In the last few days we have been reading about few hundred crores scam by a wealth manager who has been working for a leading Bank. An act like this degrades the brand “Wealth Manager” – a brand which is a symbol of trust. Wealth Manager is supposed to protect the family’s wealth & grow it at a reasonable pace to achieve the life goals which any family would have. The profession of managing wealth is quite a noble profession as it makes people financially independent. This is one profession which worldwide is compared to a profession of a family doctor! The way family doctor ensures that one follows a process to remain healthy similarly wealth manager is like a financial doctor who ensures that one remains financially healthy. I am sure today there would be various questions coming to everyone’s mind – Can I trust my financial doctor? How do I select a wealth manager?

Let me first of all clarify that an act like this definitely taints the brand wealth manager but this is an act of an individual. The whole wealth management industry is shocked and scandalized with an act of this individual. There are lots of good professionals in the industry who are passionate about this space and are practicing it for a living! Today it does not mean that one starts doubting any wealth manager even if the manager represents the same bank. However one should learn few lessons from this example and see what process they need to follow in terms of selecting a wealth manager and also invest the money so that tomorrow they do not become a victim!

Some of the steps which one must follow in selecting a Wealth Manager and selecting an investment are (this is like selecting a doctor and having a prescribed medicine to become financially independent):

All of us who represent this industry and are the wealth managers should ensure that an act like this never gets repeated as trust is the biggest underlying when we deal with money and if the trust is diluted this profession would never be able to evolve. This is where the value system, integrity, DNA or approach of an individual or institution makes a huge difference!

Whatever said & done, this profession is a profession of trust and it is difficult to hire someone without trusting someone for managing money. However, following the above steps one would ensure that it is a “calculated trust” and not a “blind trust” and it would be long lasting!

Himanshu Kohli
himanshukohli@clientassociates.com

A few weeks back I invited one of the successful entrepreneurs of India over breakfast and that meeting turned out to be an excellent opportunity of getting some real insights into how brands are built. My guest happened to be a low profile entrepreneur who had built an admirable brand in his industry before making a successful exit from the business.

Over a short span of less than a decade the brand had almost acquired a leadership halo in its industry where many international brands compete for the consumer’s mindshare. On top of it, even though an out and out Indian brand, it not only was able to give international brands a good run for their money but it was also able to extract a respectable premium over its peer brands. How did this happen and that too in an environment of value for money consumers and price driven competitors?

That was my question the answer of which I wanted to learn from the horse’s mouth. And as I learnt there was a clear method in the madness behind this success story – a terrific combination of a brilliant strategy and its impeccable execution.

My guest started explaining me that there were three core reasons behind this success.

• Quality of the product,
• Consistency of the brand, and
• Ownership of the team.

While the first two would fall into the category of a very fine business strategy the last one reflects flawless execution.

My guest mentioned that the journey of building a respectable brand began with the choice of creating a matchless quality as the only way to shine in a crowded market. The strategy was clear to build a base of loyal customers instead of building a market share of revolving consumers. When the product was launched it took some time for it to attract costumers. But once a customer had the experience of using the product he started developing loyalty towards the brand resulting in repeat business.

Once the customer was hooked on, the challenge was to make sure that he never goes and rather introduces the brand to his friends and family. This was very critical to build a sustainable business which continues to grow with time. The most important factor to make this happen was to build the reliability and trust-worthiness of the brand which could have been only possible by building products which delivered consistent quality over a customer’s repeat experience. Customers started to experience the same quality every time they bought the product and were never surprised with a new experience which could have been below their expectation.

All this couldn’t have happened without flawless execution for which a team and the organization culture driven by ownership of the common goal had to be built. Since a lot of production had to be contracted out, it was extremely important to ensure that the quality of the product produced at an external shop floor was as good as that produced internally. The only way it could have been done was by way of complete ownership of the team on the ground which was as concerned about the quality of the product as the entrepreneur himself. The ownership with which the team worked with external manufacturers ensured the quality which the brand promised and was delivered consistently within timelines.

Above are very simple but deep lessons which can be borrowed even by the private wealth industry. Since the bedrock of success in this industry is the trust in the client advisor relationship there is no better way to develop and sustain the same by following the same theme – Best Advice with consistent quality delivered over time by advisors who own the relationship completely.

Since the advisors in the industry have to depend a lot on external manufacturers for investment products for their clients this complete ownership will result in either identifying the best ideas for their clients or getting them custom made around the very needs of their clients. Moreover, since the very nature of work is in the form of repeat business, focus on growing the practice with and around exiting clients rather than building a large scale of revolving consumers will certainly develop a sticky business which keeps on growing steadily.

All this would result into nothing else but a highly credible and dependable marathon Private Wealth Brand which could give the best of the brands a very good sprint for their money!

Rohit Sarin
rohitsarin@clientassociates.com

Its been an year since the entry loads were removed by SEBI on August 01, 2009 and it may be a good time to reflect upon the impact of the same on the various segments of the private wealth management industry – the product manufacturers primarily dominated by the Asset Management Companies (AMCs) and the Wealth Managers or distributors as they are called in the Industry parlance.

The business of the AMCs has got affected big time as validated by subdued collections in equity assets. To add to the injury the profitability of AMCs is under pressure as they have to dole out a higher share from the annual management fee that they collect to sustain the interest of distributors. Similarly, on the distribution side too there has been a churn with smaller IFAs focused on selling primarily mutual funds being affected the most. Institutional advisors like banks too have been affected to a great extent as suddenly revenues on equity AUM has gone down drastically while the cost base continues to remain high. Understandably, the shift has happened towards transaction oriented products like direct equity and structured products. To cut the long story short the revenues of the industry whether on the manufacturing side or distribution side have fallen leading to consolidation at both ends.

Is SEBI the real culprit or the industry too has its contribution towards its own problems?

While SEBI did play its vital role in creating a sort of a crisis in the industry by bringing in strategic reforms too soon and too fast before the industry participants could blink their eyes and prepare for an emerging future, I feel it’s the transaction orientation of the industry which led SEBI into the same.

Since its inception days, the foundation of the industry was built upon maximizing the transaction or “upfront” revenue rather than building an annuity or “trail” revenue. And both the communities of manufacturers (AMCs) and distributors built a symbiotic relationship to nurture the “maximize the short term” orientation. While distributors were not complaining as they met their ever increasing quarter on quarter revenue targets, AMCs continued to induce this behavior by their incentive structure which encouraged churning the same little AUM that the distributor had with the same set of investing clients. The revenue model for the distributors clearly had very little incentive for them to build annuity income over longer term by getting more investors and gathering assets to build a healthy “Book” of AUM over time. Mutual fund products were sold and distributed just like an FMCG products and therefore, the term distributor became more popular than financial advisor. AMCs too played their active role more like manufacturers of FMCG products by never ending new product launches in the form of NFOs to garner more AUMs.

A sneak at the pre-August ’09 incentive structure would help us understand this.

• An entry load of 2.25% payable upfront was too attractive for the distributor as compared to a trail of 0.40% payable annualized over the year and that too if the AUM remained with the distributor.
• And if the distributor is continuing to earn a trail of only 0.40% in year 2, year 3 till perpetuity as against 2.25% which he can earn again, there was very little incentive for him to continue to hold the AUM
• Add to this the contests, the dhamakas, the bonanzas, the carnivals in spring, summers, monsoons, festive season and winters the excitement was always to win the sprint rather than the marathon.
• While there were cash rewards for the number of applications there was no recognition for the long term quality assets which are the most profitable for all stakeholders – manufacturers, advisors and investors. 

The mutual fund industry has argued that this kind of an incentive structure was inevitable as most of the distributors are driven by upfront rather than annuity revenues. But the fact of the matter is that AMCs never gave the option to the distributors to earn higher annuity revenue in lieu of upfront revenue.
 
This has cost the industry a much higher opportunity than just a mere drop in the revenues and profitability in the short term. The industry has lost the opportunity of growing much more than it could do over the years as the focus was never on building AUMs and getting new investors. The average holding period of equity AUM per investor is just about a year and this is for an asset class which is meant to grow over longer term! Undoubtedly, the industry has suffered not only on the quantity but also the quality of assets. Besides that, the short term transaction revenue orientation has also played spoilt sport by alienating existing investors as well as it creates a conflict of interest in an investor-advisor relationship.

The impact of this has been equally adverse on the distributor community as well which is currently besieged with the problem of acute shortage of talent. On account of focus on short term rewards instead of long term growth, the distributors never incentivized their advisors or RMs to build scalable practices with good quality of AUM around sticky long term client relationships. Private Wealth Management in India is a young industry with a track record of less than 10 years with most of the growth coming over last 5 years. This has attracted India’s generation next to the industry who have been led into winning the sprint rather than sustaining a marathon. Short term revenue and sales driven rewards and recognitions have channelized the minds of young talent towards quarterly bonuses and annual increments rather than building a scalable long term career. Examine the impact of this on the maturity of talent pool in the industry.

• Private Bankers having a book of more than 500 Cr would be a handful in India and can be counted on finger tips
• While the number of RMs have certainly swelled across the industry not even 10% of this army would be having books over 100 Cr today
• One could come across an RM with a 50 Cr book who could be a star performer as he sold the maximum insurance last year.
• This 50 Cr too would be built around some 50 clients with top 5 clients accounting for 50 % and remaining coming from the rest.

Inutshell, the industry has only managed to build shallow practices with very miniscule repeat business from the same customer. In a profession which is based on trust, size of the practice in terms of AUM per advisor could be a good barometer of the extent of trust built in the client advisor relationship. Clearly, the industry has failed itself by herding and not leading the aspirations of India’s extremely promising generation next.

So is it too late or there could still be some hope and light at the end of the tunnel. Light is always there outside the tunnel and the industry could get there for sure if we choose now to get out of the tunnel by thinking big over longer term. Between AMCs and wealth managers (as the industry should call itself) one of them would have to take the lead for choosing the longer term path. Since, in numbers wealth managers will easily outnumber the AMCs and are too spread out the impact of the initiative taken by a few of them may be miniscule on the industry at large. Therefore, AMCs should come together and set the ball rolling. Even if top 10 AMCs out of the 40 that we have join hands and come together to agree on an annuity revenue based incentive structure it would have a huge impact on the industry.

• The upfront revenue should be completely replaced by trail only revenue.
• Trail revenue should be shared between AMCs and wealth managers in the spirit of partnership with a higher share going to the wealth manager who have a lower AUM while AMCs earn a lower share on a higher aggregated AUM across all wealth managers
• There should be one and simple incentive structure which is a fixed trail paid perpetually on the entire AUM of the wealth manager with the AMC instead of misleading year1, year 2, year 3….structures. This’ll bring in more transparency in the AMC-wealth manager relationship while certainly helping in bringing down the operational cost for both.

If the above is combined with another significant reform it should be able to set the industry ready for a stupendous growth. That deals with vesting the power of retaining or firing the wealth manager with the investor. While currently, the investor wields the power of firing for sure by giving a change of broker code request it doesn’t has the power to incentivize the wealth manager of his choice as the trail income on the assets of the investor transferred to the new wealth manager doesn’t accrue to him while it certainly stops for the wealth manager which has been fired.

Growth in any form is a natural by-product of a win win format for all stakeholders in any system which could happen if everyone’s interests are aligned with each other instead of conflicting. While in the past they were lopsided in the favor of the manufacturers and distributors with investor at the receiving end, currently they are in favor of none.

An incentive structure based on annuity revenue would help AMCs build higher quantity and quality of a sustainable business, it’ll help wealth managers to build a recurring revenue stream which continues to grow year on year. At the same time, it’ll help the investors reduce their transactional cost. Similarly, the ability of the investor to fire, retain and patronize its wealth manager will incentivize the wealth managers to own the complete relationship. Risk of losing a client and its AUM would ensure wealth managers continue to handhold the relationship while an incentive to deepen the relationship would motivate wealth managers to own the complete relationship which is a win win for all stakeholders again.

Private Wealth management industry is still at its nascent stage and there is a long way to go in the backdrop of India’s continuous economic growth and the phenomenon of wealth shift from west to east. We have everything going for us – a thriving environment of private wealth creation, some of the most cutting edge investment management houses already there and a very aspirational India’s generation next ready to become possibly the best wealth managers in the world.

All we need to do is to think BIG and LONG TERM!

Rohit Sarin
rohitsarin@clientassociates.com