From the October 2010 issue of Investment Advisor • Subscribe!

October 1, 2010

Jewels in the Crown

As wealth mushrooms in India, the need for Western-style advice grows

Under the blazing summer sun, a long line of BMWs and Mercedes Benzes glide up outside the luxurious DLF Emporio mall in the Indian capital, New Delhi. Perfectly groomed people--impeccably turned out in the latest haute couture and seemingly unaffected by the heat--alight. They are the new wealthy of India, a class of people that since India's arrival on the global economic stage has been growing at a rapid rate.

A recent trip to India and conversations with market observers and industry players shows that this is the case not just in the larger cities like New Delhi and Mumbai: The number of high-net-worth and mass affluent people in Indian cities is also increasing fast, and so, too, are their desire and need for financial advice, for new kinds of investments and for the same types of products and services that their Western counterparts have had available for some time.

"Any objective metric looking at India suggests tremendous growth potential," says Frank LaSalla, managing director of global securities services at Pershing in Jersey City, N.J., "and India is fertile ground for any firm looking to provide wealth management services."

Pershing, through its Chennai, India-based subsidiary iNautix, has had a presence in India for a decade now. The company provides software solutions to a range of financial intermediaries, and these firms have identified private wealth management for both the high-net-worth and mass affluent markets as a top area of business going forward.

There are lessons to be learned from this mushrooming wealth for U.S-based investment advisors and their asset management and business partners, and opportunities as well in India.

Pershing estimates that the number of people in India with over $1 million in investable assets currently stands at around 1.5 million. That figure has grown by about 50% just since last year, LaSalla says, and it is expected to triple by the year 2018. There are currently about 200 million individuals in the mass affluent segment of the population, he says, and that area, too, is slated for significant growth going forward. Non-resident Indians (NRIs) with strong ties to their homeland also constitute a sizeable investor base, since they hold about 15% to 20% of their portfolios in Indian securities.

Westernization of Finance and People

Beyond the high-net-worth and mass affluent classes, the radical economic and social changes that India has been going through in the past years are also resulting in an increased "Westernization" of both the population and the financial landscape. Renny Thomas, a partner at McKinsey's Mumbai office, believes that the need for investment advisory and wealth management services across the board is only going to grow for all segments of the Indian population, and the greatest trend for much of the market will be the increased need and the growing desire for players who provide the full range of financial services for all the personal and professional needs of individuals and their families. Financial planning for every stage of a person's life is something that will become increasingly important in India, Thomas says, and as wealth increases across the country, Indians will be looking for advisors who can guide them and firms that can provide them with the right products and services.

In tandem with the increased wealth and financial awareness in India, the fee-based advisor model has been gaining ground quite fast. Indian consumers are among the most price sensitive in the world, McKinsey's Thomas says, but "our research increasingly shows that consumers are more willing now to pay for advice than earlier."

The Keys to Success in India

Nevertheless, setting up a successful advisory practice in India is not that easy, says Abhay Aima, Mumbai-based head of the wealth management business at HDFC, one of India's largest private sector banks. There's no denying that Indians are increasingly looking toward new areas for investment, turning away from the more traditional products like real estate and gold they have long favored, and toward an array of other products ranging from stock and bond funds, structured finance vehicles and even objects like art.

Many consumers are getting interested in different sorts of insurance products, in vehicles to save for their children's college education and for their own retirement--all relatively new areas to be thinking about and a consequence of the important economic and social changes that India is going through.

Indians need good advisors to guide them and they want different investment options, yet India remains a very special place, Aima says, not least because it is so regionally, religiously and ethnically diverse. It would be impossible to simply import an advisory or a wealth management model from the West and expect it to function in the same way in India.

"Any firm looking to achieve success in India needs to understand that you are talking about five countries in one," he says. "One has to understand the Indian psyche, Indian society. Things like the joint family structure; the dependence of parents on their children; the dowry system; that there is a group of people called the Jains who won't invest in pharmaceutical companies because they do animal testing. You have to be aware of these ethnic differences, you cannot just lift a financial planning model from another country and expect it to work here unless you understand these peculiarities."

Domestic Firms Have the Edge

As such, Aima believes that Indian firms are in a better position than their Western counterparts to cater to the diverse needs of the Indian population. Most of the Western firms that have come into India, either on a standalone basis or through forming joint ventures with Indian firms, tend to concentrate their efforts in the major cities only and gear their products and services toward seriously high-net-worth individuals, Aima says, but "with the changes that we have seen in India, it's important to note that there are people who need investment advice and products in cities outside the large metros. You need to be able to get to those people, to speak their language and understand them. You need to be able to tap into the people who own a normal car today but tomorrow will [buy] a Mercedes, not just the people who own a Mercedes today."

LaSalla agrees that Indian firms may have a better handle on the needs of the population, even if big-name Western firms have the firepower in terms of material backing, global reach and a broader range of investment products. It is imperative that financial advisors and wealth managers understand the many ethnic differences that exist in India, he says, and to realize that both the financial knowledge and also the risk appetite of someone in a large city like Mumbai will be completely different from that of an individual in a smaller urban center like Pune.

From a cost point of view, too, it is much more expensive for a Western firm to set up shop in India, LaSalla says, which is why many have chosen to form joint ventures with local Indian players like Reliance and Religare. For Western firms, the capital and investment controls imposed by the Indian government are also a real challenge to contend with. India is a still closed country with respect to capital flows--Indians are restricted in terms of how much money they can move out of the country and they cannot invest in any kind of product that leads to currency convertibility.

"I think India is heading in the right direction but until there is a greater free-flow of funds, investors will be limited in terms of where they can go and what they can do," LaSalla says.

A Growing Appreciation for Risk

Most important, though, any investment advisor or wealth manager needs to understand that the typical Indian investor is still more inclined toward an opportunistic, short-term investment practice, as opposed to the long-term, more holistic financial planning that has become commonplace in the West, LaSalla says. The need for the latter is becoming an inevitable reality every day for more and more Indians, but it still isn't the universal order of the day.

According to McKinsey's Thomas, the financial crisis that began in 2008 has also changed the mood in India. While the level of financial sophistication continues to grow in the country, Indian investors (like investors anywhere else in the world) have become more aware of the risks involved with complex products. As is also the case in other markets, Indian regulators have been focusing on a greater level of accountability and transparency from advisors and from the distributors and manufacturers of investment products.

"There's a great deal of focus from all around on the customer," Thomas says, "and a greater emphasis on making sure that firms are giving the right advice and selling the right products to their customers."

Those service providers that are able to cultivate sustainable, long-term relationships with their clients, that are able to offer them sound objective advice and access to a range of products suited to their risk appetite, are the ones most likely to succeed in India, Thomas says.

"Because of the changes in regulation, firms need to realize that their business model has far-reaching consequences and they cannot rely on generating revenue through pushing high-margin products," he says.

That tone has been set by the Securities and Exchange Board of India (SEBI), India's capital markets regulator, an agency that is well respected in international financial circles for having supported India's integration into the global financial system in a measured yet sustained manner, and which, since its inception, has worked on numerous initiatives to modernize the domestic financial system.

Now, SEBI is focused on the needs of the Indian investor, and it has been cracking the whip in the areas of accountability and transparency, thereby making it more difficult for advisors and investment firms to collect upfront fees and placing a greater onus upon them to offer long-term and sustainable financial advice, as well as the right kinds of investment products suited to the risk profiles of their clients.

"We believe that advisors who align themselves behind investors have an opportunity to sustain a long-term business model," says K.N. Vaidyanathan, SEBI's Mumbai-based executive director. "Advisors need to switch to recommendations based on appropriateness to and affordability of a particular investor, because only such products that meet with the investor's risk appetite and investment objectives should be recommended."

Savita Iyer-Ahrestani is a freelance writer and regular contributor to Investment Advisor and AdvisorOne.com based in New Jersey.

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