MMI - The Private Wealth Issue August 2021_Color Option

ISSUE 01 SEPTEMBER 2021 the private wealth issue MARKET SIZE. TRENDS. FIRM PROFILES & TABLES & OPPORTUNITIES INTERVIEWS SURVEYS



the private wealth issue table of contents the 04 market client segmentation 09 and needs value 16 proposition products 22 platform marketing luxury 28 advice

the private wealth issue delivering wealth 34 management industry size 37 and players firm profile 45 ASK Wealth Advisors 47 Axis Bank Burgundy Private 49 Centrum Wealth Management 51 Edelweiss Private Wealth 53 ICICI Securities Private Wealth 55 Motilal Oswal Private Wealth Management 57 Waterfield Advisors 59 InCred Wealth

the private wealth issue from the editor PRIVATE WEALTH….THE WEALTH OF PRIVATE CLIENTS. In this inaugural issue, we speak to many veterans in the industry and explore what they see as opportunities and challenges. We The term 'private client' implies there is something private about attempt to size the market, look at the value proposition the them. The term has become synonymous with 'high net worth' industry is offering, flag some issues they may want to deal with. In investors. They are different from 'individual or retail investors' who future issues, we will also speak with private clients themselves. may need help with making financial decisions. They are also For now, let's see what the industry's self-assessment is. different from institutional investors, which are sophisticated but may be slower because they usually manage money on behalf of The private client, and hence the private wealth management others. Private clients are unique – they may have the wealth and industry, is important in the bigger picture of 'investing in India' too. sophistication of a small institutional investor, but are much India needs to invest hugely in various parts of the real economy to quicker to make decisions because it's their own money. They lift the well-being of all Indians. We will cover many asset classes in don't have to do insane amounts of paperwork and present to future issues. As owners of a big portion of India's wealth, private investment committees to invest. They are the 'smart money'. client investors will probably supply this capital. So it's imperative that we understand what drives them. Since India once was amongst the richest places in the world, there was always some 'old money' in India. These blue blood I present to you – the private wealth issue. private clients may have been banking with Swiss private banks for generations. But once India opened up in the early 90s, the Hansi Mehrotra number of well-heeled 'new money' Indians grew exponentially, Editor and spawned the private wealth management industry by the turn Money Management India of the century. [email protected] About 20 years into this journey, let's take a look at how far the September 2021 private wealth management industry has come. Some hits, some misses. Many foreign players came and left. Many new homegrown companies got launched. Many have yet to reach a sustainable scale.

the private wealth issue the market India has been a promising wealth management market for a while. The growing 'middle class' is part of folklore. The rich Indians may not be as 'crazy' as the Asians in terms of conspicuous consumption but the numbers have been growing steadily. So the prospects for the wealth management industry, as a whole, and the private wealth segment specifically have always been considered good. Let's see how good.

the private wealth issue DEFINING THE 'HIGH NETWORTH' Wealth usually means 'net worth' which, of course, means total assets minus liabilities. However, since the wealth management industry can't manage clients' primary homes, it has been customary to exclude the value of the primary home from the calculation and instead use the concept of 'investable assets'. Hence, the industry tends to segments individuals, or sometimes households, into three broad groups - • Retail: investable assets of between up to $100,000 (while some use up to $250k) • Affluents: investable assets of between $100,000 and $1 million • High net worth individuals (HNWI): investable assets of over $1 million Traditionally a UHNW segment has been carved out for wealth over $30 million, but lately some reports divide HNW more finely as - • Lower end of high net worth individuals (HNWI) I: between $1 million and $5 million • Lower end of high net worth individuals (HNWI) II: between $5 million and $20 million • Upper end of HNWI: between $20 million and $100 million • Ultra high net worth individuals (UHNWI): more than $100 million Note these are arbitrary definitions, like many other concepts in finance. The Indian industry uses lower thresholds, as we will learn from the interviews with industry experts. However, at this stage, we need to be aware of the global definitions as we use market sizing data from global wealth reports. THE WEALTH REPORTS Many institutions produce 'wealth reports' estimating household wealth, mostly for broader purposes. We will try to keep the discussion on the HNW or 'wealthy' wherever possible. The most commonly cited reports are listed below - Report How they estimate Number of HNW (defined as net worth of >USD 1m) Credit Suisse Statistical modeling using 698k (including data from national primary home) statistical agencies CapGemini Statistical modeling using 278k (excluding Knight Frank data from national primary home) statistical agencies Wealth-X 6884 UHNW Forbes Not explained 285k HNW, 12,460 VHNW, Bottom-up surveys and 4470 UHNW secondary research 100+ billionaires (100th Bottom-up research billionaire was worth $1.3bn) Hurun Bottom-up research 209 billionaires of which 177 live in India Kotak Top of the Survey of x HNWI Pyramid 160k (in 2017) Source - Money Management India - the private wealth issue 2021

the private wealth issue The Credit Suisse Global Wealth Report, one of the widely quoted reports, uses statistical techniques to estimate household wealth. Note Credit Suisse (CS) is different from other wealth reports in that it includes 'total wealth', including owner-occupied primary homes while others focus on 'investable' assets only. Secondly, it also includes the market value of pension assets while most others don't. Lastly, CS adjusts the shape of the wealth distribution at the upper end. It uses data from the Forbes annual global list of billionaires to improve the estimates of wealth holdings above USD 1 million, and then uses 'well-established statistical techniques' to estimate the intermediate numbers in the top tail. This produces 'plausible values' for the global pattern of asset holdings in the HNW and UHNW categories. CS draws the global wealth pyramid as having 4 segments. The top tier of the wealth pyramid is the high net worth (HNW) individuals i.e. USD millionaires. This segment includes 56 million people globally or 1.1% of all adults, yet owns 46% of globalwealth. The global wealth pyramid 2020 56 m (1.1%) > USD 1 million USD 191.6 trn (45.8%) USD 100,000 to 583 m USD 163.9 trn (39.1%) USD 1 million (11.1%) USD 10,000 to 1,715 m USD 57.3 trn (13.7%) USD 100,000 (32.8%) USD 5.5 trn (1.3%) < USD 10,000 2,879 m Total wealth (55.0%) (% of world) Wealth range Number of adults (% of world adults) Source - James Davies, Rodrigo Lluberas and Anthony Sharrocks, Credit Suisse Global Wealth Databook 2021 The report highlights the general trend of wealth inequality rising and then declining in the early years of the century. India is one of the few notable exceptions to this trend - wealth inequality has been increasing steadily. CS attributes this to the increasing share of financial assets in household wealth.

the private wealth issue Macroeconomic indicators Population China India million Adult population 1,442 1,387 million GDP 1,105 USD per adult Mean wealth 900 USD per adult Median wealth 13,394 USD per adult Total wealth 67,771 2,902 USD trillion US dollar millionaires 24,067 14,252 thousand Top 10 % of global wealthholders thousand Top 1 % of global wealthholders 74.9 3,194 thousand Wealth inequality 5,279 12.8 Gini index 99,114 698 4,887 11,059 70.4 649 82.3 Source - James Davies, Rodrigo Lluberas and Anthony Sharrocks, Credit Suisse Global Wealth Databook 2021/EIU As is expected of a developing economy, India's population is skewed towards the lower end of the wealth spectrum with only 0.1% of the population making the 'dollar millionaire' definition. With about 698,000 adults, India is home to 1% of the USD millionaires. This number is 66,000 lower than the previous years because the value of wealth fell during 2020. Wealth distribution relative to word (%) 80 70 60 50 40 30 20 10 0 USD 10,000 - USD 100,000 - >USD 1 m <USD 10,000 USD 100,000 USD 1 m China India World Source - James Davies, Rodrigo Lluberas and Anthony Sharrocks, Credit Suisse Global Wealth Databook 2021 The widely-quoted CapGemini World Wealth Report has been an annual publication for 25 years. CapGemini also estimates the size and growth of total wealth by market using national account statistics, and the distribution of this wealth across the adult population in that market using a wealth/income relationship formula and Lorenz curves. Financial assets are captured at book value and then adjusted using stock indices returns. Investable wealth figures include financial assets and exclude collectibles, consumables etc along with primary residences.

the private wealth issue Global number of individuals per wealth band (2020) and growth (2019-2020) Number of Share of HNWI population HNWI wealth individuals Growth HNWI wealth Growth 2020 2019-2020a 2019-2020a 2020 Ultra-HNWI 200.9 k 34% 9.6% 9.1% USD30m+ (1% of total) (0.5PP) (0.9PP) Mid-Tier Millionaires 1,894.6 k 22.7% 7.8% 7.9% USD5m-USD30m (9.1% of total) (1.1PP) (0.9PP) Millionaires Next Door 18,742.3 k 43.3% 6.1% 6.3% USD1m-USD5mb (89.9% of total) (2.7PP) (2.5PP) Source - Capgemini Financial Services Analysis, 2021. The 2021 edition of the report estimated that after five years, North America overtook Asia-pacific in HNWI population and wealth, in part helped by the stellar performance of leading US stocks, in turn due to the massive stimulus. Top 25 markets by HNWI population, 2019-2020 (thousands)6,575 2020 2019 7,500 5,909 HNWI population 6,000 62.9% of global HNWI population 4,500 (61.6% in 2019 and 58.4% in 2012) 3,000 1,500 3,537 0 3,387 1,535 1,466 1,461 1,317 714 702 573 591 459 438 403 392 301 298 299 287 295 284 278 263 224613 250 205 236 235 218 215 210 203 205 207 195 178 118728 186 182 186 199 163 155 153 142 134 134 United States Japan Germany China France United Kingdom Switzerland Canada Italy Netherlands Australia India South Korea Iran Spain Russian Federation Saudi Arabia Kuwait Taiwan Hong Kong Norway Brazil Austria Sweden Thailand Annual growth (%) 11.3 6.2 6.9 11.0 1.7 (3.0) 4.9 2.9 2.1 4.1 4.0 5.9 11.6 21.6 2.6 1.2 3.3 (0.8) 9.5 9.6 2.5 (6.6) 5.3 11.1 3.0 2019-2020 Ranking change - - - - - - - - - - - - - +3 -1 -1 +1 -2 +2 +2 -1 -3 +2 - - 2019-2020 Source - Capgemini Financial Services Analysis, 2021. Using the narrower definition, CapGemini estimated there were about 263,000 HNWI in 2019 and 278,000 in 2020 in India. India represents around 4.3% of the overall population of HNWI in Asia Pacific, similar to that of

the private wealth issue Australia, while Japan makes up about 51% and China 20%. India has shown one of the fastest growth rates for HNW population - about 20.4% compared to 15% for the rest of Asia-Pacific. However, last year this growth rate dropped to 5.9% - behind the leaders China, Taiwan, Hong Kong and South Korea. Chart heading (Thousands) CAGR 2010-2016: 8.8% Annual Growth 2016-2017: 12.1% % Change Total 6.2m 2016-2017 6,000 Total 5.5m 203 71 Asia-Pacific 15.0% 4,500 122 (excl. Japan) 3,000 123 181 66 116700 124 Other Markets 12.4% 142 110 Total 4.7m 148 108 243 208 Malaysia 6.1% 219 54 263 Total 4.3m 160 67 255 278 Singapore 11.5% 107 156 66 125 91 1,129 Thailand 13.6% 105 138 47 Total 3.4m 189 112124 80 198 1,256 Total 3.3m 55 176 40 226 Indonesia N.A.* HNWI Population 116 50 118 91 156 890 Taiwan 12.3% 65 219 99 111405631 193 58 144 32 758 Hong Kong 15.0% 30 126 180 89 South Korea 17.3% 534 94 562 84 India 20.4% 1,500 2,891 3,162 Australia 9.2% 1,739 2,327 2,452 China 11.2% 1,822 Japan 9.4% 0 2011 2013 2014 2016 2017 2010 Source - Capgemini Financial Services Analysis, 2018. Chart heading (US$ Billions) CAGR 2010-2016: 9.7% Annual Growth 2016-2017: 14.8% 25,000 % Change Total 2016-2017 US$ 21.6T Asia-Pacific 17.4% (excl. Japan) 924 20,000 Total 469 526 Other Markets 13.9% 15,000 US$ 18.8T 630 10,000 633 811 661 Malaysia 7.2% 438 677 Total 548 464 884 Taiwan 13.3% 562 184 895 Thailand 14.9% Total US$ 15.8T 573 1,067 802 HNWI Financial Wealth US$ 14.2T 473125 404 769 6,495 877 642803 356 456 157 Singapore 12.8% 543 5,774 Total 516 Total US$ 10.7T 523 396 707 Indonesia N.A.* US$ 10.8T 477 134 709 510 310 504 279 674 785 South Korea 18.3% 340532 272 335 627 Australia 10.2% 298 .439 612 Hong Kong 16.3% India 21.6% 339862 100 381 106 4,502 511 542 582 477 408 3,769 5,000 2,657 2,706 4,231 China 12.5% 7,012 7,731 5,533 5,899 Japan 10.3% 4,135 0 2011 2013 2014 2016 2017 2010 Source - Capgemini Financial Services Analysis, 2018. The wealth owned by the 263k HNWI in India added up to USD 1.07 trillion in 2019 and has grown at the highest rates in the region.

the private wealth issue Kotak's Top of the Pyramid Report estimated the wealth of the 160,600-odd HNWI to be closer to USD 2 trillion in 2017 (~ INR 153 trillion using conversion rate of INR 73 per USD). Global of ultra HNIS in india Their number was up by 10% in Fy17 and their wealth grew by 13% `86 `128 `153 trillion trillion trillion `104 `135 trillion trillion 2012-13 2013-14 2014-15 2015-16 2016-17 100,900 117,000 137,100 146,600 160,600 Number of ultra HNIs Combined networth Source - Top of the Pyramid 2017, Kotak Wealth Management Let's now take a closer look at the UHNW population. SEGMENTING HNWS - ULTRA HIGH NETWORTH (UHNW) Using the definition of Ultra high net worth (UHNW) being worth $50m, CS estimates India has 4,320 UHNW individuals. Ultra high net worth individuals in 2020, top 20 countries 0 20,000 40,000 60,000 80,000 100,000 120,000 USD 100-500m United States >USD 500m China Germany United Kingdom Japan India France Canada Italy Switzerland Australia Korea Russia Hong Kong SAR Taiwan (Chinese Taipei) Spain Sweden Brazil Singapore Netherlands USD 50-100m Source - James Davies, Rodrigo Lluberas and Anthony Sharrocks, Credit Suisse Global Wealth Databook 2021

the private wealth issue Boston Consulting Group (BCG) puts a higher bar for the 'Ultras bracket - individuals whose total financial wealth exceeds USD100 million. It estimates India appears at number 6 with 8,000 people worth about USD 1.1 trillion, out of the global total of about 60,000 people with a combined wealth of USD 22 trillion. Top 12 UHNWI markets Financial investable wealth 2019 vs 2020 Number of ultras UHNW investable wealth ($trillions) change (%) UHNWIs in 2020 2020 to 2025 2019 to 2020 change (%) (thousands) (thousands) 15.4 US 5.8 2.0 15.8 20.6 7.4 Mainland China 3.6 2.9 26.5 7.8 5.8 23.9 Germany 1.4 0.4 5.9 2.9 0.7 6.4 Hong Kong 1.0 0.4 10.4 1.9 0.7 8.7 France 0.7 0.1 2.1 2.5 0.5 4.1 India 0.6 0.5 16.9 0.8 0.6 14.4 UK 0.6 0.1 3.5 2.1 0.4 4.6 Italy 0.5 -0.1 0.4 1.8 0.2 0.2 Russia 0.5 0.2 14.8 0.5 0.2 12.4 Canada 0.5 0.2 10.0 1.9 0.6 8.7 Switzerland 0.4 -0.1 3.7 0.7 0.1 3.3 Taiwan 0.4 -0.2 2020 2020 to 2025 12.4 1.3 0.5 12.2 Source - BCG GlobalWealth 2021. Note - UHNWI - ultra high net worth individual, defined as an individual with total financial wealth of $100 million. All dollar amounts are expressed. SEGMENTING HNWS - BILLIONAIRES Taking the segmentation even finer, the term 'billionaire' is self-explanatory - people worth USD 1 billion. In this segment, the Forbes list is regarded as one of the most reliable. Forbes estimates there are 39 billionaires in India as at March 2020. This compares to 358 in the US and 142 in China. Wealth-X, a specialist information provider on the wealthy, published a similar list of countries but estimated the numbers of billionaires to be higher in all of them. It pegged Indian billionaires to around 87. Number of billionaires Wealth Rank Country 2019 Year-on-year 2019 Year-on-year population change (%) wealth ($bn) change (%) 1 United States 788 11.8 3,431 13.9 342 20.0 1,151 15.6 2 China 153 4.8 477 7.8 114 11.8 390 9.9 3 Germany 100 9.9 274 14.1 100 3.1 217 3.5 4 Russia 96 10.3 280 7.8 87 6.1 314 10.3 5 Switzerland 62 8.8 152 3.7 60 9.1 219 12.0 6 United Kingdom 53 12.8 157 11.1 50 2.0 162 5.0 7 Hong Kong* 47 -14.5 163 -1.5 46 2.2 10.2 8 India 45 15.4 96 4.0 87 9 Saudi Arabia 10 France 11 Italy 12 Brazil 13 United Arab Emirates 14 Canada 15 Singapore *Hong Kong is a semi-autonomous, special administrative region of China. Source - Wealth-X

the private wealth issue Indeed, Wealth-X estimates that there are 39 billionaires in Mumbai alone. City/rank Number of billionaires 2019 Change in population New York 1 (number of individuals) year on year Hong Kong* 2 96 113 +8 +9 San Francisco 3 77 +2 Moscow 4 73 +3 London 5 66 +1 Beijing 6 57 +2 Singapore 7 45 +6 Los Angeles 7 44 +5 Shenzhen 9 39 +2 Mumbai 9 38 - Dubai 11 35 -3 São Paulo 12 33 - Istanbul 13 32 - Hangzhou 14 32 +1 Tokyo 15 30 +1 *Hong Kong is a semi-autonomous, special administrative region of China. Source - Wealth-X CONCLUSION - THE MARKET IS BIG AND GROWING The main customer for a private wealth management firm is a high net worth individual or household. Based on various estimates, there are probably around 250,000 such potential customers in India. The growth in numbers and assets of such customers is bound to keep growing at a decent clip with the increasing share of financial services - firstly in terms of entrepreneurs 'unlocking' their businesses through sales or IPOs, and then, through investing sale proceeds through financial assets. While the number of HNW in India was growing at a scorching pace, part of the faster Asia pacific growth rate, the pandemic may have changed this trajectory. If we include a wider range of customers including the 'affluent' segment, the market is significantly bigger. In addition to a wider range of individuals, private wealth firms also advise institutional investors such as corporate treasuries, not-for-profit foundations, even exempt provident funds. In other markets, such institutions would be served by investment consulting firms.

the private wealth issue client segmentation and needs Having established that there is a reasonably large, and growing, number of potential clients with wealth, we need to ask what their needs are. What does 'managing wealth' actually mean?

the private wealth issue CLIENT SEGMENTATION - BEYOND SOURCE OFWEALTH We can safely assume that all potential clients - the high net worth individuals - are not the same, and hence, their needs might vary based on their differences. So we should segment the market by some attributes; these could be demographic, psychographic, behavioural or simply based on needs. • Demographics are quantifiable statistics such as age, gender, income, education level, marital status etc. • Psychographics classify people according to psychological variables such as attitudes, opinions, values and interests. These could be more useful than demographics for the wealth management industry. For example, some HNWIs believe in getting the highest possible returns while others might want to protect their wealth, or reflect their values on environmental or social issues. • Behavioural attributes describe whether someone takes a particular action and how frequently they do. Some HNWIs might like to trade often while others believe in a buy-and-hold strategy. • Needs-based segmentation divides potential customers based on distinct needs. Some HNWIs simply want consolidated reporting while others want their wealth to grow by a certain hurdle rate. The newly wealthy also take time to figure out their own investment philosophy and investing personality. These concepts are different from the risk profile or tolerance. An investment philosophy is a succinct statement of how the investor believes markets behave and what opportunities they have the capabilities to take advantage of. Even professional investors evolve their investment philosophy over time as they experience multiple business cycles and live through once-in-a-lifetime market events. Clients might take even longer to discover that their understanding of markets may be flawed or incomplete and of course, the unknown unknowns. Investor personalities are archetypes of their preferences for sophistication and control. Some investors like to delegate while others do not, irrespective of their knowledge levels and risk tolerance. Quadrants of sophistication and control High Level of Sophistication Low Need for High Need for Control Control Low Level of Sophistication Source - Charlotte B Beyer, CFA Research Foundation Relationship Alpha

the private wealth issue Charlotte Beyer, a veteran in advising and working ultra high net worth individuals, recommends both advisers and investors go on a journey of self-discovery. She encourages both to place themselves on this schematic, Quadrants of Sophistication and Control, originally presented in the early 90s. In an paper titled 'Relationship Alpha' for the CFA Research Foundation, she reminds advisers that such an evaluation process will save time and aggravation as advisers and investors can be matched appropriately. Michael Pompian, another veteran in advising UHNWIs has written multiple books on behavioural finance and how it helps to segment clients into four types based on behaviour. His books include questionnaires to help with the segmentation. Biases associated with each behavioral investor type General Type PASSIVE ACTIVE <=======================================================||======================================================> Risk Tolerance Bias Types Low Medium High IPT Primarily Emotional Primarily Cognitive Biases Passive Preserver Primarily Cognitive Primarily Cognitive Endowment Active Accumulator Low Aversion Friendly Follower Independent Individualist Overconfidence Status Quo Ambiguity Aversion Conservatism Self Control Anchoring Hindsight Availability Optimism Mental Accounting Framing Confirmation Illusion of Control Regret Cog. Dissonance Representativeness Recency Self Attribution Source - Michael Pompian, Behavioural Finance and Investor Types Pompian suggests such behavioural personality profiling is very useful in the relationship management as it guides whether firm should try to moderate the biases or adapt to them. Types of bias and level of wealth High Level of Wealth (ADAPT) Cognitive Biases Moderate and Adapt Emotional Biases (MODERATE) Adapt (ADAPT) Moderate and Moderate Adapt Low Level of Wealth (MODERATE) Source - Michael Pompian, CFA Research Foundation Risk Profiling Through a Behavioural Lens

the private wealth issue KEYATTRIBUTES OF ULTRA HNIs IN THE INDIAN CONTEXT We are not aware of any large scale surveys of investors on risk profiles, preferences or attitudes in India. The Kotak Top of the Pyramid report is the only survey that appears to have asked investors about their approach to investing. It highlighted the approaches being different depending on whether the investors were entrepreneurs, inheritors or professionals. We have retained the classifications and definitions of ultra HNIs as entrepreneur, inheritor, professional. ENTREPRENEUR INHERITOR PROFESSIONAL Success in primary Success in family Personal income business business Self-recognition Wealth preservation Self-actualisation and achievement and growth Wealth is for family, but Wealth is strictly for Wealth must remain they must strive to earn it the immediate family within the family Attaining value Attaining a Maintaining a for money luxurious lifestyle luxurious lifestyle Uplifting society Feel-good factor and Feel-good factor Opportunity-driven, uplifting society high-risk Opportunity-driven, Opportunity-driven informal Sources of wealth Attitude to perpetuation of wealth Motivation for charity Motives for wealth creation Drivers for spending Approach to investing Source - Top of the Pyramid 2017, Kotak Wealth Management None of the wealth managers interviewed mentioned anything about helping investors figure their investment philosophy or personality. CLIENT NEEDS - INCLUDING EXPRESSIVE AND EMOTIONAL Once a wealth firm has determined or at least has a working hypothesis about the potential clients, it must focus on understanding customer needs, especially underserved needs. Whether called needs, wants, desires or pain points, it's important for the industry to uncover and understand these needs. The technology industry uses the concept of 'user story' which follows the format 'as [a type of user], I want to [do something], so that I can [desired benefit]. It's important to ask customers 'why that is important to you' repeatedly until it doesn't lead to any new answers. This 'peeling the onion technique' helps elevate the discussion from more granular, detailed benefits to higher-level benefits, or root cause of a problem. Another way of prioritizing needs is using the Maslow's hierarchy of human needs, starting with physiological, safety, belonging, esteem and self-actualisation. The implication of the hierarchy is that a higher level need doesn't matter unless the more basic needs are met. In technology, the UX design doesn't matter if the site is not 'up', the page load times are too slow or there are too many bugs in the main functionality. Once the customer needs are listed, they need to be prioritised. While 'importance' is one dimension, it's also useful to look at the 'satisfaction' level for each need or benefit. Some needs are low in importance so the satisfaction levels may not matter. If plotted on a x-y axis, the highly important needs being met with good satisfaction levels is a competitive space. The real opportunity lies in an important need not being met well to customers' satisfaction levels.

the private wealth issue Wealth is an emotional topic. Wealth managers have to remember that investors may not just want utilitarian benefits i.e. the highest returns but also expressive and emotional benefits. In his book, Finance for Normal People, Meir Statman suggests most people want these three kinds of benefits - utilitarian, expressive, and emotional - from all products and services, including financial products and services. • Utilitarian benefits answer this question: What does something do for me and my pocketbook? • Expressive benefits answer this question: What does something say about me to others and to me? • Emotional benefits answer this question: How does something make me feel? He suggests that “investment wants include the utilitarian benefits of safety, as by an insured bank deposit; the expressive benefits of high social status, as by a hedge fund; and the emotional benefits of exhilaration, as by a successful initial public offering.” Explaining why the wealthy may seek exotic investments such as hedge funds or venture capital, he writes “the utilitarian benefits of hedge funds are no higher than those of index funds. Indeed, the utilitarian benefits of hedge funds are likely lower because their returns to investors are lower and their fees higher. But hedge funds offer investors the expressive and emotional benefits of high social status because they are available only to the wealthy, whereas index funds are available to almost all. Similarly, the utilitarian benefits of shares sold at initial public offerings are no greater than those of shares of established companies. Indeed, the utilitarian benefits of IPO shares are likely lower because their returns are likely lower. But shares sold at initial public offerings offer emotional benefits of hope and exhilaration that established companies' shares cannot match.” SO WHAT DO THE WEALTHYWANT FROM WEALTH MANAGERS? Whether earned over a number of generations or suddenly coming into wealth, if there is such a thing, most wealthy have probably thought about what they would like to do with their wealth. Wealth is the means to other ends, such as the feeling of security, freedom or power. Some like the idea of leaving a legacy, whether for their own family or a particular cause. Perhaps they have yet to figure all this out. Of these four, which two best describe howyou see the purpose ofyourwealth? Security Freedom Legacy Power Knowing you have Enjoying what you Something you leave The ability to do enough and feeling what you wish when secure you will not money can buy, behind that might run out of money whether it's time, make a difference for you wish, stuff or the career without financial an individual, of your choice an organisation constrants or a course you believe in Source - Charlotte B Beyer, Wealth Management Unwrapped Most wealthy investors are clear that the wealth industry can't hope to match the returns that created the wealth to start with. So they are savvy enough to know the returns will need to be somewhere between those available from fixed deposits (for which they don't need a wealth manager) and those from a single business. They spend some time figuring out the returns that a diversified portfolio can generate with what level of volatility and downside risk.

the private wealth issue When asked, investors may list some of the following - • Consistent returns above inflation • Peace of mind that wealth is protected from downside risk • Consolidated reporting • Insights into global economics and markets • Tax planning • Protection strategies and vehicles • Business succession • Family governance • Help with children's education (such as admission to Ivy League colleges) While managing investments may appear to be the top priority need, HNWIs do have additional challenges that are different from those that an institutional investor or a retail investor might face. These challenges include taxes, family dynamics and investor personality & values. Beyer likens this to playing multi-level chess games - a move on one chess board impacts the other three. When you are playing chess on one board, you cannot ignore what happens to the other three. Keeping that complexity in mind protects you against a big stumble further down the path. Risk & Return Trade-Offs Investor Personality & Values Family Dynamics Impact of Taxes Source - Charlotte B Beyer, Wealth Management Unwrapped Most experienced wealth managers no doubt understand and appreciate the complexities that come with different client segments and needs. However,

the private wealth issue value proposition While the number of high net worth individuals and the size of their wealth give an indication of the 'potential market size' (or total addressable market) for the overall savings or money management industry, we now look at how the wealth industry chooses to respond to client needs. In other words, we explore the 'value proposition' of the wealth management industry. An article by Harvard Business School explains the value proposition concept in the following way.

the private wealth issue A value proposition defines the kind of value a company will create for its customers. Finding a unique value proposition usually involves a new way of segmenting the market. While the value chain focuses internally on operations, the value proposition is the element of strategy that looks outward at customers, at the demand side of the business. Strategy is fundamentally integrative, bringing the demand and supply sides together. WHAT CUSTOMERS? WHICH NEEDS? What end users? Which products? What channels? Which features? Which services? WHAT RELATIVE PRICE? Premium? Parity? Discount? Finding a unique value proposition usually involves a new way of segmenting the market A novel value proposition often expands the market Source - Harvard Business School https://www.isc.hbs.edu/strategy/creating-a-successful-strategy/Pages/unique-value-proposition.aspx 1. Which customers are you going to serve? Within an industry, there are usually distinct groups of customers, or customer segments. A value proposition can be aimed specifically at serving one or more of these segments. For some value propositions, choosing the customer comes first. That choice then leads directly to the other two legs of the triangle: needs and relative price. 2. Which needs are you going to meet? In many cases, choosing the need the company will serve is the primary decision that leads to the other two legs of the triangle. Here, strategy is built on a unique ability to meet a particular need or a subset of needs. Often that ability arises from the specific features of a product or service. Customers might be defined by the common need or set of needs they share at a given time instead of demographics. 3. What relative price will provide acceptable value for customers and acceptable profitability for the company? For some value propositions, relative price is a primary leg of the triangle. Some value propositions target customers who are overserved (and hence overpriced) by other offerings in the industry. A company can win these customers by eliminating unnecessary costs and meeting “just enough” of their needs. Where customers are overserved, the lower relative price is often the dominant leg of the triangle. Conversely, some value propositions target customers who are underserved (and hence underpriced) by other offerings in the industry. These customers want an enhanced product or service and are willing to pay a premium for it. The unmet need is typically the dominant leg of the triangle, while the higher relative price supports the extra costs the company has to incur to meet it.

the private wealth issue THE WEALTH INDUSTRY'S VALUE PROPOSITION What customers? Line between high net worth and affluent are blurred As outlined earlier, the wealth management industry usually segments its customers into three broad globally accepted categories - retail, affluent, and high net worth - based on their net financial worth (net worth not counting principal residence). However, given the difficulty of confirming the net worth of the customers at account opening, when there is low trust, most banks resort to setting the threshold for the amount entrusted to them rather than net worth. For example, some firms define their 'private wealth' offer with INR 1 crore (~ 125k) invested with them, while others ask for INR 5-7 crores (~ USD 1 million). This practice makes it hard to split the revenue and profit pools between the affluent and high net worth segments. Indeed, some banks open their affluent accounts with INR 30 lakhs, which is closer to USD 40k, while others with INR 10 lakhs, blurring the line between affluent and retail segments. Which needs? Sorting needs Let's start with a list of perceived needs that most private wealth managers say their clients ask for - • Investment returns – competitive in line with risk profile • Execution of investment decisions • Custody of investments • Consolidated reporting • Benchmarking of investment returns to market and industry peers • Financial/goal planning • Understanding of global geo-political economy and markets • Access to interesting/high return opportunities • Network for strategic business opportunities • Investment banking services • Tax advice • Wealth planning services such as estate planning and succession planning • Strategies for intergenerational transfer, protection from family disputes etc using trust structures • Insurance - global, tax efficient, keyman, general insurance for assets • Credit - loan against securities, loan against property, unsecured loans • Foreign exchange and cross-border transactions • Concierge services • Philanthropy advice and execution • Finance education – for self and/or family members • Access to Ivy League and other high profile educational institutions • Other ………… Awealth firm needs to balance the expressed needs against the expertise and cost of providing the service. Firm wouldn't waste resources on services that the client might not appreciate and pay for. Let's now look at some ways a wealth firm may look at deciding which of these needs the firm may want to address. Ranking based on tangible and intangible benefits • Utilitarian benefits - of maximum returns per unit of risk, or execution and custody • Expressive benefits - of access to hard-to-access private investments, for example, that might confer bragging rights • Emotional benefits - of behavioural coaching

the private wealth issue Ranking based on importance • Hygiene or must-haves - investment execution and custody • Performance benefits - higher returns, quicker and easier-to-understand reporting • Delighters - unexpected service or UI/UX design Segmenting based on regulatory constraints • Investment distribution - including research, execution, reporting • Investment advice - separated out because of regulation • Broking - of investments and insurance products • Credit - separated out because of regulation • Wealth planning services - seen as 'ancillary' or 'complementary' services, offered in-house or through partnerships What relative price will provide acceptable value for customers and acceptable profitability for the company? Splitting the value chain between wealth management or asset management By definition, the main service provided by the wealth management industry is 'managing wealth.' However, this encompasses both the investment management through funds offered by asset management companies (AMCs) and as well as advisory services by wealth management companies (WMCs). Manufacturing and distribution is part of the same value chain of providing returns on capital. The close, and somewhat blurred, relationship between asset and wealth management is perhaps why these are often grouped together in diversified financial services groups. In theory, the wealth manager advises on asset allocation and the asset managers do the stock- picking, clearly demarcating the sources of value-add. In practice, the wealth manager provides stock-picking services and the asset manager implements asset allocation through diversified funds. So the two industries are part of the same continuum of value-add. This has implications for measuring the size of the industry, both in terms of assets as well as revenue and profit pools. An investor can choose to invest through a fund on the advice of a wealth manager, in which case the invested amount is included in the 'assets under management' (AUM) figures of the asset management industry, as well as 'assets under advice' (AUA) figures of the wealth management industry. If the investor chooses to invest in direct stocks, again on the advice of a wealth manager, it is counted only as AUA of the wealth segment (though they may pay brokerage commissions on the transaction values rather than an ad valorem fee based on the AUA). Then there's the managed account (called portfolio management services or PMS in India) industry, which is a hybrid of asset and wealth management, in that providers offer a service that acts like a product. Wealth firms seem to view their own PMS as a service but evaluate those offered by AMCs as a product. Fintech makes it even harder to demarcate by offering technology solutions that implement advice on scale, disintermediating the need for fund structures. HOWTO PRICE SERVICES Wealth management firms charge for their services using a combination of formulae, including - • Asset-based commissions (paid by asset management firms) • Transaction-based brokerage on placement and/or trading of direct securities and funds • Interest rate spreads on lending • Embedded margins in structured products • Asset-based fees (charged to clients)

the private wealth issue In some markets, clients are also demanding fixed fees or hourly rates though we didn't see much evidence of this in India, except in the case of family office services. The wealth management industry has been a 'distribution' industry for the asset management industry for a long time. Hence, it used to get paid on upfront and ongoing commissions, also called retrocessions in some markets, for placing client assets into funds or pooled products. While the upfront commissions are getting harder to generate, the industry still relies on ongoing commissions from the asset management firms, or administration platforms in some markets. Firms that have evolved from securities firms also rely on brokerage on trading of securities, especially equities and derivatives. On the other hand, banks are used to making interest rate spreads on lending. Private banks lend against securities (called Lombard lending), whether widely traded or the client ESOPs, real estate and business assets. Wealth firms that are not affiliated with banks set up non-banking financial companies (NBFCs) to offer lending services. Lastly, wealth firms can also generate significant revenue through margins embedded in pricing of structured products. Hence, depending on the origin of the firm, the revenues will be a combination of revenue streams. Going forward, the revenue model for most firms in the wealth management industry the world over is moving towards asset-based fees - replacing asset-based commissions. This transition is challenging as it's usually accompanied by fiduciary responsibilities. HAS THE WEALTH INDUSTRYACHIEVED GOOD PRODUCT-MARKET FIT? As outlined in the article titled 'the market size (link)', and confirmed by everyone interviewed for this report, private wealth management appears to be a good market opportunity, as defined by size and growth prospects. However, as we will see in the article (link) titled 'the industry size (link)', it appears the current market size is still relatively small. This could be a calculation issue. Or a gap in the product-market fit. For example, is it possible that the industry is not providing the right mix of products and services? Or that the benefits haven't been communicated correctly? Or that they are not being priced appropriately to allow for a decent margin? Or that the industry is only just achieving scale so the industry is just about to see improved economics? Refer to the industry interviews for different views on these questions. }} Solution Space Product: UX Feature Set Value Proposition Product-Market Fit Problem Underserved Needs Space Market: Target Customer Source -

the private wealth issue products platform Having decided on the value proposition, let's look at the specific products & services (features in a tech context) that the Indian wealth management industry has decided to offer. Firms were very clear that they can help 'manage and grow' wealth, not 'create' wealth. Their clients, whether entrepreneurs, inheritors or professionals, were better able to create exponential wealth. As wealth managers, their job was to manage their clients' wealth and affairs such that the wealth was protected from inflation and grew at a competitive rate given their stated risk profile. They do so by attempting to add value mostly through investment management. The management part includes reporting, custody etc.

the private wealth issue

the private wealth issue Some firms provided a longer list, but most grouped their services into three broad categories - • Investments - to growwealth (to match inflation at least, and higher depending on risk profile) • Lending - to leverage growth • Wealth planning - to protect wealth (from tax, creditors and mis-spending) Investment services range from advice to execution to monitoring. So investment advice and management is really the bread and butter of wealth management. Ideally, wealth managers should be able to advise and manage the full range of investment opportunities available to their clients globally. In reality, there are regulatory and logistical restrictions on the range of investments wealth managers can offer. Beyond investments, most private wealth management firms do offer a wider range of services, primarily lending and wealth planning services. While Indian firms have started offering these, most do so through partnerships and referrals. Investment banking is another area that many offer while concierge services are still missing. HOW DO WEALTH FIRMS ADD VALUE IN INVESTMENT MANAGEMENT Check any wealth management firm's website or pitch deck and one would find a laundry list of services they offer - stocks, debt, mutual funds, alternative investments, structured products, internal/third-party PMS etc. They seem to list the coverage rather than the actual service. Interestingly, 'investment advice' is the one that would be hard to find. This is partly due to regulations that mean that advice is offered under a separate Registered Investment Adviser (RIA) license rather than the Mutual Fund Distributor (MFD) license that most wealth firms hold. While most wealth firms also obtained the RIA license, recent amendments to the RIA regulations mean that they are not too keen on using it - they would need to separate their client base into those who wish to receive services (and indirectly pay through MF commissions) under the MFD license and those who wish to pay a fee to the wealth manager directly. Investment services are broadly categorized as - • Trading/execution of securities (stocks, bonds, derivatives) and distribution of funds - under stockbroking and MFD licenses • Advisory - under a RIA license • Portfolio management - non-discretionary and increasingly, discretionary - under a PMS license While most private wealth firms offer these three investment services, the split of revenue and profits from each varies from firm to firm. The process to come up with these services can be broken into the following steps - • Asset allocation • Strategic asset allocation - the long-term 'neutral' or 'default' allocation to growth versus defensive asset classes which determines the broad level of returns. • Short or medium term asset allocation - recommendations for tilts against the long-term asset allocation based on views on short or medium term market volatility; short term is defined as daily or weekly basis, while medium term can vary from 3 months to 3 years. • Portfolio construction - design within asset class or split between sub-components within an asset class; for example, active/passive, split between large/cap, domestic/international, style etc. • Fund/stock selection - selection of funds and/or stocks & bonds which are likely to add value over market index and peers • Model portfolios - combination of securities or mutual funds

the private wealth issue The following graphic shows the typical steps in the provision of investment services. The products team focuses on the selection & due diligence aspect of various types of products. The investment advisory team monitors the economic and market conditions, or adapts external views, to come up with model portfolios of stocks and/or funds. Interestingly, the investment process and team is called 'products & services' and reports to either a chief investment officer (CIO) or more often, head of products & services. Long-term Strategic asset Discretionary Know your client- capital market allocation (PMS) facts and risk assumptions (SAA) profile (personality) Economic Dynamic / Active/passive, Non- Financial views & market tactical tilts liquid/private Discretionary proposal/plan valuations etc (PMS) Execution Investment Passive / Portfolio Re-balancing/ Investor philosophy ETFs construction tilts goals and constraints Active funds / views managed accounts Advisory Implementation routes Selection & Private assets due diligence Structured Execution Monitoring products only and review Direct securities Investment advisory process Relationship management (stocks, bonds F&O, FX) Investment process Copyright © Hansi Mehrotra, Money Management India As an aside, some global investors attribute investment value to three sources - better information, better analysis and better behaviour. Applying this framework, it appears the wealth industry mostly focuses on the first two i.e. better information and analysis although there is some talk about coaching the client about better behaviours. In some firms, this team also gets involved in 'manufacturing' products i.e. working with external parties such as investment banks to package a structured product. Or the team may work with colleagues in a subsidiary or sister company that is in the asset management or portfolio management business. Since investment value-add is the main service that a private wealth firm offers, it's one of the main factors that clients would select a firm for. With that in mind, we asked the firms to articulate their 'investment philosophy.' We wanted to get to a succinct statement about their investment beliefs and where/how they could add value. For example, for something that appears as simple as selection of mutual funds, the provider would need a 'philosophical view' on what factors to assess for the asset management company managing the fund, and what weight to apply to each factor before deciding to start researching funds in-house or getting inputs from external providers. When asked, the CIO or head of products says they apply the 'usual filters' such as size, track record etc. But as the following table shows, there are many subjective views embedded in their selection of filters. The table separates out the various views embedded into each stage into methodology and data inputs -

the private wealth issue Views on the methodology View on the inputs Strategic asset How to forecast capital market What asset classes to include? allocation assumptions? Capital market assumptions Modeling approach - mean (usually forecasts over 1-2 variance, stochastic etc business cycles) Qualitative overlay - factor Asset class limits (eg max 20% in analysis alternatives) How to tackle fat tails? Rebalancing strategy - period or deviation trigger Medium/short What basis to use for term asset short/medium term tilts - Regular outputs for valuation, allocation valuation, momentum, outlook momentum, outlook etc resulting etc in a signal of Ranges around 'neutral' for tilts 'overvalued'/'undervalued' Calibration of signal strength to size Securities What factors are important when of tilt recommendations assessing fundamentals? (value Implementation - instant vis-à-vis and growth investors tend to staggered apply different weights to similar factors; in the case of bonds, Analysis of fundamentals reliance on credit ratings?) Analysis of valuations, momentum How to do valuation? (again value etc for price and growth investors tend to Internal or external research or value differently; for bonds, how combination to do valuation?) Data/factual information Funds Is the selection to get market Internal or external research or recommendations (beta) exposure or combination outperformance (alpha)? How to filter the universe? How to assess alpha potential i.e. which qualitative and quantitative factors to use and what weights to apply? How to assess business/ operational risks i.e. a due diligence questionnaire or expert review? How to assess alternatives? Decision to do in-house v get external inputs depends on alignment of views on methodology, competitive advantages vis-à-vis costs, conflicts of interest etc How often to review mutual fund selection? When to replace mutual funds? What is the appropriate fee level for each asset class? Model portfolios How to put a combination of Active/passive depending on securities or mutual funds view on efficiency of markets and together? Core/satellite or any ability of investors to exploit other such framework? inefficiency Allocations to sub-segments within asset class depending on structural or valuation views No. of securities/managers depending on view on consistency, business risks etc Copyright © Hansi Mehrotra, Money Management India

the private wealth issue

the private wealth issue The next question is - even within the wealth firm, whose views these are. In a small firm, these may reflect the personal views of the senior most investment professional. In a large bank or wealth management firm, these views are likely to have been built up over time so they become 'house views'. Either way, the investment views need to be documented. None of the wealth firms we interviewed referred to such a documented articulation of their investment philosophy. Private wealth firms undoubtedly have expertise at various stages of the investment process. The lack of a clearly articulated investment philosophy is possibly a communication issue rather than an investment expertise one. However, this may well be affecting the transmission of this expertise in the way relationship managers advise and communicate with their clients. These issues will become more relevant in the near future as we enter an environment in which manager alpha in mutual funds is getting eroded and investors are likely to pursue a barbell strategy of dividing assets into cheaper passive funds and more expensive private assets. PORTFOLIO MANAGEMENT SERVICES OFFERING DISCRETIONARY OPTIONS The investment advisory process is one of portfolio construction and management. The investment adviser understands the client situation, including risk profile, time horizon, goals, constraints etc and suggests a portfolio strategy using the firm's investment research. The clients may sign-off each transaction individually (in the execution service) or as a portfolio (in the non- discretionary service). Once the clients have trust in the wealth firm's expertise, they may choose to delegate the decision-making process completely by giving a power of attorney to allow the portfolio manager to make changes to the portfolio. The wealth firms see the move to discretionary portfolios as a sign of progress in the Indian market. But it also blurs the line between wealth and asset management. Clients have to monitor the performance of discretionary portfolios closely to ensure that they are getting a reasonable alpha for the higher fees paid. They also have to trust the wealth firm to suggest external PMS providers if they are not able to generate reasonable alpha. RELATIONSHIPADVISORY MODELS AND PROCESSES FLUID The relationship process is basically the financial planning process - understand the investor and the issues, propose a plan, execute the plan and monitor both the investor and the investment environment. However, the mutual fund distributor (MFD) license doesn't permit financial planning other than as incidental advice. The clients are also not interested in sharing their personal information in the first meeting. So, in reality, the first meeting is a 'pitch meeting' in which the wealth manager is selling their firm's and their own value proposition. If it goes well, the second meeting is the relationship manager may bring an investment adviser to pitch a solution to what they believe the investor's issues are. Once the investor agrees to the solutions, they are 'signed up' by fulfilling the KYC requirements. The risk profiling questionnaire is filled in at this stage, presumably leading to some adjustments in the offered investment solutions. MISSING OUT ON INSURANCE When listing their products and services, most of the Indian private wealth firms did not mention insurance, either as stand-alone or as part of their wealth planning services. It's not clear whether it was understood that it's included, or whether the clients didn't appreciate the importance of insurance in their protection plan. In some other jurisdictions, private wealth firms do include insurance in their offering, sometimes partnering with insurance brokerage firms to ensure they get access to the best products at all times. Marsh and Mercer - part of Marsh & McLellan group - offer insurance brokerage and advice services. Mercer's Private Client Services provides risk management propositions, with a focus on integrated life insurance solutions for HNW clients with their wealth planning needs in mind.

the private wealth issue According to their website, the firm works in close partnership with major private banks and trustees globally to serve HNW clients in over 50 markets, with offices across Singapore, Hong Kong SAR, China Mainland, Geneva and Zurich. Mercer's website showed an example of a savings plan in an insurance wrapper that allows the client to transfer policy ownership a number of times over a number of generations. Therefore, they have the ability to plan broadly and on a much more significant time scale. The generational timeline is crucialwhen they are creating a lasting tradition of success. Single pay premium: USD 1,000,000 Father at age 40 Son at age 30* Granddaughter at age 40^ Year Year Year Year Year Year Year 0 20 40 60 80 100 120 Policy USD 2.3 M USD 6.4 M USD 20.5 M USD 67.4 M USD 225.4 M inception date Client passes policy Son passes policy to Projected account value to his son his daughter (client’s of granddaughter at age granddaughter) 80: USD 757 M *Assuming that the client’s son was born in Year 10 from the policy inception date ^Assuming that the client’s granddaughter was born in Year 40 from the policy inception date This illustration is only applicable for savings plan with “change of insured” option. Source - mercer.com/pcs Such savings plan structures allow flexibility in that clients can choose to assign beneficiaries and distribute policy payment according to policy owner's wishes. This can be done in lump sums or over a prescribed period. A savings plan can be customized to have an inbuilt breakeven point and the flexibility of surrendering the policy at any time. The annual growth of a savings plan's cash value is not treated as income and therefore subject not to tax. Moreover, the proceeds of a savings plan death benefit are not subject to income tax in most jurisdictions. Proceeds of cash value withdrawalwill result in the resultant gain to be treated as income and subject to tax. RECOMMENDING AND MANUFACTURING ALTERNATIVES PRODUCTS In line with the move to internal and external PMS providers, wealth management firms are increasingly recommending their clients invest in alternative asset classes such as commercial real estate, venture capital/private equity, infrastructure etc through alternative investment funds (AIFs). The AIF license regime came into effect in 2012. After a slow start, the flows into AIFs seem to have increased dramatically. Data from SEBI's website shows there are now more than 715 funds with the commitments amounts exceeding $25bn (10?). Cumulative investment in AIFS ($m) 80,000 60,000 40,000 20,000 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Commitments raised Year Investments made Funds raised The move to private assets is in line with the worldwide trend of asset flows following a bar-bell shape - increased allocations to low cost passive and high cost alternatives/private assets. Indian wealth firms' bid to bring their wealth and asset management capabilities closer together is in line with global trends.

the private wealth issue marketing luxury advice Private wealth caters to high net worth individuals, who are also consumers of luxury goods and services. So is private wealth/banking a luxury service? Does the private wealth industry use luxury marketing techniques and do theywork? We explore.

the private wealth issue DEFINING LUXURY SERVICES Defining luxury services should be easy - 'turns out it's not. Apparently, the academic literature on luxury focuses on luxury goods rather than on services. And the literature on services leaves out the luxury segment. So 'luxury services' are an emerging area of research. Defining luxury itself is hard. The history of luxury has evolved along two main approaches - the French approach based on 'distinctive' and the American approach based on 'conspicuous' according to a recent book by marketing professor Dr Wided Batat. These two approaches explain the motivations that drive individuals to purchase and consume luxury. Most of the academic literature focuses on a relatively narrow set of dimensions including high product quality, a high price, exclusivity and positive customer emotions. Applying these definitions and mostly hospitality services examples to the broader luxury services is hard though. For example, people may signal their conspicuous consumption by turning up in the latest model of BMW, but signaling a luxury holiday in Bali may involve not just walking around in a conspicuously bronzed skin but actually posting pictures on social media. Services require proactive communications and storytelling i.e. bragging whereas goods can simply be used such that others can see them. This means that conspicuous consumption may be of lower relevance. A recent paper by Wirtz, Holmavist and Fritze defined 'luxury services' as extraordinary, hedonic experiences that are exclusive. Exclusivity can be monetary, social and hedonic in nature. Luxuriousness is jointly determined by objective service features and subjective customer perceptions. Together, these characteristics place a service on a continuum, ranging from everyday luxury to elite luxury.' The authors explained that services can create exclusivity through – • Monetary exclusivity – difficult to afford • Social exclusivity – difficult to gain access to through high levels of access control • Hedonic exclusivity – difficult to enjoy as a certain level of customer knowledge, sophistication and skills may be required to fully appreciate and enjoy the finer details and intricacies of the multi-faceted dimensions of a luxury service experience The paper further explains that services can be exclusive on an objective basis i.e. being truly rare, or subjective for an individual. What is luxury to one person may not be to another. The 'extraordinary hedonistic consumptions experiences' can be – • People processing – spa or hair styling • Mental stimulus processing – entertainment • Possession processing – pet grooming • Information processing – private banking The authors placed private banking as an 'information processing' service' that also involved 'supplementary services' that provided a luxury experience that had to 'ooze luxury' when providing the information or taking orders. For example, providing high net worth financial services may involve the gamut from dining and wining, exclusive talks, gifts and luxury meeting rooms.

the private wealth issue The continuum is on both the service characteristics and the consumer behaviour and perception – Elite luxury Standard luxury Everyday luxury Elite High frequency Can be part of habitual Can be part of habitual Consume for intrinsic consumption consumption, unlikely to quality be considered luxury Not interested in conspicuous consumption, more discreet and tasteful Socialising only with same socio-economic group Privacy and discretion important Snobs Low frequency Conspicuous offering Often part of habitual Conspicuous opportunity to be seen consumption Would socialize with engaging in luxury elite Middle class Rare frequency Occasional frequency, I want the best attitude aspiring status in everyday Lower class Once in a lifetime, if Constituting self- consumption ever perception through occasional luxury Potentially occasional services consumption as personal rewards Lurkers and admirers, may aspire but generally can't afford Examples F&B 3-star Michelin Casual fine dining Starbucks Car Chauffeur-driven Rolls Chauffeur-driven Uber Black or Mercedes Royce limousine taxi Hotels Raffles Four Seasons Hilton Air travel VVIP private jet or Singapore Airlines Singapore Airlines Singapore Airlines Suite Business Class Premium Economy Source - Wirtz, Holmavist and Fritze We couldn't find a study of the Indian luxury services sector. Speaking about the attitudes of the Indian wealthy, Priya Roopani, a luxury marketing consultant, says that Indian consumers prefer to buy luxury goods such as watches, jewelry, fashion/accessories abroad because the after-sales service is a 'nuisance or a headache here, while overseas the salesperson is constantly in touch'. She cited car services as another example, saying in India the customers have to call the car company while overseas the company calls the customers. On the other hand, 'in hospitality, they are all over you. Here it is an invasion of privacy. They don't knowwhere to draw the line. At times, in luxury real estate.’ HOW INDIAN PRIVATE WEALTH FIRMS MARKETAND SERVE Private wealth firms are not visible in the public domain so it's hard to gauge their marketing and client service activities. While the generally accepted definition of HNW is net worth of USD 1 million, private wealth firms adopt their own criteria for accepting customers. Some firms position themselves at the higher end by targeting higher AUM per client while others aim at the more affluent end of the market. However, all of this positioning is done through action - none of the websites explicitly state their ideal customer profile.

the private wealth issue Consulting firms like Oliver Wyman have been encouraging the wealth management industry to 'target the white space' of affluent investors rather than cater to the competitive HNW segment. In its latest report, BCG also encourages the industry to cater to what it calls the 'simple-needs segment' - investors with personal wealth of between $100,000 and $3 million and whose wealth management needs are not complex. Whether as a result of not being able to attract the right HNW segment, or chasing higher margins as suggested by consulting firms, it appears that Indian private wealth firms have been casting their net quite wide. In many interviews, firms have admitted that they will happily onboard clients with much lower commitments than their stated threshold. This approach of everyone catering to all has meant that there is no clear positioning amongst the firms. Most firms interviewed also mentioned they segmented their clients by source of wealth rather than other possible ways such as needs for services, attitudes or investor behaviour/personality types. The segmentation mentioned in the Kotak Top of the Pyramid report is typical - • Entrepreneurs - first generation wealth creators, mostly still running the family business • Inheritors - second generation business families that have inherited the business and other wealth • Professional - CXO, professionals (doctors, lawyers etc) and creatives/celebrities There is some effort to capture differences in attitude. For example, the Kotak survey shows the differences amongst the three segments in the way they describe the beneficiaries of their wealth. However, it's not clear from the interviews whether clients in each segment actually behave differently or demand differentiated services. Indeed, none of the interviewees highlighted any differences in services. Wealth sources of ultra HNIs across categories Primary business remained the main source, 14% 11% 59% 21% Entrepreneur 7% 11% 9% 50% Overall 12% 6% 37% 11% 45% Equity Inheritor 5% Sale of primary business 2% Real estate 14% 6% 24% Success in business 43% Professional Personal income 13% Source - Top of the Pyramid 2017, Kotak Wealth Management

the private wealth issue Key attributes of ultra HNIs in the indian context We have retained the classifications and definitions of ultra HNIs as entrepreneur, inheritor, professional. ENTREPRENEUR INHERITOR PROFESSIONAL Success in primary Success in family Personal income business business Self-recognition Wealth preservation Self-actualisation and achievement and growth Wealth is for family, but Wealth is strictly for Wealth must remain they must strive to earn it the immediate family within the family Attaining value Attaining a Maintaining a for money luxurious lifestyle luxurious lifestyle Uplifting society Feel-good factor and Feel-good factor Opportunity-driven, uplifting society high-risk Opportunity-driven, Opportunity-driven informal Sources of wealth Attitude to perpetuation of wealth Motivation for charity Motives for wealth creation Drivers for spending Approach to investing Source - Top of the Pyramid 2017, Kotak Wealth Management MARKETING ACTIVITIES Anecdotally, they sponsor private events encouraging clients to refer friends, in line with the belief that the best way to connect with the HNW is through referrals and perhaps, passions such as art, music, philanthropy etc. The private wealth industry is fairly active in the sponsorship of cultural events such as art and music. Another area that generates a lot of interest is politics, presumably because of its direct impact on economic policy. The top private banks and firms are visible in their hosting and sponsorship of high profile speakers on political and economic issues. For example, Kotak Wealth invites its HNW clients to events addressed by former US presidents. IIFL Wealth has sponsored the 'Indian Express Adda' as well as 'The Print's Off the Cuff' series in which a high profile host chats informallywith high profile guests, leaving a lot of time for audience interaction. A more recent area that private wealth firms have become somewhat active in is the start-up scene. Presumably, private wealth firms want to be visible to founders (and their angel and venture capital investors) from the beginning. Some firms get active in matching founders with investors from within their client network - a service that is well appreciated by the HNW segment. NEED FOR DIGITAL While referrals may introduce the firms' names to prospective clients, it's their brand awareness and digital footprint that will determine whether the prospect takes the next step, according to April Rudin, a global marketing consultant specializing in wealth management. 'People vet before they've met,' she quips. Rudin believes it's important for wealth firms to have a well designed website, coherent with their overall brand image and messaging. The website has an 'atmospheric look and feel...It's like walking into a home. It could be modern or traditional, colourful or neutral etc. Above-the-fold is the most important real estate so it's important that the firm has articulated something differentiated here, that's not a cliche.' Underlining the importance of widening the brand appeal, Rudin reminds the industry that the next generation is likely to rely on recommendations from their peers rather than from their parents. So firms may want to start partnering with younger brands like sneakers for example. Other appealing areas are health, collectibles and philanthropy.

the private wealth issue The Rudin group works with wealth management firms on their marketing and communication strategy. Their process starts with a thorough discovery stage of talking to stakeholders. 'Principals of firms are shocked to hear that clients say they don't care about performance or 200-year heritage. They assume a lot of things…so they need to hear clients verbatim'. In the second stage, Rudin works with the firm on messaging and content creation. She employs digital tools like social listening tools and A/B testing to ensure the marketing spend actually works. For example, wealth firms tend to put out too much technical content that perhaps only small proportion of clients would understand or use. Instead she recommends putting the same information in 3-4 multiple formats. It's possible that the older client glances at the infographic and the millennial reads the detailed whitepaper. The third stage is distribution in which Rudin helps firms reach out to the market via various channels. Talking about her experience in Asia, she agreed that firms have to take into account the tighter knit community, high digital adoption and mobile penetration rates and customise the global approach with the local touch. Her message to wealth firm CEOs is to remember that the world is client centric so the marketing communication needs to be more about them and less about the firm. Rudin agrees with the simple client segmentation approach. She said some firms have got this right with business owners, whether male or female, having different needs and challenges than inheritors. She admitted to having changed her mind about segmentation when she saw firms going overboard by setting up microsites for millennials and women with stereotypical images. 'At 51% of the population, women are not a segment! Perhaps men should be', she said, quite upset about the way some wealth firms market to women assuming that all women are the same. The images for 'fun loving millennials' are also ridiculous - millennials are now in their 30s and quite diverse. Rudin advises wealth firms to use technology to hyper-personalise. She also advises firms to make their communication more authentic, saying 'people want to work with people, not corporate brands.' April Rudin Founder & CEO The Rudin Group Click here to watch full interview

the private wealth issue HOW INDIAN PRIVATE WEALTH FIRMS ARE DOING DIGITAL MARKETING Simply put, it appears they are not. The industry doesn't appear to be very active on social media, apart from using WhatsApp to share content such as invitations to webinars etc. This is understandable as WhatsApp has become the de facto messaging platform for India at a time when SMS apps are bombarded with spam. HNW individuals also appear to be active on facebook, with nearly 75% saying they visit facebook at least once a day. Frequency of visits to apps and websites Facebook and Whatsapp got most traction 30% 30% 25% 9% 6% LinkedIn 18% 35% 21% 19% 7% Twitter 5% 9% 36% 31% 19% Facebook 4% 3% 13% 28% 52% WhatsApp Never Rarely Once in a day 2-3 times a day > 3 times Source - Top of the Pyramid 2017, Kotak Wealth Management CONCLUSION - CAN MARKETING HELPTHE INDUSTRYACHIEVE ITS POTENTIAL? As outlined in the previous chapters, there seems to be a huge gap between the number of HNW families mentioned in various wealth reports and the number of clients served by the industry. While the industry constantly talks about the huge potential, it doesn't appear to be marketing its services beyond the existing client pool. It's not clear why. This implies a huge scope for the industry to raise awareness for wealth management services generally.

the private wealth issue delivering wealth management Having decided which products & services will be offered and then done some high level marketing activities, private wealth firms deliver these services in a 'high touch' way - through very senior private bankers (PBs), wealth managers (WMs) and relationship managers (RMs). We now look at the 'final mile' - the sales, advice and relationship management processes of Indian private wealth firms.

the private wealth issue RELATIONSHIP MANAGERS LEARN TECHNICAL SKILLS ON THE JOB Wealth management firms have been lamenting the lack of talent for many years. When asked about the talent pipeline, most firms confirmed that they prefer to hire people with private wealth experience. Banks groom talent by lateral hires from retail (affluent) and corporate banking, which in turn hire MBA graduates. Relationship managers are then trained on-the-job, with some external input such as CIEL's wealth management program. Interestingly, banks or firms have not engaged with global specialist wealth management accreditation providers such as Chartered Wealth Manager (CWM), or even specialist investment accreditation providers such as the CFA Institute. The CFA Institute has been sharing that an increasing proportion of charter-holders of their flagship Chartered Financial Analyst (CFA) program work in wealth management. Even in India, the CFAI has been holding an annual wealth management conference for six years to engage with the wealth management community. SALES PROCESSES SEEM TO BE ABOUTTHE PITCH... Indeed, most wealth firms seemed to focus on the softer skills of sales and relationship management when hiring RMs. We couldn't find any client surveys of satisfaction levels in India, but there have been a few globallywith mixed feedback. In her book 'Wealth Management Unwrapped', veteran Charlotte B Beyer asks her high net worth investor readers to pretend that they are CEOs of their new company My Wealth, Inc and recall the worst sales pitches they have heard from wealth management firms. The book lists some pet peeves listed by investors she has worked with over manyyears.

Fast talker, Confusing the private wealth issue arrogant presentation Product Saying \"trust me\" prematurely focused, trying to sell me Disorganised Not on topic; Saying what they think I want to always hear instead of the truth (or what they really think) marketing! Who vs what: emphasis on the person's 25 years of experience, not substance; but what was the performance of this veteran? \"They're not Using guilt to accomplish their proactive; goal, not MINE \"You need to I have to do all understand the reality of markets, the reaching not just panic.\" \"Well, I can't stand out this anxiety about my money!\" Fees are Double talk, Treating me too high jargon as if I'm stupid They'd prefer After the honeymoon ends, not to talk to I'm taken for granted or ignored me but rather look at their Little interest in me or worse, too Bloomberg personal (a pretense not real) terminals Introduced to the \"name on the door\" once, and never saw them again

the private wealth issue ...AND ADVICE PROCESSES OFTEN HAVE COMMUNICATION GAPS In the book, she also highlighted that relationships between investors and their relationship managers break down quite often. She mentioned some common communication gaps, summarised in the graphic. WHAT INVESTORS NEVER TELL ADVISORS: 1. I can tell when you are nervous and totally uncertain of what you are telling me about the markets or your firm or my portfolio. 2. I can't understand - don't even enjoy reading - the volume of reports you send. 3. I spot it instantly when, someone on the team is not well respected by colleagues; the team is not congenial. I wonder why you bother bringing this person to the meeting at all, unless it's the boss! 4. I don't like whom you've assigned to work with me. I wish I could switch. 5. I wish you would talk less and listen more. You are boring. WHAT ADVISORS NEVER TELL INVESTORS: 1. I lose sleep, too, when your portfolio is losing money. 2. I wish I were not required to use my firm's back office for the reports we generate for you. Our technology is not so good. 3. Sometimes on bad days, I am just as uncertain as you are about the direction and safety of the markets. 4. My boss pressures me to sell you a number of products I don't really believe in. 5. Fees you pay me do not make me your personal concierge, expected to drop everything, including other clients, just to keep you happy. 6. Sometimes I wonder if you really listen to me, or do you just hear what you want to hear?

the private wealth issue FIRMS NOW REALISING VALUE OF SALES/ADVICE PROCESS Some private wealth firms have engaged specialist training providers. Carl Thong, group managing director of the Singapore-based Momenta group is such a trainer. Trained as a pastor himself, Thong admits that there was a time that he thought like many in the industry – which is that hard work and attitude are enough. Eventually he realised that “mindset is part of being coached and trained.” He now evangelises the value of training promising visible hard results i.e. increased sales, rather than just good feedback on his sessions. Momenta's sales training has a number of pillars – mindset, technical, habit-formation and instructional design. Thong believes it's important to customise the training to the firm's specific platform and that it is habit-forming. On customization, Thong said he would like to truly customise but ends up 'copy-pasting' or contextualizing to the private wealth firm's platform. He also believed that most firms don't allow enough time and cost for training to be habit-forming. So while his firm will take on 1-2 training workshops, he is honest enough to tell them it won't work. He tries to tell them that habits take a bit of time to form - “Role-playing is not enough…it's like swimming. You can't read about swimming. You need to drink some pool water before you learn to swim. Even then, swimming in a pool is different from swimming in a river or in the sea.” Having worked with some private wealth firms, and also some end-investors, Thong believes Indian prospects tend to pose transactional questions such as 'how much returns can you make' and 'will you offer a discount on the fees' but it's up to the RM to shift the conversation to a more strategic level. Carl Thong Group Managing Director Momenta Group Click here to watch full interview

the private wealth issue CRM TOOLS AND PROCESSES STILLWANTING Another area that wealth firms admit that they have some work to do is that of customer relationship management. In the sales/prospecting stage, some firms mentioned having a central research team to collate publicly available information on, and network links with, prospects. The rest is left up to relationship managers. Most firms did not appear to be aware of prospect databases such as Wealth-X (see box). Wealth-X, an information provider, suggests building an emotional connection and building a virtuous networking circle. The firm suggests some principles for every stage of the business development process - discovery, research and engagement. In the Discovery stage, the firm recommends treating every UHNW as a market segment of one. It reminds that the UHNW dismiss anyone who lacks preparation or shows a poor understanding of their needs, and that it takes patience to build a relationship with the wealthy compared to the mass market. Interestingly, Wealth-X claims that there are only two consistently proven ways to engage the UHNW segment - an introduction via trusted acquaintances and through the individuals' unique interests, passions and hobbies. So it recommends harnessing the power of referrals and passions. In the Research stage, the firm recommends screening existing client databases against the Wealth-X database to uncover prospects that wealth firms may already know. The firm's database also allows wealth managers to identify wealthy individuals connected to existing clients. In the Engagement stage, Wealth-X recommends a very exclusive and curated guest list for event-based marketing rather than the typical 'bring a friend along' approach that most wealth firms take. It also recommends that the invitees be carefully matched to their passions, and then the invitations be unique to stand out. The teams should be prepared to engage new invitees with conversations about their passions. Finally, there should be a follow-up strategy. While one can understand the lack of data on prospects, it was a bit surprising to hear of not having proper CRM for ongoing relationship management. This is an area worth exploring when discussing the role of technology in wealth management going forward.

the private wealth issue

the private wealth issue industry size and players As outlined in the value proposition article, it is hard to estimate the size of the private wealth management industry for a number of reasons. Some firms include their affluent customers in their publicly available figures for AUA and revenue which is a bigger and more crowded segment. Private wealth firms compete with numerous other types of players for the affluent customer. Banks have an inherent advantage as they already have a relationship with their customers - and can differentiate between them based on their bank balances and transaction values. Yet interestingly, banks don't reveal the break-up of their figures between these two segments.

the private wealth issue Numerous players are competing for affluent segment assets High- Retail Affluent Upper affluent High net worth touch Low- Service intensity Private banks-HNW offering touch Private banks-affluent offering Full service brokers Independent financial advisors/planners Digital asset managers Insurance companies Retail banks Online/discount brokers Robo-advisors $50,000 $100,000 $250,000 $500,000 $1 million $2 million $3 million AuM per client Source - BCG project experience. On the other hand, some firms include services other than pure wealth management, such as lending, broking etc while others include asset management as part of their wealth management figures. For example, private wealth firms that evolved out of securities firms seem to have a significant proportion of their revenues coming from brokerage. Having laid out the difficulties, we will look at the global industry and attempt to size the Indian industry in very broad terms. REVENUE IS DRIVEN BYTHE 'ASSETS UNDER MANAGEMENT' Since the primary way to calculate revenue is asset-based, the relevant metric is referred to as 'assets under management' (AUM). The global wealth management industry aims to charge about 1% i.e. 100 basis points per annum on the AUM. The actual yield has been lower - around 70-80 bps. This is higher than asset managers for traditional asset classes (debt and equity) but lower than those for alternative asset managers. Revenue margins for wealth and asset managers (2011-2020, revenue over AUM, bps) 250 2011-2020 2015-2020 CAGR CAGR 200 150 -1% 2% 100 -2% -2% -1% 1% 50 -3% -5% 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Wealth Managers Alternative Asset Managers Traditional Asset Managers Alternative Asset Managers (excl. performance fees) Source - Thomson Reuters/Refinitiv, Morgan Stanley & Oliver Wyman analysis.

the private wealth issue Revenue margins have been shrinking and are now at 73 bps of AUM in Western Europe, partly due to the lower-margins ultra high net worth segment, compression in discretionary and advisory mandate margins and the low interest rate environment. Costs have increased across the value chain. While private banks tried to find higher margins in internally managed asset management products, the profit pool for private banking in Western Europe fell to 13.3 billion Euros and the aggregate profit margin to a low of 21 bps. The AUM per adviser stands around 225 million while revenue around 1.65 million Euros. Oliver Wyman, a specialist consulting firm in financial services, estimated the market size for wealth to be around $136 trillion, with more than half being in the HNW or private wealth segment. This implies a global revenue pool of around $ 70 billion for the HNW segment. Global onshore wealth by wealth band (2019-2025E, USD TN) 183 Wealth Client 19-20 20-25E band type growth CAGR >50MM UHNW 145 162 46 25 136 34 39 37 10% 8% 31 19 22 126 18 30 33 10-50MM Core HNW 9% 7% 28 8% 6% 28 1-10MM Entry-level 6% 5% 16 HNW 26 56 59 62 68 75 0.1-1MM Affluent 2019 2020 2021E 2023E 2025E Source - Wyman Wealth Management Model. Note - Wealth is defined as investable personal financial wealth, i.e., gross personal financial assets held by private individuals (including currencies/deposits, equities, bonds, mutual funds, alternatives, corporate assets in publicity-listed entities controlled by private individuals) excluding assets held in insurance policies and pensions and non-finacial assets (e.g., direct real estate or any other real assets). Assets performance vs. net new money (NNM) Emerging markets 2019-2024 CAGR, % of AuM Developed markets 12% 4% 3% 3% 9% 3% 2% 1% 2% 8% 7% 1% 1% 6% 6% 5% 4% 3% 3% 3% 3% 4% 3% 2% North Western Japan China Latin Other Middle East Eastern America Europe America APAC & Africa Europe NNM Asset Performance AUM growth Source - Oliver Wyman Wealth Management model.