Wealth management services in India is still at a nascent stage. Traditionally, wealth management companies have focused on high-net-worth individuals (HNI) with net assets of ≥ US$ 1 million and ultra-high-net-worth individuals (UHNWI) with net assets of ≥ US$ 30 million. The HNI and UHNWI groups in India have witnessed significant growth in the last decade and this is a demand driver for wealth management services.
Source: Knight Frank and Capegemini World Wealth Report, 2016
Growing Indian economy, rising per capita income and increasing urbanisation are also acting as tailwinds for the wealth management industry. The number of affluent middle-class people is on the rise. The World Economic Forum estimates 80% of India’s population to fall in the middle-class segment by 2030, up from about 50% in 2019. The increase in disposable income will create wealth management needs in the affluent middle-class segment.
According to a consulting firm Praxis Global Alliance’s report titled ‘Evolution of Wealth Management’ (published on September 06, 2019), India’s wealth management space is led by domestic players accounting for ~77.5% share by assets under management (AUM). In the top 20 wealth management (WM) companies, domestic companies lead with an ~80% AUM.
Drivers and key trends in wealth management in India
Rising inclination for hiring wealth managers among young people
With rise in the number of nuclear families and paradigm shift in the lifestyle of millennials, the Gen X is increasingly becoming aware of the need to rely on their own wealth instead of their children. Also, with rising awareness and exposure, people want to be able to enjoy the finer things in life and therefore, want to save for luxuries. This has spurred the demand for wealth managers.
Prioritise goal-based planning over financial accumulation
Companies operating in the wealth management sector feel the need to relook their product offerings and change focus from wealth accumulation to goal-based solutions for customers. The goal-based solution approach factors in the actual cash flow requirement of the individual.
Higher demand for alternative asset classes versus traditional ones
With traditional asset classes such as fixed deposits and bonds offering low returns and less protection from inflation, alternative asset classes such as alternative investment fund, private equity, venture capital, real estate investment trust (REIT), derivatives and cryptocurrency have started to gain traction. These alternative classes offer significantly better returns with less volatility.
Increasing reliance on automation
The high cost of manual services, coupled with rising need to remove legacy operations, has made organisations shift to new automation tools. These tools not only reduce costs, but also help create capacity, enhance employee engagement, and improve client experience by providing superior products. With the rise in competition and consumer demand, this common trend is expected to continue.
The rise in digitisation has subsequently led to growth in the number of robo-advisors, who use automated, algorithm-based systems to advise on portfolio management based on the financial situation, risk appetite and future goals of individuals concerned. The Indian robo-advisory landscape can be categorised broadly into three types—fund based (examples include Scripbox, Fisdom, Finpeg, Orowealth and Kuvera); equity based (Smallcase, Fyers, Tauro Wealth and Markets Mojo); and comprehensive wealth advisory (INDWealth, Cube Wealth and Arthayantra). The assets under advisory (AUA) of leading robo-advisors in India (according to their own disclosures) are: Kuvera – Rs. 14,500 crore (US$ 1.97 billion); Orowealth – Rs. 3,000 crore (US$ 408 million); Scripbox – Rs. 1,500 crore (US$ 203 million); and Goalwise – Rs. 850 crore (US$ 115 million).
Renewed focus on the non-urban segment
The current wealth management market in India is at the early stages of development. Until now, the focus of established players was on the urban segment. However, with mounting competition from fintechs and sudden inflow of foreign wealth management, providers have prompted domestic companies to focus on approximately one-fifth of HNIs residing in rural areas.
Easier entry norms for new players
The wealth management industry was traditionally dominated by large players and the industry required significant investments for sustainability. However, this has changed with the rise in technologies and awareness among people. With a spiraling number of new-age fintechs, customers have a wide variety of products to choose from.
Challenges in the industry
- Cybersecurity Threats: With rising use and adoption of different technologies by wealth management companies, there has been growth in data breaches and cyber-attacks in the recent years. As these institutions hold a lot of private data, any leak can take a significant hit on their brand image.
- Competition: New-age firms that have adopted technologies at a faster rate have a clear edge over larger and traditional asset management firms. These new-age firms have succeeded in attracting younger HNIs who want greater transparency and control over their investments.
- Regulatory Burdens: The Indian wealth management industry is primarily regulated by the Securities and Exchange Board of India. Over the years, especially after the 2008 economic downturn, SEBI has introduced regulations to protect customers. These regulations (outlined to best serve interests) have severely limited the abilities of wealth management companies, resulting in low revenue generation.
- Shortage of Qualified & Trained Advisors: As the wealth management industry is at an elementary stage in India, firms face challenges in hiring and retaining employees with necessary domain knowledge. There is also significant employee attrition, which plagues the industry.
According to a report titled ‘Global Wealth 2021: When Clients Take the Lead’, published in June 2021 by the Boston Consulting Group (BCG), financial wealth grew among Indians at 11% p.a. from 2015 to 2020 and is further expected to increase at 10% p.a. to US$ 5.5 trillion by 2025.
Wealth management firms will have to adopt technological advancements and provide individualised, comprehensive advice aligned with the changing investment trends and needs. Constant innovation and new ways to deliver services will continue to disrupt the industry.