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Personal Finance should not make you Lose your Mind (Part IV)

There are a lot of models that have worked outside India, have failed here. Wealth management services are one of them. To gather proof of this, we need to go back to post recession era when some of the well known global houses were forced to close their doors to Indian markets (Link 1, Link 2). Some of the reasons why this happened are:

  1. They ran a fee-based model, an unknown model to many Indians. If you look at the fee charged by an IFA (Individual Financial Advisor), retail banks and distribution houses – who were either dependant on transaction based revenue or were charging a minimum amount of fee. Both were high, even for high net individuals
  2. A stringent regulatory environment restricted these players from offering tailored products, which were otherwise offered in other markets and often were their prime selling point.
  3. Post recession, many High Networth Individuals lost faith in the tailored products as their portfolios took a massive plunge. Many of these funds could not provide capital protection post five-year lock in periods.

These were the main reasons why many Indian houses never jumped into the market to offer Wealth Management as a separate service and continued to offer Wealth Management as an extension of their retail offerings

Ignored opportunity:

The business model around which traditional wealth management houses are structured to make them unscalable at the retail level. The services are more akin towards providing only investment management and beating benchmarks returns. This was the only way in which one service provider differentiates from the other. Even when some houses tried targeting the retail based service on long term goal based approach the model wasn’t scalable from the perspective of generating sustainable revenue. In a research was done by Price Metrix (A Mckinsey Co.) 2016 on retail wealth management services operating in North American Markets showed client relationships with deeper access to retirement money were only able to grow as profitable businesses because the corpus of money involved and the length of the relationship.

When we look at retail wealth management space in India, bigger retail players like Karvy entered the market late and were focussed towards offering service at the over the counter level because the brokerage revenues were sustainable without the need of deepening retail relationships. Post recessions the model drastically failed and people had to call back their expansion plans. The mutual fund industry faced heavy redemptions pressures from retail accounts who used these retail wealth management houses as a mode of mass product distribution.

The new re-wired customer

A term coined by Deloitte in 2016 in its report “ 10 Disruptive trends in Wealth Management”. The report spoke about the new age wealth management services customers who belong to the Millennial, Generation X and baby boomers influenced by their young peers. The research spoke about the some of the traits of this new age customer, who prefers finance advice delivered to them

  1. In a more bespoke manner, a more personalized approach catering to even an element of the personal balance sheet.
  2. Multi channel advisory giving access to advisory which collates different formats of advice at one point and looks customers wealth cycle from the perspective of life stage needs.
  3. Service getting delivered through digital formats, through which the customer can interact in a simple and intuitive manner.
  4. The democratization of investment which calls for presenting financial products being tailored in a quite similar manner as done by traditional wealth management houses for their HNW customers.

Though the reports majorly reflect traits of US customers but new age Indians are also quite directed in the same direction. With the highest number of people joining the Indian workforce by 2025 making it one of youngest country in terms of human resource calls for creation of scalable retail wealth management services.

Human intelligence powered by data science and chat bots would possibly make the traditional wealth management service more scalable and holistic. This would further help these retail services providers deepen customer relationship and will replace the over the counter retail model to a bespoke model which would lead to the sustainable revenue stream for these new age service providers.

About Shobhit Dixit

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