Krishnan Ganesh, who sold his online-tutoring company in Bangalore for $213 million, is the type of client that attracted global wealth managers to India. His refusal to use them helps explain why some are leaving.
“Private bankers in India do limited value-addition,” said Ganesh, 52, whose experiences with them fed a conclusion that they pushed commissioned products for their own benefit rather than his. “In India, there’s a lack of alignment between a private banker and an individual’s needs.”
Skeptical clients like Ganesh are just one roadblock money managers have confronted in catering to millionaires in India, where rising wealth is estimated to quadruple to 380 trillion rupees ($6.3 trillion) from last year’s levels through 2018. Regulatory crackdowns, lack of convertibility of the rupee and a preference for real estate investing add to the challenge. UBS AG, Morgan Stanley and Macquarie Group Ltd. all have opted to exit India’s private-wealth market in the past year.
“India’s millionaires are not used to paying fees for advice on wealth management,” said Abhay Aima, group head for private banking at Mumbai-based HDFC Bank Ltd. “Customers here are far more value-conscious and stingy when it comes to paying fees. The fee-based model hasn’t picked up in India at all.”
HDFC Bank is India’s biggest wealth manager by customers and revenue, according to Aima. It has stayed away from offering fee-based advisory services, instead making money on commissions for transactions, he said.
Other wealth-management units using advisory-fee models have been competing with HDFC Bank’s free services. Private-banking businesses still operating as part of retail banks in India include New York-based Citigroup Inc., Frankfurt-based Deutsche Bank AG, and HSBC Holdings Plc and Standard Chartered Plc, both based in London.
Royal Bank of Scotland Group Plc, based in Edinburgh, still offers wealth management, even though it has ended its presence in almost half of the Indian cities where it previously had branches. Stand-alone wealth managers or those operating without retail-banking units include Credit Suisse Group AG, Paris-based BNP Paribas SA and Barclays Plc.
Morgan Stanley agreed to sell its India wealth-management unit to Standard Chartered in May 2013. Standard Chartered paid $8 million plus an additional undisclosed amount later for the unit, which had $800 million in assets under management, a person familiar with the matter said at the time of the sale. The bank, which has 99 retail outlets in India, making it the largest foreign lender by branches, said the acquisition represented a significant increase in its private-banking assets in the country, without disclosing figures.
Spokesmen for Morgan Stanley in Hong Kong and Standard Chartered in Mumbai declined to comment on the deal.
About 86 percent of Indians’ household assets are in real estate and tangible investments such as gold, the highest rate among 16 countries tracked, Zurich-based Credit Suisse said in an October 2013 report. Reliance on property reflects volatility in India’s stock markets and debt products, while real estate is perceived to have steady growth, said Partha Pratim Basu, chief operating officer for Credit Suisse’s Indian wealth-management business, which started in 2008.
Few regulations protecting consumers and the slow resolution of property disputes mean global banks tend to leave real estate advising to Indian wealth managers, who are more accustomed to the market, Aima said.
A Real Estate Regulation and Development Bill presented in Parliament a year ago that has yet to become law could help global private banks by providing more clarity, he said. HDFC Bank offers real estate advisory services through its parent, Housing Development Finance Corp.
Central bank restrictions on converting rupees into other currencies and investing in assets in foreign countries also limit investment offerings of global wealth managers.
“If you had full capital-account convertibility, then expertise on foreign investments would have started adding value, and foreign players would have had an edge,” said Rajesh Iyer, Mumbai-based head of investment-advisory services and family offices at Kotak Wealth Management, a unit of Kotak Mahindra Group, which according to its website provides financial advice for about 40 of India’s 100 richest families. “Indian units like us have ears on the ground and understand what is happening across asset classes here.”
Kotak Wealth Management, like other private banks, doesn’t reveal its fee structure or assets under management.
Global private banks in the U.S. and Europe can charge annual fees for advisory services of about 1 percent of assets under management, which typically are reduced for clients with bigger balances. Banks usually charge a base fee and add on for products or services such as a financial plan or tax advice, said Steve Crosby, senior managing director and Americas wealth leader for PricewaterhouseCoopers LLP in New York.
UBS is in the process of closing its India wealth-management unit as part of a global strategy to move to a “capital-light business,” Mark Panday, a spokesman in Hong Kong, said in an e-mailed statement. Wealthy clients “typically want products that tie up large amounts of capital,” he said.
UBS’s Asia-Pacific assets under management rose to a record $245 billion at the end of last year from $177 billion in 2011, according to data from the Zurich-based bank, which doesn’t break out figures for India.
Religare Enterprises Ltd. announced in September that because Macquarie had “decided to exit the wealth-management business from Asia, including India,” it was buying the Sydney-based bank’s share in their joint venture. Australia’s biggest investment bank hasn’t separately said it’s getting out of private banking in Asia. Elizabeth Cox, a company spokeswoman in Hong Kong, declined to comment on the action. The India unit, which started in 2007, had assets of 28 billion rupees under management in 2013, according to the statement.
Instead of shrinking, Credit Suisse hired employees at its private-banking unit in India last year and is expecting growth, Basu said, declining to disclose its assets under management, total employees in India or fee structure.
In the fee-for-transactions model “you are incentivized for what you sell, while in an advisory model you are remunerated to step into the client’s shoes and think for him,” said Amit Khandelwal, head of sales for Credit Suisse’s India wealth-management business, defending advisory fees.
“You have to be patient in this business in India,” he said. “There is no quick buck to be made. This business segment will grow. As of now, we have only scratched the surface.”
Credit Suisse is the Asia-Pacific region’s third-largest private bank by assets under management, with $117 billion as of 2012, behind UBS and Citigroup, according to Private Banker International, a London publication on the wealth industry.
Ultra-high-net-worth individuals in India, defined as having assets of more than $30 million excluding primary residence, are estimated to grow 98 percent through 2023 from last year’s 1,576, compared with 28 percent growth globally, according to a March report by real estate brokerage Knight Frank LLP. The number of billionaires is expected to double in that period from last year’s 60, the report said.
India is home to 156,000 high-net-worth individuals, according to a report released last week by Cap Gemini SA and Royal Bank of Canada. It ranked the South Asian nation 16th, above Argentina and Singapore, by number of wealthy people.
Crisil Ltd., the Indian arm of Standard & Poor’s, said in an August report that the wealth of India’s richest people would quadruple by 2018.
“This is not a business in which you can come in with a suitcase when going is good and decide to pack up and leave when it isn’t good,” said HDFC Bank’s Aima. “You need to stay put and be here whether the going is good or bad.”
The banking regulator also has tightened regulations on the sale of third-party products such as mutual funds and other savings instruments by banks. HDFC Bank saw income fall at its wealth-management unit as volumes and commissions dropped, Paresh Sukthankar, deputy managing director of HDFC Bank, told reporters in April.
HDFC Bank received 1.6 billion rupees in fees and commissions from sales of mutual funds alone in 2013, about the same as Citigroup with 1.65 billion rupees, according to data from the Association of Mutual Funds in India.
The country’s millionaires will be more open to paying fees if the rally in financial assets lead by equity markets continues, Kotak’s Iyer said. India’s benchmark S&P BSE Sensex Index fell 5 percent last year through the end of August. It began surging as the campaign to elect now-Prime Minister Narendra Modi picked up momentum and has risen 33 percent since on optimism that his Bharatiya Janata Party’s biggest majority victory in three decades will revitalize the economy.
“People have issues in markets where they themselves are not really making any money,” Iyer said. “If the environment improves and sustains for some period, then paying of a fee may not be of much concern.”
Ganesh, who sold his TutorVista Global Ltd. to Pearson Plc, said he allocated part of his wealth for bonds and real estate. He still has no plans to use a money manager, except when he can’t access investments himself.
“I will make investment decisions on my own and will seek help of bankers only to execute the trades,” he said.