Private Wealth Management- Part 1

Once, 6 blind men were asked to describe an elephant. The first man touched the side of the elephant and described it as a wall. The second man touched the tusk and called it a spear. The third man touched the trunk and described it as a snake. The fourth one touched the knee and calls it a tree. The fifth one touched the ear and said it’s a fan. Finally, the last one touched the tail and described the elephant as a Rope!

None of them called an Elephant an Elephant. Why would that happen? Because their perceptions led to misinterpretation.  

This is what happens when a client has different entities like an accountant, tax advisor, financial planner, etc. handling various aspects of money. Their advice is always biased towards their objectives rather than catering to the sole objective of handling the funds of the clients in the most optimum manner. In other words, they all describe the elephant differently, just based on the part of the elephant they touched.

In such situations, a wealth manager steps in. He is not blind and his vision can see the entire elephant rather than understanding it only through the parts of the elephant that he has touched.

What is wealth management?

Private wealth management is an investment advisory practise that incorporates financial planning, portfolio management, and other aggregated financial services for individuals, as opposed to corporations, trusts, funds, or other institutional investors. 

The services provided by a wealth manager may include broad areas such as financial disciplines and services such as legal, tax, wealth and investment advice, estate planning, accounting, tax and retirement planning. 

How do wealth managers operate?

In India, the private wealth management arm generally functions as a small working group within large financial institutions. It offers specialized wealth management to individuals. They sell proprietary and non-proprietary investment products and services consisting of portfolio management, estate planning, etc to High-Net-Worth Individuals (‘HNWI’) to help grow their assets and provide for future generations. 

The private wealth management segment is usually comprised of a variety of specialists who can offer advice on diverse types of investments such as hedge funds, money markets, private equity, and other types of investments. Independent wealth managers leverage their expertise in risk management, tax, and estate planning to manage the wealth of their HNWI clients. The entire bouquet of services provided is what makes it unique.

A high percentage of private wealth managers charge their clients a proportion of the assets under management. A fee-based payment scale, as opposed to a commission-based payment scale, offers less conflict of interest and better performance potential. A commission-based payment may motivate the private managers to recommend investment products and services that will earn them high commissions but that offer less potential to grow the client’s wealth. However, a fee-based payment allows the wealth managers to choose a combination of portfolios with high profitability that will grow the client’s wealth.

High-net-worth individuals may also consider opening a family office to provide a more personalized approach to their investments. Family offices may be either single-family offices or multi-family offices. A single-family office provides support to one wealthy family, while a multi-family office can serve multiple HNW individuals and families. Multi-family offices are more common than a single-family office because it allows for cost-sharing of investments and consulting expenses.

Status of Wealth Management Industry in India

The Indian wealth management industry had been in a very nascent stage until a few years ago. However, the scenario is changing rapidly at present. The country holds enormous potential for wealth creation in the foreseeable future and the industry is ready to tap into the opportunity. The potential of the Indian wealth management industry is proven by Capgemini’s World Wealth Report. As per the report, India is amongst the top ten countries in terms of total holding of private wealth. India’s High Net-worth Individuals’ (HNIs’) wealth is estimated to reach approximately INR 400 Tn over the next five years, growing at a CAGR of 27%.

As per CRISIL Global Wealth Report, 2020, India ranks fourth in the number of Ultra High Net Worth Individuals (‘UHNW’). However, the number of UHNW individuals is below 10% of the world leader, the United States. This indicates a huge potential for growth in terms of the UHNW in India. The number can be further bolstered by the economic growth of the country. As per the IMF projections of April 2021, India is the fifth fastest-growing country in the world. 

Along with increased wealth, there improved financial literacy amongst Indians to provide for their financial goals. This can be witnessed through decreased physical savings in India. 

Even during the pandemic phase, India has witnessed a significant increase in its retail participation, especially during the New Normal. In uncertain times like these, more investors – both novice and experienced – are realizing the value of customized and expert guidance by turning to wealth management firms.

Stay Tuned for the next part to understand how digitalisation is changing the wealth management scenario.

Drop a comment or write us an email at info@pirimidtech.com for any feedback about this article. Do check out our portfolio in building Robo advisory, Large Scale Trading Systems, Algo Trading, Stock Sentiments, Price Trends Forecasting, Backtesting frameworks, Credit Model, Open Banking, etc. on our website. Connect with us to discover how our Fintech expertise can help you build cutting-edge solutions powered by AI/ML.

This is a guest post by Yash Surana, who is a CA and an MBA (Finance) from SPJIMR, Mumbai, and loves writing about finance, strategy, startups & Personal Finance.

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