of months into the launch of the Nifty Enhancer. It was the company’s first structured note and its first big outing to demonstrate what it had promised clients: Research-backed, carefully thought-out, innovative products that gave robust returns. Karan knew they couldn’t afford to have dissatisfied clients especially since they had hard-sold the Nifty Enhancer.

  It required an urgent rescue operation. First, they tweaked the product. Then, Karan personally went back to each of the hundred plus clients who had put money in the structured note to ask them to move to the new model. Doing this wasn’t fun, or easy.

  He had to point out the flaws in a product they had so enthusiastically sold only months before, and convince clients of the merits of their new thinking to fix it. This did little to boost confidence of an already skittish clientele, worried about putting their faith in the young company.

  When the markets rebounded and the product eventually reached its maturity in June 2011, the revamped Nifty Enhancer proved to be an immensely profitable investment. Clients were euphoric as they ended up making at least 50 per cent more than they would have with the earlier structure. ‘It was some save,’ laughs Sharmistha Chakraborty, a relationship manager who had sold the product to several of her clients.

  The secret sauce

  Umang Papneja, the company’s president & chief investment officer, joined IIFL Wealth in 2009, after equity research and private banking experience at Motilal Oswal, HDFC Bank and Societe Generale, and has been responsible for the firm’s strategy on all its investment products.

  Right off the bat, IIFL Wealth set up a bond desk, a real estate desk and worked closely with the parent company’s institutional equities team: A move that gave it deep insights into all key asset classes in its clients’ portfolios.

  The research skills that the company had built gave it the confidence to move beyond what the big asset managers were manufacturing. In fact, the special products it co-created or manufactured with funds such as HDFC Mutual Fund, Reliance Asset Management and ICICI have been some of their most successful ideas — bringing in new clients and delivering robust returns.

  This close-architecture (of products that are only available to its clients) model, competitors say, is a slippery slope fraught with the same kind of dilemmas that big banks have faced in being both manufacturers and distributors of products. There is a danger in your advice becoming distorted when you sell what you build.

  Papneja sees it differently. ‘All manufacturers have their own view and if we agree with all of them, it means we have no view of our own. For example, how can you be invested in different fund philosophies — one heavily into large cap, the other into small cap? What’s your view then? Either, we say, we are very bullish on large caps, and go the distance on them, or whole hog on them, or we don’t,’ he says.

  IIFL Wealth currently has over 220 people in sales that serve as the point of contact for clients, although its managing partners and the founding team are all “sales guys” at heart, and routinely meet every client. In wealth management firms, the relationship manager becomes the company’s brand: Any company is only as good as the advice given to a client by its weakest relationship manager. Relationship managers select from an array of products and investment ideas when pitching to clients. IIFL Wealth has tried to centralise that function. It was important to do this as they scaled up so they could control the advice being given to a client. It’s impossible to control what 200-plus people are saying otherwise.

  They focused instead on curating the products offered to clients and training their sales teams and relationship managers. The focus was on creating twenty good products a year — making sure they were well constructed — and making sure that these found their way into every client’s portfolio. For example, their maiden alternative investment vehicle, the Alternative Investment Fund or the IIFL Income Opportunities Fund raised over 600 crore ($90 million) in early 2013 and was extremely successful.

  Initially, some relationship managers resisted ideas like these, and continued selecting and advising clients from a wider array of products that they thought were best suited. But once they saw the benefits of bringing clients onboard with an innovative product, they came around.

  Out-of-the-box thinking has not always worked, Papneja adds, citing the example of an inflation-index bond that they had launched in 2014. The product was designed to take advantage of the growing inflation at that time. Almost immediately, inflation began to drop. It’s done so in all of 2015 and 2016. Right now, the product may be looking “stupid,” Papneja admits, but with its tenure of nine years, they will have to wait and watch for a final analysis.

  More recently, in July 2015, they launched another alternative investment fund — this time, to help clients invest in start-ups. Market sentiment influenced this product.

  During 2014 and 2015, venture and growth capital investments in India were on an upward spiral as both start-up valuations and the number of deals shot up. In 2014, PE and venture capital deals worth $15.2 billion ( 1,0,165 crore) were closed, an increase of 28 per cent. This is the highest within the last five years, and close to the 2007 peak of $17.1 billion ( 1,14,364 crore). Equity and growth-stage deals accounted for 80 per cent of all deals in 2014, with highest investments seen in customer technology, real estate and banking, financial services and insurance45.

  Such was the start-up frenzy in 2014 and 2015 that even those who might have earlier been dismissive began to think they were missing out on the action. It wouldn’t be wrong to say that 2014-15 was when the start-up ecosystem began to go mainstream, with valuations of some rivaling older, established brands.

  In May 2015, Flipkart, after raising $550 million from existing investors, was reported to be valued at $15 billion, higher than the individual market capitalisation of over 99 per cent of the 5,500 companies listed on the BSE46. These included majors such as Tata Motors, Mahindra and Mahindra and Indian Oil Corporation.

  T
he 2013-2015 period also saw robust exits in the start-up space. The number of reported exits rose by 14 per cent with the value of exited investments estimated at $5.3 billon47. For example, a $1-million investment in 2007 in RedBus, the bus ticketing platform, returned over twenty times that amount when the start-up was acquired by Naspers, the South African media conglomerate, at an equity value of $140 million. Similarly, an initial investment of 54 crore in 2006 in Justdial returned twelve times more when the company went public on the Bombay Stock Exchange with a valuation of 3,700 crore in June 2013.

  Healthy returns from transactions like these inspired confidence in start-ups as a must-have asset class, especially for the first-generation wealthy. Since much of their wealth has come from an exponential growth in equity, they understand the value of private equity investments.

  It also matches their ambition for high returns as well as their appetite for risk that traditional asset classes might be unable to give. Investing in start-ups fulfilled another objective many first-generation wealthy seemed to have set out for themselves: A chance to mentor and support young entrepreneurs and bright ideas.

  As things stand though, only 15 per cent of HNI investor portfolios are allocated to alternative investments, found a study. Within that, PE investments counted for less than 1-2 per cent of most portfolios, most made through funds.

  IIFL Wealth’s Seed Ventures Fund has been built to do this — increase the opportunities for its clients to add private equity as a strategic long-term asset in their allocations. Evaluating and selecting from the many seed funds, private equity funds or making direct investments into companies is difficult.

  As IIFL Seed Ventures Fund has been set up as a “fund of fund” structure, it allows investors to put in money across the different funds that have been chosen.

  In creating the Seed Ventures Fund, IIFLW has an immense advantage — the counsel of its clients. In fact, its advisory board is made up of Anupam Mittal (founder of Shaadi.com), Aprameya Radhakrishna (co-founder of TaxiForSure), Ashutosh Taparia (joint managing director, Famy Care), Atul K Nishar (founder, Hexaware), Dileep Nath (attorney-turned-entrepreneur), Sandeep Tandon (co-founder, Freecharge) and Anil Ahuja (CIO, IPEplus and Asia Star Funds).