Private wealth product platform

Having decided on the value proposition, let’s look at the specific products & services (features in a tech context) that the Indian wealth management industry has decided to offer. 

Firms were very clear that they can help ‘manage and grow’ wealth, not ‘create’ wealth. Their clients, whether entrepreneurs, inheritors or professionals, were better able to create exponential wealth. As wealth managers, their job was to manage their clients’ wealth and affairs such that the wealth was protected from inflation and grew at a competitive rate given their stated risk profile. They do so by attempting to add value mostly through investment management. The management part includes reporting, custody etc. 

Some firms provided a longer list, but most grouped their services into three broad categories – 

• Investments – to grow wealth (to match inflation at least, and higher depending on risk profile)
• Lending – to leverage growth
• Wealth planning – to protect wealth (from tax, creditors and mis-spending)

Investment services range from advice to execution to monitoring. So investment advice and management is really the bread and butter of wealth management. Ideally, wealth managers should be able to advise and manage the full range of investment opportunities available to their clients globally. In reality, there are regulatory and logistical restrictions on the range of investments wealth managers can offer.

Beyond investments, most private wealth management firms do offer a wider range of services, primarily lending and wealth planning services. While Indian firms have started offering these, most do so through partnerships and referrals. Investment banking is another area that many offer while concierge services are still missing.

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How do wealth firms add value in investment management

Check any wealth management firm’s website or pitch deck and one would find a laundry list of services they offer – stocks, debt, mutual funds, alternative investments, structured products, internal/third-party PMS etc. They seem to list the coverage rather than the actual service.

Interestingly, ‘investment advice’ is the one that would be hard to find. This is partly due to regulations that mean that advice is offered under a separate Registered Investment Adviser (RIA) license rather than the Mutual Fund Distributor (MFD) license that most wealth firms hold. While most wealth firms also obtained the RIA license, recent amendments to the RIA regulations mean that they are not too keen on using it – they would need to separate their client base into those who wish to receive services (and indirectly pay through MF commissions) under the MFD license and those who wish to pay a fee to the wealth manager directly. 

Investment services are broadly categorized as – 

• Trading/execution of securities (stocks, bonds, derivatives) and distribution of funds – under stockbroking and MFD licenses
• Advisory – under a RIA license 
• Portfolio management – non-discretionary and increasingly, discretionary – under a PMS license

While most private wealth firms offer these three investment services, the split of revenue and profits from each varies from firm to firm. 

The process to come up with these services can be broken into the following steps – 

• Asset allocation
• Strategic asset allocation – the long-term ‘neutral’ or ‘default’ allocation to growth versus defensive asset classes which determines the broad level of returns. 
• Short or medium term asset allocation – recommendations for tilts against the long-term asset allocation based on views on short or medium term market volatility; short term is defined as daily or weekly basis, while medium term can vary from 3 months to 3 years.

• Portfolio construction – design within asset class or split between sub-components within an asset class; for example, active/passive, split between large/cap, domestic/international, style etc.

• Fund/stock selection – selection of funds and/or stocks & bonds which are likely to add value over market index and peers 

• Model portfolios –combination of securities or mutual funds 

The following graphic shows the typical steps in the provision of investment services. The products team focuses on the selection & due diligence aspect of various types of products. The investment advisory team monitors the economic and market conditions, or adapts external views, to come up with model portfolios of stocks and/or funds. Interestingly, the investment process and team is called ‘products & services’ and reports to either a chief investment officer (CIO) or more often, head of products & services.

As an aside, some global investors attribute investment value to three sources – better information, better analysis and better behaviour. Applying this framework, it appears the wealth industry mostly focuses on the first two i.e. better information and analysis although there is some talk about coaching the client about better behaviours.

In some firms, this team also gets involved in ‘manufacturing’ products i.e. working with external parties such as investment banks to package a structured product. Or the team may work with colleagues in a subsidiary or sister company that is in the asset management or portfolio management business.

Since investment value-add is the main service that a private wealth firm offers, it’s one of the main factors that clients would select a firm for. With that in mind, we asked the firms to articulate their ‘investment philosophy.’ We wanted to get to a succinct statement about their investment beliefs and where/how they could add value.

For example, for something that appears as simple as selection of mutual funds, the provider would need a ‘philosophical view’ on what factors to assess for the asset management company managing the fund, and what weight to apply to each factor before deciding to start researching funds in-house or getting inputs from external providers. 

When asked, the CIO or head of products says they apply the ‘usual filters’ such as size, track record etc. But as the following table shows, there are many subjective views embedded in their selection of filters. The table separates out the various views embedded into each stage into methodology and data inputs – 

The next question is – even within the wealth firm, whose views these are. In a small firm, these may reflect the personal views of the senior most investment professional. In a large bank or wealth management firm, these views are likely to have been built up over time so they become ‘house views’. Either way, the investment views need to be documented. None of the wealth firms we interviewed referred to such a documented articulation of their investment philosophy.

Private wealth firms undoubtedly have expertise at various stages of the investment process. The lack of a clearly articulated investment philosophy is possibly a communication issue rather than an investment expertise one. However, this may well be affecting the transmission of this expertise in the way relationship managers advise and communicate with their clients.

These issues will become more relevant in the near future as we enter an environment in which manager alpha in mutual funds is getting eroded and investors are likely to pursue a barbell strategy of dividing assets into cheaper passive funds and more expensive private assets.

Portfolio management services offering discretionary options

The investment advisory process is one of portfolio construction and management. The investment adviser understands the client situation, including risk profile, time horizon, goals, constraints etc and suggests a portfolio strategy using the firm’s investment research. The clients may sign-off each transaction individually (in the execution service) or as a portfolio (in the non-discretionary service). Once the clients have trust in the wealth firm’s expertise, they may choose to delegate the decision-making process completely by giving a power of attorney to allow the portfolio manager to make changes to the portfolio.

The wealth firms see the move to discretionary portfolios as a sign of progress in the Indian market. But it also blurs the line between wealth and asset management. Clients have to monitor the performance of discretionary portfolios closely to ensure that they are getting a reasonable alpha for the higher fees paid. They also have to trust the wealth firm to suggest external PMS providers if they are not able to generate reasonable alpha.

Relationship advisory models and processes fluid

The relationship process is basically the financial planning process – understand the investor and the issues, propose a plan, execute the plan and monitor both the investor and the investment environment. However, the mutual fund distributor (MFD) license doesn’t permit financial planning other than as incidental advice. The clients are also not interested in sharing their personal information in the first meeting. 

So, in reality, the first meeting is a ‘pitch meeting’ in which the wealth manager is selling their firm’s and their own value proposition. If it goes well, the second meeting is the relationship manager may bring an investment adviser to pitch a solution to what they believe the investor’s issues are.

Once the investor agrees to the solutions, they are ‘signed up’ by fulfilling the KYC requirements. The risk profiling questionnaire is filled in at this stage, presumably leading to some adjustments in the offered investment solutions.

Missing out on insurance

When listing their products and services, most of the Indian private wealth firms did not mention insurance, either as stand-alone or as part of their wealth planning services. It’s not clear whether it was understood that it’s included, or whether the clients didn’t appreciate the importance of insurance in their protection plan.

In some other jurisdictions, private wealth firms do include insurance in their offering, sometimes partnering with insurance brokerage firms to ensure they get access to the best products at all times. Marsh and Mercer – part of Marsh & McLellan group – offer insurance brokerage and advice services. Mercer’s Private Client Services provides risk management propositions, with a focus on integrated life insurance solutions for HNW clients with their wealth planning needs in mind. According to their website, the firm works in close partnership with major private banks and trustees globally to serve HNW clients in over 50 markets, with offices across Singapore, Hong Kong SAR, China Mainland, Geneva and Zurich.

Mercer’s website showed an example of a savings plan in an insurance wrapper that allows the client to transfer policy ownership a number of times over a number of generations. Therefore, they have the ability to plan broadly and on a much more significant time scale. The generational timeline is crucial when they are creating a lasting tradition of success. 

Such savings plan structures allow flexibility in that clients can choose to assign beneficiaries and distribute policy payment according to policy owner’s wishes. This can be done in lump sums or over a prescribed period. A savings plan can be customized to have an inbuilt breakeven point and the flexibility of surrendering the policy at any time. The annual growth of a savings plan’s cash value is not treated as income and therefore subject not to tax. Moreover, the proceeds of a savings plan death benefit are not subject to income tax in most jurisdictions. Proceeds of cash value withdrawal will result in the resultant gain to be treated as income and subject to tax.

Recommending and manufacturing alternatives products

In line with the move to internal and external PMS providers, wealth management firms are increasingly recommending their clients invest in alternative asset classes such as commercial real estate, venture capital/private equity, infrastructure etc through alternative investment funds (AIFs). 

The AIF license regime came into effect in 2012. After a slow start, the flows into AIFs seem to have increased dramatically. Data from SEBI’s website shows there are now more than 715 funds with the commitments amounts exceeding $10bn.

The move to private assets is in line with the worldwide trend of asset flows following a bar-bell shape – increased allocations to low cost passive and high cost alternatives/private assets. Indian wealth firms’ bid to bring their wealth and asset management capabilities closer together is in line with global trends.