The wealth management sector in India is at a turning point. Nearly 80% of households are expected to have middle-class incomes by 2030, up from about 50% in 2019. This indicates that the affluent middle class is growing.
● The population of high net worth individuals (HNIs) in the nation is projected to increase from 3.5 lakhs in 2020 to 6.11 lakhs in 2025, a 75% increase. The number of ultra-high net worth people (UHNIs) is expected to increase by 63% throughout that time.
● In addition to becoming economically mature, investors have also become emotionally mature. For instance, even when COVID-19 rocked the financial world, most investors concentrated more on readjusting than panicking and selling everything they owned. 14.2 million new demat accounts were established in India alone in FY21, which set a record.
● Given India's long-term economic prospects, favorable demographics, rising income levels, and current low penetration, the Indian wealth management business are expanding steadily. India is currently in the top 10 countries in terms of total private wealth held. Over the next five years, it is anticipated that the total wealth owned by Indian high net-worth individuals (HNI)—those with investable assets of $1 million or more—will increase at a CAGR of 27%, reaching almost Rs. 400 trillion.
● The importance of wealth management in India is underscored by the fact that 8% of the country's population controls 45% of its wealth, and only 20% of affluent families consult wealth managers.
Nevertheless, this figure is gradually increasing as more and more clients seek guidance on:
Budgeting (detailed short- and long-term objectives)
Planning your estate
In India, the overall HNI population is made up of about 69 percent of people under the age of 55. This group looks for a wealth manager because they lack the knowledge and the time to keep an eye on their finances.
The Indian wealth management industry's changing landscape
● Access to services and penetration into the HNI market outside of tier 1 cities is becoming more difficult. With technology being the main engine of business, a firm's fondness for being rooted in one particular area is waning. Given the rising costs of providing service in tier 2 and tier 3 areas, using technology to deliver solutions to HNIs has become an essential component of the offering.
● Wealth management companies are finding technical solutions for using Robo advisers to provide guidance slowly but surely. These computer-driven asset allocation models can easily handle the menial tasks involved in basic asset allocation.
● However, high-engagement solutions like estate planning, tax minimization measures, etc. will still require human involvement. As more family-run enterprises observe that the next generation wants to start again and not necessarily carry on with the typical family business, family office solutions and estate planning are in higher demand.
● The rise of the mass wealthy is another important factor. More and more households can create surplus money due to rising urbanization and organized employment (IT being the leader in this regard) and would prefer to invest it in profitable ventures rather than just bank savings.
● The new generation of Millennial and Gen Z investors are always connected and prioritize using technology. They want to be able to communicate with financial advisors in real-time via all available channels, including text messages and video chat. Additionally, they need constant access to investment options and portfolio redesigning conventional investment ecosystems to be better suited to this cohort's requirements.
● In addition to non-traditional investments like carbon credits and non-fungible tokens (NFTs), millennials are also increasingly interested in passive investing, unlisted businesses, private equity, antiques, and collectibles. ESG investing is becoming more popular. Nine ESG-focused funds have been introduced in India over the last few years. Young investors are very concerned about social and environmental issues, so this is not surprising. They actively look for investment opportunities that reflect their ideals.
● Regulators, such as the Securities and Exchange Board (SEBI) of India, are paying closer attention to the fee structures used by advisory companies, data security and privacy procedures, use of AI/ML, crypto assets, and ESG (environmental, social, and governance) funds. Tax increases are also anticipated, which is a huge worry for investors. Advisory businesses will need to have a solid compliance program and system of controls in place to be proactive and prepared.
● Historically, physical assets like gold and real estate accounted for 95% of household wealth in India. However, investors are now favoring financial savings over tangible ones. They are more conscious that, in the face of rising inflation, an excessive concentration of wealth in non-financial assets might produce unfavorable returns. They can experience better returns and greater efficiency in terms of liquidity and contingency planning with a more balanced approach to portfolio creation.
Future potential for Indian wealth management
The wealth management sector in India is still quite young. The market is increasingly shifting away from one-size-fits-all solutions and toward a more tailored offering. Technology serves as a supplement to this to handle non-core activities. In Asia Pacific (excluding Japan), up to 25.5 percent of HNIs use loans to increase their profits. Consequently, there is a stronger focus on credit and lending options for HNIs. A large potential is being created for the Indian wealth management business by the emphasis on personalization, reliance on technology, the need for loan solutions, and growing knowledge of the advantages of financial assets over physical assets.
● The number of HNIs and UHNIs in India has significantly increased during the past several years. In addition, numerous reforms have boosted the share of the organized sector in the economy, resulting in a thriving startup environment and a significant number of unicorns being produced in the country. With the help of digitization, the wealth management sector can save costs, enhance portfolio analysis, and offer clients a seamless and all-encompassing experience.
● HNIs have long employed traditional investing options like fixed deposits, direct stocks, pooled vehicles like mutual funds, and tangible assets like gold and real estate as successful investment tools.
● Money has started to flow into alternative asset classes that follow non-traditional patterns, such as long-short strategies, pre-IPO unlisted stocks, structured products, and international investments to diversify their opportunity set and earn additional alpha, signaling a paradigm shift in investment patterns in recent years.
● Real estate investments have traditionally been a significant portion of HNI holdings. However, it has been noticed that this exposure is declining during the past few years. An appealing way to invest in infrastructure assets is through invITs. To diversify the portfolio, the Liberalized Remittance Scheme and rupee-denominated funds are appealing options.
Challenges in the Wealth Management Industry
Regulator compliance and maintaining a strong risk management system at the execution and customer data levels are the primary challenges the industry is now facing. Another significant problem for this market is the upkeep and training of a sufficient workforce with the necessary subject expertise, including a grasp of the behavioral patterns of different cohorts of investors.