Regulatory caps on fees, increasing competition and the growing number of players in the industry are all putting pressure on margins for most wealth management firms, said Vikas Satija, managing director and chief executive officer of Shriram Wealth in an interview with Puneet Wadhwa in New Delhi. Going ahead, wealth management firms, he believes, will increasingly require highly qualified professionals who can provide quality solutions to clients. Edited excerpts:
Are most wealth managers underestimating the impact of the West Asia conflict on Indian economy & markets?
I think the overall market structure remains healthy. From a growth perspective, nothing has fundamentally changed for India. There will always be temporary disruptions. The next couple of quarters could be challenging for corporate earnings because of factors such as higher oil prices, currency movements and inflationary pressures.
However, the long-term India story remains intact. India continues to have a strong consumption story and remains an attractive growth market. At the same time, investors should consider allocating 10-15 per cent of their portfolio to global markets as a diversification strategy.
In fact, many clients have approached us asking whether this is the right time to increase allocations rather than reduce them. Retail investors have not shown signs of panic so far despite the geopolitical uncertainty.
Do you think there is still enough space for wealth management firms to survive and thrive over the next two to three years?
Let me put it from an India standpoint. Today, India’s total savings are close to $1.2 trillion, which is roughly 30 per cent of a $4 trillion economy. If we go by the broad vision that India could become a much larger economy by 2047, even allowing for some variation in the projections, the opportunity is significant. If the savings rate remains similar, we are talking about savings growing from around $1.2 trillion to nearly eight times that level over the next two decades.
There is another aspect to this. Across developed markets globally, typically 60-70 per cent of wealth is professionally managed. In India, only about 15 per cent of wealth is currently professionally managed. The rest is largely handled through independent financial advisors (IFAs), banks and other channels, but not necessarily through structured professional wealth management services.
If you put these two trends together—an expanding savings pool and rising professional management of wealth—the opportunity becomes very large. If the industry grows eight times over the next two decades and the professionally managed share rises from 15 per cent to 30 per cent, 45 per cent or even 60 per cent, the scope is substantial. So, from that perspective, there is enormous room for professional wealth management in India.
What has happened over the last three years is that many new wealth management outfits have entered the market because, from the outside, the business appears attractive. The primary costs are employee expenses, infrastructure and technology. As a result, entry barriers seem relatively low, which is why you’re seeing a large number of players coming in. However, building a professional wealth management institution and sustaining it over a long period is a different challenge altogether.
I believe the opportunity is large enough for many more players to enter. The real question is whether they can create an institution that clients trust and rely upon over many years.
What is your USP?
Both institutions (Shriram Group and Sanlam Group) bring a long-term perspective. That said, one needs two things in wealth management business: a strong distribution reach and deep financial expertise. Shriram brings the distribution capability. As a group, we have a strong presence across the country, with over 1,10,000 employees and around 4700 plus branches. On the other hand, Sanlam has extensive global experience in insurance and asset management. Those are its core strengths.
What we have consciously decided is that we want to focus on solutions rather than products. There are enough players in the market that specialise in product manufacturing.
Our model is an open-architecture distribution platform where we identify the best available solutions for clients. We have built our proposition around five key pillars: wealth management, lending, global investments, inheritance and legacy planning, and protection (insurance). These five pillars form the foundation of our proposition at Shriram Wealth. Our objective is to work out the best solutions and bring them to investors.
For the wealth management industry, where do you see the next phase of growth coming from—Tier 1, Tier 2 or Tier 3 cities? Which segment will contribute the most?
If we take mutual fund data as a benchmark, the top five cities still account for more than 50 per cent of the industry’s assets under management. However, if you look at the trend over the last three years, around 35 per cent of the net incremental inflows have come from beyond Top 30 cities.
That tells you the contribution from smaller cities is steadily increasing. There is no shortage of opportunity in Tier 2 and Tier 3 markets.
In our own strategy, we focused on Tier 1 cities in the first year and opened 12 branches accordingly. Over the next five years, however, the plan is to expand from these 12 cities to the top 50 cities in the country.
Shriram already has a strong presence in many of these locations, and we intend to leverage that infrastructure. Cities such as Lucknow, Nasik, Bhubaneshwar and Kochi represent significant opportunities across the length and breadth of the country. The key question is whether enough professional wealth management services are being offered in these markets today. The answer is no.
Most new wealth management firms will naturally begin with Tier 1 cities, but eventually every player will need a strategy for Tier 2 and Tier 3 markets. Going forward, these markets will become increasingly important for the industry.
What is the moat for a wealth management firm that wants to avoid being absorbed by a larger player?
The first requirement is a long-term perspective. If India’s growth story plays out over the next two decades, there is enough opportunity for everyone. The real differentiators are scale, institutional backing and trust.
There will always be firms that enter the business with a three-, five- or seven-year horizon and eventually look to consolidate or exit. But institutions that are building for the long term are more likely to survive and thrive. If you do not create trust over a long period of time, it becomes very difficult to sustain a wealth management business.
How do larger wealth management firms compete with boutique firms run by well-known industry veterans?
Trust remains the biggest differentiator. Beyond that, our approach is to focus on solutions rather than products. Historically, the industry was largely product-driven. The idea was simple: find a product and sell it to the client. Today, that approach needs to change.
The focus should be on understanding a client’s overall requirements and then identifying solutions that fit those needs. For example, rather than pushing a particular investment product, we first identify what the client needs and then source the most suitable option from the market.
Many firms have started moving in this direction, but I still believe the industry has a long way to go. Getting the solutions-based approach right is the key to long-term success.
Do you think wealth management will become a more expensive business over the next three to five years as costs rise and margins shrink?
Yes. There are three major cost components in this business: employee costs, infrastructure costs and technology costs. All three are likely to rise significantly. The first requirement is institutional backing and a long-term vision. That is one reason why I believe many smaller players will eventually consolidate.
The other requirement is to balance spend between the three components. Some firms may invest heavily in technology, while others may prioritise talent or distribution. Every business will have a different model. The key is to optimise across all three areas and play to your strengths.
Technology is important, but technology alone cannot replace human intelligence & guidance. Similarly, having a large workforce without the right technology may not be efficient. The balance between people, infrastructure and technology will be critical.
Do you see profit margins coming under pressure for wealth management firms?
That process has already begun. Regulatory caps on fees, increasing competition and the growing number of players in the industry are all putting pressure on margins. The way to address this is through a broader solutions-based approach.
If a client only uses you for mutual fund investments, your revenue opportunities are limited. However, if you can serve the client’s investment, lending, protection, global investing and legacy-planning needs, you create a much larger wallet share. That is why having a wider platform is important.
Margins will remain under pressure as the industry becomes more institutionalised and professionally managed. That is a natural evolution that most industries go through.
What are the three things you would like regulators to focus on for the wealth management industry?
First, I would like regulators to continue with the progressive approach they have adopted so far. Whether it is SEBI, RBI or IRDAI, regulators have played an important role in strengthening the financial ecosystem. Second, there should be greater focus on increasing awareness and distribution in Tier-2 and Tier-3 cities. Investor education and wealth managers training will be critical.
Third, we need higher standards for professionals entering the industry. I would not necessarily call them entry barriers, but I do believe certification and training requirements should become stronger. The objective should be to improve the quality of solutions being offered to investors.
So the industry needs better-qualified advisors rather than higher entry barriers?
The focus should be on ensuring that more people are properly trained and certified. Wealth management firms will increasingly require highly qualified professionals who can provide quality solutions to clients.
How are investors responding to SIFs compared with SIPs?
SIFs are still at a very early stage. Awareness remains low, not only among retail investors but even within the HNI segment. It will take time for investors to understand and adopt the product. SIPs, on the other hand, are a mature and widely accepted investment vehicle.
