Santosh Final Winter Project

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A PROJECT REPORT ON

FUTURE OF WEALTH MANAGEMENT

SUBMITTED BY

VINOD SINGH RAWAT

Roll No: 1507

UNDER THE GUIDANCE OF

PROF. LAXMI PRABHA

A RESEARCH SUBMITTED IN PARTIAL FULFILMENT OF THE

REQUIREMENT FOR THE DEGREE IN MASTER OF MANAGEMENT

STUDIES PROGRAMME FROM THE UNIVERSITY OF MUMBAI

YEAR 2010-2011

SWAYAMSIDDHI COLLEGE OF MANAGEMENT & RESEARCH

BHIWANDI

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[Approved by AICTE, Affiliated to University of Mumbai & Govt. of Maharashtra DTE Code

MB 336]

(An ISO 9001-2000 Certified Institute)

Sonadevi Weight Bridge, Near Octroi Naka, Kalyan Road, Temghar, Bhiwandi, Dist.

Thane 421 302

CERTIFICATE

This is to certify that Mr. Vinod Singh Rawat (Roll No. 1507) student of Second Year

Master of Management Studies (MMS/MBA) of SWAYAM SIDDHI COLLEGE OF

MANAGEMENT & RESEARCH has successfully completed the winter project work

titled Future of Wealth Management in partial fulfillment for the degree of Master

of Management Studies of University of Mumbai.

Date: 15/03/2011

Signature of the project guide Director

Prof. Laxmi Prabha Dr. HENRY BABU

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DECLARATION

I, Vinod Singh Rawat, student of MMS II(Finance), 2009-2011 studying at

Swayam Siddhi College of Management & Research, Bhiwandi, declares that

the project work entitled Future of Wealth Management submitted in

partial fulfillment of MMS program under the University of Mumbai.

This report neither full nor in past has ever been submitted for award of any

other degree of either Mumbai University or any other University.

Mr. Vinod Singh Rawat

1507, (2009-11)

Swayamsiddhi College of Management & Research

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ACKNOWLEDGMENT

I wish to accord my sincere gratitude to the Swayamsiddhi College of Management &

Research for their support and cooperation.

I thank Prof. Laxmi Prabha for her support and guidance, without whom, the Project

would not have been possible.

Also, the support of my colleagues was indispensable as their points and approach

has helped me to achieve success in my project.

Vinod Singh Rawat

MMS-II

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TABLE OF CONTENTS

Sr. No Particulars Pg. No

1 Executive Summary 6

2 Introduction 7

3 STATE OF THE WORLDS WEALTH 8

4 OVERVIEW OF WORLD ECONOMY 9

5 2000-2010: Indias Dazzling Decade 10

6 2011: Hurdles to cross 13

7 Advantages & Disadvantages 20

8 Recent Trends in Wealth Management 21

9 Core elements of Wealth Management Services 24

10 Financial Planning 26

11 Portfolio Strategy Definition / Asset Allocation 28

12 Portfolio Management 33

13 Strategy Review And Alignment 35

14 Key Challenge Areas 36

15 Solution Framework 39

16 Case Studies 43

17 Conclusion 48

18 Bibliography 55

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EXECUTIVE SUMMARY

Wealth management industry in India is one of the sunrise industries that have apromising future. With the growing individual income levels and healthy spending

outlook prevailing among families, everyone is trying to balance their lifestyles as pertheir income levels.

As corporate culture penetrating even in PSU banks and undertakings, it is evidentthat the future of India lays in much more robust and dynamic managerial talent ofthe country. The idea gains strength with government banks and PSUs on a hiringspree on day 1 of campus placements among top B-schools of India.

So with government tying hands with corporate India it is almost certain that therewill be disciplined increase in wealth creation for the nation. So the core purpose of

the paper is to understand the current outlook of wealth management in India androadmap into the future.

In the annual survey done by Cap Gemini, SA and Merrill Lynch it was found thatranks of millionaires grew 6% in the previous year, because the number of richer

people grew in India & China where India is competing China. India & China postedthe biggest gain in millionaires advancing by 23% & 20% respectively.When we are watching the world wide increase in number of millionaires the factscollected by Cap Gemini, S.A. and Merrill Lynch survey report. India has 23%

growth in the last year. The biggest Asian economy China stands on second positionwith 20%, west Asia 16%, United States 4% and United Kingdom (UK) 2%.

So we can understand that there are more opportunities in the wealth management

business in Asia especially in India.

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INTRODUCTION

Wealth Management Definitions

Wealth Management can be defined as;

A professional service which is the combination of financial/investment advice,

accounting/tax services, and legal/estate planning for one fee.

Wealth management is best conceptualized as a platform where a number of differentsets of services and products are provided. Its a full-service model that can offeradvice on investment management, estate planning, retirement, tax, asset protection,cash flow, and debt management.

Wealth Management or Investment Management is;

The professional management of various securities (shares, bonds etc) and other

asset (e.g. real estate), to meet specified investment goals for the benefit of the

investors.

Investors may be institutions (insurance companies, pension funds, corporations etc.)or private investors (both directly via investment contracts and more commonly viacollective investment schemes e.g. Mutual Funds).

The term asset management is often used to refer to the investment management ofcollective investments, whilst the more generic fund management may refer to allforms of institutional investment as well as investment management for privateinvestors. Investment managers who specialize in advisory ordiscretionarymanagement on behalf of (normally wealthy) private investors may often refer totheir services as wealth management or portfolio management.The provision of 'investment management services' includes elements of financialanalysis, asset selection, stock selection, plan implementation and ongoingmonitoring of investments.

Wealth Management is also known as Private Banking.

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STATE OF THE WORLDS WEALTH

The world's population of high net worth individuals (HNWIs1) grew 17.1% to 10.0million in 2009, returning to levels last seen in 2007 despite the contraction in world

gross domestic product (GDP). Global HNWI wealth similarly recovered, rising18.9% to US$39.0 trillion, with HNWI wealth in Asia-Pacific and Latin Americaactually surpassing levels last seen at the end of 2007.

For the first time ever, the size of the HNWI population in Asia-Pacific was as largeas that of Europe (at 3.0 million). This shift in the rankings occurred because HNWIgains in Europe, while sizeable, were far less than those in Asia-Pacific, where theregion's economies saw continued robust growth in both economic and market driversof wealth.

The wealth of Asia-Pacific HNWIs stood at US$9.7 trillion by the end of 2009, up30.9%, and above the US$9.5 trillion in wealth held by Europe's HNWIs. AmongAsia-Pacific markets, Hong Kong and India led the pack, rebounding from mammothdeclines in their HNWI bases and wealth in 2008 amid an outsized resurgence in theirstock markets.

The global HNWI population nevertheless remains highly concentrated. The U.S.,Japan and Germany still accounted for 53.5% of the world's HNWI population at theend of 2009, down only slightly from 54.0% in 2008. Australia became the tenth

largest home to HNWIs, after overtaking Brazil, due to a considerable rebound .

After losing 24.0% in 2008, Ultra-HNWIs2 saw wealth rebound 21.5% in 2009. Atthe end of 2009, Ultra- HNWIs accounted for 35.5% of global HNWI wealth, up from34.7%, while representing only 0.9% of the global HNWI population, the same as in2008.

The Asia-Pacific HNWI population rose 25.8% overall to 3.0 million, catching upwith Europe for the first time, after falling 14.2% in 2008. Seven countries within theregion actually saw their HNWI populations recover beyond 2007 levels

Asia-Pacific HNWI wealth surged 30.9% to US$9.7 trillion, more than erasing 2008losses and surpassing the US$9.5 trillion in wealth held by Europe's HNWIsAfter falling 19.0% in 2008, the HNWI population in North America rebounded,gaining 16.6% in 2009. HNWI wealth there rose 17.8% to US$10.7 trillion. NorthAmerica remains the single largest home to HNWIs, with its 3.1 million HNWIsaccounting for 31% of the global HNWI population.

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WORLD ECONOMY CONTRACTED IN 2009, BUT ASIA-PACIFIC KEPT

GROWING

World GDP contracted 2.0% in 20094, after growth of 1.8% in 2008, as thefundamentals of the global economy were gripped by the effects of the globalfinancial crisis. In Western Europe, GDP shrank 4.1% in 2009, driven primarily byGermany and the U.K. Eastern Europe and Latin America were also hit hard, andGDP contracted by 3.7% and 2.3% respectively5. The GDP contraction in Europeand Latin America was primarily due to the drop in exports and reduction inindustrial production (manufacturing, mining and utilities). However, economicgrowth was evident in some parts of the world. GDP grew 4.5% in Asia-Pacificexcluding Japan, helped in particular by strong GDP growth of 8.7% in China and6.8% in India6 .GDP also expanded by 1.4% in the Middle East and North Africa7.Governments around the world stepped up efforts to stimulate economic recovery and

support the financial system. Governments implemented a wide array of measures totry and keep their economies from sliding into recession as financial conditionsremained challenging. Those efforts included fiscal stimulus by many nations, butmost sizably by the U.S. and China.Key drivers of wealth experienced strong gains. Many of the world's stock marketsrecovered, and global market capitalization grew to US$47.9 trillion in 2009 fromUS$32.6 trillion in 2008, up nearly 47%. Commodities prices dropped early in theyear, but rebounded sharply to end the year up nearly 19%. Hedge funds were alsoable to recoup many of their 2008 losses.The global economic recovery remains nascent. World GDP growth is likely to be

positive in 2010-11 and is expected to be led by Asia-Pacific excluding Japan.

However, sustained economic recovery is contingent upon the timely withdrawal of

government stimulus along with the return of growth in private consumption.

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2000-2010: Indias Dazzling Decade

The 2000-2010 decade was a dazzling one for India. During this decade,Indias nominal GDP nearly trebled from less than US$0.5b to US$1.3t,

and per capita GDP rose 2.5x from US$427 to US$1,058. Robusteconomic growth created a huge opportunity for the Indian corporatesector, and the decade saw the emergence of several Indian global-sizecompanies and mid-size challengers across sectors. The stock markets tooresponded well, delivering 18% CAGR returns, the second best performingemerging market. Market cap expanded 14x over the decade, improvingIndias global rank from 17 to 8.

Introducing FY13 estimates: FY10-13 Sensex EPS CAGR of 22%Based on a bottom-up PAT aggregation of Sensex constituents, we arriveat FY13E Sensex EPS of Rs1,492, up 18% YoY. FY10-13E EPS CAGR at22% is marginally lower than the FY10-12E EPS CAGR of 24%, but doesnot materially alter our hypothesis that Indian corporate sector earningshave entered into a new growth cycle following a two-year growth holiday.

Macro economyOver 2000-10, Indias nominal GDP nearly trebled from less than US$0.5b toUS$1.3t, and per capita GDP rose 2.5times from US$427 to US$1,058. Indias realGDP clocked a robust CAGR of 7.2%, led by service sector (up from 49% of GDP to57% over the decade).

Growth in large part was internally financed, with savings and investment rateincreasing from ~24% to over 34% over the decade. Investments played a key roleas a growth driver while government spend ensured resilience during crisis years.

Share of infrastructure rose from 4.5% of GDP to 7.5%.

Inflation for the decade averaged at just 5.3%, the lowest since 1970s. This wasdespite the monetary policy challenges presented by huge and volatile capitalflows.

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The decade saw a dramatic improvement in government finances led by fiscallegislation. Combined (center + states) fiscal deficit more than halved from 9.9%of GDP in FY02 to 4.1% in FY08. This gave the government some leeway toimpart fiscal stimulus to mitigate the impact of 2008 global crisis.

Merchandise trade (imports+exports) as percentage of GDP nearly doubledfrom 22% to 40%. Imports grew faster than exports and trade deficit increasednearly 10x. However, surge in invisibles and capital flows resulted in overall BoPsurplus for most years. Indias forex reserves expanded ~7x to US$280b. The rupeeappreciated in nominal terms for much of the decade, but REER was largely stable

Corporate sector: Bold new face of India Include

The past decade witnessed the emergence of several global size world-class Indian

transnationals, which now have global ambitions, including Infosys, TCS, Wipro,Tata Steel, Tata Motors, Bharti, etc.

Several mid-size companies have successfully challenged the leadership positionof incumbent players and garnered meaningful market shares e.g. HDFC Bank hastransformed the way in which banking is performed while JSW Steel has emergedthe largest domestic private steel producer.

Increased per capita income, higher discretionary spending, growing aspirations ofthe Indian consuming class, growth of retail credit, etc has led to the emergence ofseveral new businesses - Wireless (Bharti / Vodafone), IT (Infosys, TCS, Wipro),

NBFCs / Insurance, Real Estate (DLF, Unitech), Infrastructure (GMR, MundraPort, IRB).

Stock markets: Among best performing global markets with 18% return CAGR.The Sensex delivered a return CAGR of 18%; India was among the best

performing

Global markets during the decade. Indian market cap clocked 27% CAGR toUS$1.6t, improving its global rank to 8 from 17 in December 2003.

FII holding in Sensex companies increased by 5pp to 19% while DII holdingshave dropped by ~4pp to 13%. The total value of FII holding in Indian markets

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(excluding GDRs/ADRs) is US$231b against cumulative nominal net inflows ofUS$102b.

The number of companies with market cap exceeding US$1b increased from 28 to

207, while the number of companies with market cap exceeding US$25b increasedfrom none as late as 2003 to 13 by 2010.

The 10th largest market cap company in December 2010 (ICICI Bank at US$29b)is almost 2.5x the largest market cap company in December 2000 (Wipro atUS$12b). Six of the top-10 market cap companies in December 2000 were notamong the top- 10 in 2010.

In 2010, market cap of the largest company (Reliance Industries) was higher thanthe market cap of the entire Sensex in 2000.

In 2000, the Consumer sector had the biggest weight in Sensex at 26%, which hasdropped to 7% in 2010. The weight of Financials, in contrast, has increased from6% in 2000 to 17% in 2010.

Currently, Sensex one-year forward P/E at 17x is at 17% premium to the decadal

average of ~14.5x.

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2011: Hurdles to cross

The 2000-2010 decade was a dazzling one for India, with nominal GDP nearly

trebling and per capita GDP rising 2.5x. Robust economic growth created a hugeopportunity for the Indian corporate sector. The stock markets too responded well,delivering 18% CAGR returns, among the best performing global markets. Freshfrom a dazzling decade, the Indian economy and the stock markets face keychallenges in 2011: sustained rise in oil prices, industrial growth headwinds, andstressed liquidity.

We introduce FY13 estimates, which suggest Sensex EPS CAGR of 22% over FY10-13, confirming that corporate sector earnings are in a new growth cycle. However, ifthe current trend of rising commodity prices persists, the PAT mix will tilt in favor of

global cyclicals rather than domestic plays.

Oil & Gas (ex RMs) PAT up 62% YoY and Metals PAT up 35% YoY, higher thanaggregate PAT growth of 24% YoY. Expect sectors dependent on domestic marketsto be affected by current headwinds. Global commodities and export-oriented sectorsare better placed in near term.

Fresh from a dazzling decade, the Indian economy and in turn the stock markets face

key challenges in 2011. Sustained rise in oil prices will fuel inflation and also worsen

current account deficit. Industrial growth is facing headwinds by way ofenvironmental issues, resource crunch, infrastructure deficit, and political/corporate

governance. Stressed liquidity caused by lagging deposit growth is pushing up rates.

Expect sectors dependent on domestic markets to be affected more. Global

commodities and export-oriented sectors are better placed in the near term.

Hurdle #1: Oil and commodity prices are a key concern

Prices of oil and other international commodities are on an uptrend due to reasons

ranging from rising consumption in emerging market economies to high globalliquidity. Indian economy remains highly vulnerable to rising crude oil prices. Ifcurrent prices prevail for the rest of FY11, gross annual under-recoveries of the oilsector will mount to Rs685b, almost 50% higher than Rs460b in FY10. In the absenceof price protection, a 10% increase in international oil prices would have a 1% directimpact on overall inflation and another 60bp indirect impact within 3-6 months. It

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would also increase Indias current account deficit by US$8b (over FY11E US$40b),as oil imports constitute ~30% of Indias total imports.

Hurdle #2: Industrial growth facing headwinds

IIP data has been volatile in recent months; there is no discernible trend. NHAIawards have slowed down. SBI has cut its disbursement growth guidance for FY11from ~22% to 18-20%. Environment issues have also impacted projects in metals,hydro power, etc. Resource crunch (largely for coal), infrastructure deficiency, andwidespread corruption in the political, bureaucratic and corporate circles are alladding up to make Indias business landscape murkier.

Hurdle #3: Liquidity situation has expectedly remained stressed in 3QFY11

During the last quarter, deposit growth (~15%) has significantly lagged credit growth(~23%). This funding gap is the primary reason for the liquidity stress, further

aggravated by higher currency holding by the public and huge cash balances held by

the government with RBI. Sustained period of liquidity shortage may hamper

industrial growth; there is negative correlation between money market rates and

industrial production. The sustained liquidity stress has also permeated to the other

segments of the financial sector, pushing up rates in the credit market and yields of

government securities.

Investment strategy: Export-oriented sectors better placed in near term

We believe the above challenges are likely to impact the performance of severalsectors, particularly those dependent on domestic markets. We expect rising inputcosts, fuel prices and interest rates to impact discretionary consumption spendsincluding Autos. Utilities will be impacted by resource crunch, environmental issuesand tight liquidity, as will Infrastructure projects. Financials will get impacted by

tight liquidity hurting margins, especially for those without a low-cost depositfranchise. In this backdrop, export-oriented sectors like Technology, Pharmas, GlobalCommodities would continue to outperform.

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Hurdle #1: Oil and commodity price increases return to haunt

Prices of oil and other international commodities are on an uptrend due to reasonsranging from rising consumption in emerging market economies to high globalliquidity. While Indian consumers enjoy some price protection, this comes at a cost tothe fiscal deficit and financial health of oil companies. In the absence of price

protection, a 10% increase in international oil prices would result in a 1% increase inoverall inflation through direct impact. Indirect impact could take inflation up byanother 60bp within 3-6 months. It would also increase Indias current account deficit

by US$8b as oil imports constitute ~30% of Indias total imports.

International commodity price trend indicates clear headwind .

Global commodity prices are on a clear uptrend. Rising consumption in emergingeconomies, better than expected economic data in advanced countries, decline in thedollar and rising global liquidity have all contributed to this trend. Definitely the firstand also the second now appear to fuel a sustained rise in commodity prices. Thisreverses the gains accrued to India so far in controlling inflation, that of soberinginternational prices.

Oil prices impact India directly, more so because of increased energy intensity of theeconomy as well as high import dependence. The administered price mechanism(APM) provided a degree of resilience to domestic oil prices from internationalfluctuations - within the broader energy group, the APM basket was much lessvolatile throughout the recent booms and busts.Shielding domestic prices has fiscal and financial health consequencesWhile APM enabled stability in domestic oil prices, this came at a heavy cost to the

fiscal deficit and the health of the oil companies. During the peak year of FY08, the

governments oil subsidy burden was of the order of Rs713b, a magnitude similar to

the cost of implementing a food security bill or the entire spending in roads/bridges

and telecom investment for that year. Despite deregulation of petrol prices, for FY11,the fiscal burden is expected to be as high as Rs364b. As an almost equivalent part of

the burden is shared by oil companies (both upstream and downstream),

hike/decontrol in oil prices is a necessity from the point of the governments fiscal

health and the oil companies financial health .

Impact of oil price hike on inflation and current account deficit

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Domestic oil price hike/decontrol is bound to have a direct and indirect impact oninflation.

We estimate that the direct impact of a 10% (~US$10/bbl) increase in internationaloil prices (if fully passed on by domestic oil companies) would be a 1% jump inheadline WPI inflation. The indirect impact of knock-on effect on commodity pricesspread over 3-6 months could be another 60bp increase. The impact would beconsiderably lower if there is only partial pass through of international price changes.

As oil constitutes a sizable portion (~30%) of total imports, it has implications for thecurrent account balance. We estimate that a US$5/bbl increase in oil price would leadto a US$4b increase in current account deficit for the year. The estimated US$40bcurrent account deficit for FY11 will increase to US$52b if oil price rises fromUS$85/bbl to US$100/bbl.

Hurdle #2: Industrial growth facing headwinds

There are initial signs of headwinds to industrial growth. IIP data has been volatile inrecent months; there is no discernible trend. NHAI awards have slowed down, with

project awards of 3,500-4,000km till date v/s the target to award 18,000km in FY11.SBI has cut its disbursement growth guidance for FY11 from ~22% to 18-20%.

Doing business in India may well be getting more difficult and complex. A spate ofrecent corruption cases has already engulfed many of Indias high profile names.Meanwhile, there are other challenges in Indias business landscape:(1) environmental clampdown, (2) bureaucratic hurdles, and (3) infrastructure deficit.

Resource crunch (largely for coal) is also a reality and increased reliance on importsresults in exposure to availability and pricing risks in addition to widening currentaccount deficit. Banking, real estate and telecom sectors are already under thescanner. Metals / mining and infrastructure sectors are also facing strong headwinds.We believe that E&C companies could face headwinds in order intakes, as projects

get deferred. The financial sector could have asset quality issues, given that projecteconomics are impacted by resource deficiencies. Power utilities will be impacted bycoal shortage, impacting project returns. Resource plays like Coal India, Sesa Goa,and Tata Steel stand to gain.IIP growth has been volatile; interpretation difficultIIP growth rates in FY11 YTD have been volatile - 4.4% in September 2010 and16.6% in April 2010. This makes interpretation of the data challenging and trend

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analysis does not address the fundamental question - has industrial momentum pickedup in a sustainable manner? Recent instances and ground reality checks indicate thatseveral headwinds are building up:

SBI has cut its disbursement growth guidance for FY11 from ~22% to 18-20%.Coal linkage committee meetings have been postponed for a long time, and this isimpacting new project pipeline.

Coal Indias production could be lower by 16m tonnes in FY11 (down 4%) and39m tonnes in FY12 (down 8%), given the strict implementation of environmentnorms. Environment issues have also impacted projects in metals, hydro power,etc.

L&T could miss its guidance of 25% growth in order intake for FY11, givenproject deferments, increased competitive intensity, etc.

Resource deficiency: implications for the investment chainThe business environment in India is already reeling under severe resource crunch,the most prominent being shortfall in coal availability, infrastructure constraints, etc.Recent classification of coal producing areas as Go and No Go areas,implementation of Comprehensive Environment Pollution Index, etc have furtherconstrained availability.

Coal Indias actual production shortfall in FY12 could be lower by 73m tonnes (14%of targeted production), 39m tonnes over and above the 34m tonnes shortfall already

indicated in the mid-term appraisal of the Eleventh Plan. Incremental captive blockswill now be awarded to the private sector on bidding basis. Imposition of mining taxwill also impact profitability of mining operations. Recently, Planning Commissionestimated possible coal imports of 100m tonnes+ in FY12 for the power sector,representing ~20% of total fuel basket as compared to 38m tonnes (~9% of the fuel

basket) in FY10. Coal imports will contribute ~46% of Indias incremental coalrequirements till FY15. This exposes the country to risks in terms of pricing andavailability of imported coal in addition to widening current account deficit.

These deficiencies will have implications on the investment chain. The Twelfth Plan(FY13-17) coal linkage committee meeting has been postponed several times. Thecurrent logjam needs to be addressed, as existing capacities already underconstruction face shortfalls.

There are other pressure points including land acquisition, constraints in evacuationinfrastructure, etc. Infrastructure deficiency is well known and the situation is

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becoming worse, reaching a stage where growth could be meaningfully impacted.NHAI awards have witnessed a meaningful slowdown, with project awards of 3,500-4,000km till date, v/ s a target to award 16,000km+ in FY11.

Doing business in India: New challengesDoing business in India may well be getting more difficult and complex. The recentspate of high profile corruption cases involved senior cabinet ministers, chiefministers, leading businesses, bankers and public figures spanning across sports,defense, telecom, banking, real estate, media and public relations, and indeed, thegovernment. Undeniably, an environment of uncertainty has been created by theserevelations that have a bearing on the investment climate.

Meanwhile, there are other challenges in Indias business landscape(1)environmental clampdown,

(2) bureaucratic hurdles, and(3)infrastructure deficit. Banking, real estate and telecom sectors are already

under the scanner. Metals / mining and infrastructure sectors also face strongheadwinds

Hurdle #3: Stressed liquidity for prolonged period

Lower growth in bank deposits than in bank loans has created a structural liquidityshortage that has been accentuated by high currency demand from the public and cash

balances by the government. A reversion of inflation worries could propel RBI toraise policy rates by 50bp in 2011. A cut in CRR to enhance structural liquidity maygo in parallel. However, if liquidity shortage persists, it could start hurting growthand industrial production, as short- term rates percolate towards the longer end of themarket. RBI would need to step up its open market and foreign exchange operationsin case capital flow falls short of requirement.

Banking sector funding gap has created a structural liquidity shortageThe liquidity situation has expectedly remained stressed in 3QFY11. While the basicfunding gap of deposit growth (~15%) falling behind credit growth (~23%) is the

primary reason for the liquidity stress, the situation is aggravated by higher currencyholding by the public and huge cash balances held by the government with RBI.Money market rates have breached the corridor for a large part of the quarter whilerecourse to LAF window remained in the range of Rs1.2t-1.5t in recent times, farabove the comfort levels of +/- 1% of NDTL (broadly deposits) announced by RBI.RBI has initiated a series of measures including infusion of primary liquidity throughopen market operations.

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Inflation worries coming back, led by increases in food and oil pricesInflationary impulses have surfaced again in December 2010, with a reversal of thesobering trend in primary articles (mainly food) and fuel & energy group. Withunseasonal rains spoiling crops in some parts of the country and oil prices firming up,inflation would remain a worry in 2011. We expect RBI to increase LAF rates by50bp to be effected during the relatively lean season of April-August. An outsidechance of 25bp hike in remaining FY11 has become a possibility on the back ofsudden firming of primary commodities inflation. The extent of excess capital flowswould continue to determine the broad liquidity situation, but so far the signal thathas emanated indicates that RBI would be ready to provide genuine liquidity needs

but at higher rates.

Prolonged liquidity stress to hurt growth Sustained period of liquidity shortage may

hamper industrial growth; there is negative correlation between money market ratesand industrial production. The sustained liquidity stress has also permeated in theother segments of the financial sector, pushing up rates in the credit market and theyields of government securities

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ADVANTAGES AND DISADVANTAGES

ADVANTAGES:

1) Helpful In Tax Planning : The wealth management professional always showsthe good path to the customers and provide the service of tax planning. How tominimize the tax and save more money?

2) Helpful In Selection of Investment Strategy: Another advantage from thecustomer point of view is with the help of WM Professional the customer can easilyknow the investment strategy and analyze risk and return.

3) Helpful In Estate Management: With the help of wealth management

professional we can also manage our estate. Estate management is a task to provideobjective administration of our funds tailored to aim in responsible distribution and

protection of our overall estate.

4) Helpful in forward looking: We can say planning, that recognizes as our estategrows and changes occurs we require some team of professionals who help us infuture planning.

5) Helpful for Indian Economy: Banks which are engaged in business of WM

earning revenues from the foreign countries i.e. outsourcing for economy

LIMITATIONS

1. WM Reduces The Scope Of Management: Though we all know thatmanagement has existence at all levels of life and society but the term wealthmanagement only related with the higher level means rich people, and is nothaving any plans and provisions for poor and lower and middle level of society.

2. Chances of Fraud: Another demerit or limitation of the WM concept is it is not

showing the actual position. The customer doesn't know about the things going onwith using his wealth and there may be chances of forgery and fraud withcustomers.

3. Actual Picture VS Inflation: What is the actual position of market we don't knowbecause every thing is done by some WM professionals. So we can not assumeour position in the market that also results in inflation because economy is

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unknown about the actual state. There may be chance that the customers are inrisk but they are showing the false return and vice-versa.

Recent Trends in Wealth Management

Predictive MarketingTo grow the wealth management business profitably, wealthmanagers must have CRM capabilities that are highly analyticalin using customer data to draw sophisticated insight andpredictions around profiling and targeting profitable customerpropositions. Wealth managers need to customize offerings anddeliver value within efficient service models that balance costlyresources against a high quality customer experience. Feedbackon marketing campaigns, customer interactions, and customertransaction insights is crucial to the continual improvement of the

success of the CRM analytics and predictive trending forecast.

CentralizationGoing forward, wealth managers will need to institutionalize theirknowledge about customers and their needs to allow for moretimely advice, more consistency of client servicing acrossadvisors, and a better customer experience in each of the access

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channels. More institutionalized customer information will alsosupport the replacement of existing high-cost,

decentralized delivery models with lower-cost centralized virtual models, therebymaking more personal service available to more customers at a lower cost.

Real Time

As wealthy customers demand more frequent and a higher quality of guidance fromtheir financial advisors, and become more active in the investment processes and

performance measurement of their portfolios, the need for real-time access toinformation becomes critical. Strong data management with highly integrated feedsfrom internal and external data sources will be essential for the real-time wealthmanagement platform. Real-time securities pricing information greatly enhances theeffectiveness and value of risk metrics and supports more informed, and better timedinvestment decisions.

Outsourcing

The cost of developing and maintaining wealth management platforms and operationsis a significant component of the overall cost base of the wealth manager. In addition,there are many wealth managers who are looking to develop integrated platformswith the characteristics described above. Integrated platforms with sophisticatedwealth management functionality would take many years to set up, and require anenormous investment, along with the cost of maintaining them. Therefore, manywealth managers are more aggressively outsourcing large portions of their middle and

back office technology and processes such as securities processing, settlement, trustaccounting, reconciliation, and performance reporting. ASP models are also

providing similar support in a more standardized model to smaller wealth managers.

Web Services

Wealth managers and wealth management servicing providers are making theirplatforms available to the wealthy end users and Independent Financial Advisors(IFAs) through private-labelled hosted web services applications that allow aninvestor to directly collaborate with an advisor. For example, advisors can use a third

party secure publishing platform which handles a variety of document formats such

as HTML, Word, Excel and PDF, and is integrated with the wealth managementprocessing platform.

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Core Elements of Wealth Management Services

In most basic sense, wealth management services involve fiduciary responsibilities inproviding professional investment advice and investment management services toInstitutions, funds (Pension/mutual/Hedge), corporations, trusts as well as HNWIs. Inthe present context of our discussion, we would keep our focus limited to HNWIs.

Some of analogous terms used for wealth management could be considered asPortfolio Management, Investment Management and many times Fund Managementor Asset Management.

Depending on the mandate of the services given to the Wealth Manager, wealth

management services could be packaged at various levels:

a) Advisory: Wealth mangers role is limited to the extent of providing guidanceon investment / financial planning and tax advisory, based on client profile.Investment decisions are solely taken by the client, as per his /her own

judgment.

b) Investment Processing (transaction oriented): Client engages wealthmanager to execute specific transaction or set of transactions. Investment

planning, decision and further management remain vested with the client.

c) Custody, Safekeeping and Asset Servicing: Client is responsible forinvestment planning, decision and execution. Wealth manager is entrusted withmanagement, administration and oversight of investment process.

d) End-to-end Investment Lifecycle Management: Wealth manager owns thewhole gamut of investment planning, decision, execution and management, on

behalf of the client. He is mandated to make financial planning, implementinvestment decisions and manage the investment throughout its life.

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Wealth management services comprises of following key function areas:

a) Financial Planning

b) Portfolio Strategy Definition/ Asset Allocation / Strategy Implementation

c) Portfolio Management Administration, Performance Evaluation andAnalytics

d) Strategy Review and Modification

Detail description on each of these areas has been presented in the succeeding

sections.

Financial Planning

Portfolio

Strategy &

Modeling

Strategy impln.,

& Review

Portfolio Mgmt/

Admin

Investment Performance

-Return (absolute/trend)

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Client profiling &

assessment of

investment

Defining Portfolio

Management Strategies

Portfolio Modeling,

determination of the

Implementation, Rebalancing &

divestment of assets

Managing transactions processes, benefit

processing, Tax management, Accounting,


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-Tax impact

-Transactions cost

Financial Planning

Client Profiling:

Client profiling takes in account multitude of behavioral, demographic andinvestment characteristics of a client that would determine each clients wealthmanagement requirements.

Some of key characteristics to be evaluated for defining clients investment objectiveare:- Current and future Income level

- Family and life events

- Risk appetite / tolerance

- Taxability status

- Investment horizon

- Asset Preference /restriction

- Cash flow expectations

- Religious belief (non investment in sin sector like - alcohol, tobacco, gamblingfirms, or compliant with Sharia laws)

- Behavioural History (Pattern of past investment decisions)

- Level of clients engagement in investment management (active / passive)

- Present investment holding and asset mix

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Investment Objective:

Based on the client profile, investment expectations and financial goals of the clientcould be clearly outlined. Defining investment objectives helps to identify investmentoptions to be considered for evaluation.

Investment objective for most of the investors could be generally considered amongstthe following:

- Current Income

- Growth (Capital Appreciation)

- Tax Efficiency (Tax Harvesting)

- Capital Preservation (often preferred by elderly people to make sure they dontoutlive their money.)

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Portfolio Strategy Definition / Asset Allocation

Asset allocation: The key to investing

In the process of personal financial planning an individual must select assets that willgenerate adequate returns to meet the financial goals, and at the desired levels of risk.This is known as asset allocation.

Though "asset allocation" decisions are critical to one's financial plan, it is one thatvery few understand and consciously keep in mind when making an investmentdecision. There are two questions to be answered in every asset allocation decision:WHAT and HOW?

WHAT?

Asset allocation decision is about dividing the investments between asset classes suchas equities, cash and money markets equivalents, bonds, insurance, real estate,derivatives. Commodities, antiques and art, international financial instruments.

The principal reason for diversifying investments across different asset classes is tominimize the risk of a portfolio. It requires one to avoid investments whose returns

tend to move too closely with each other. Given this, the common flaw with investingin "growth stocks", "value stocks", "small caps" and "mid caps" is that their returnsare all highly correlated, making them all members of the same asset class, "domesticequities". Similarly, "RBI relief bonds" are just one type of all the fixed incomesecurities that are available to an individual, akin to Government of India securitieslike treasury bills and bonds, corporate bonds, certificate of deposits etc. While allthese are fixed income instruments, they can still be divided into three asset classesviz. cash and money market equivalents like commercial papers, treasury bills etc.,inflation-indexed bonds (that provide protection against inflation) and investmentgrade bonds (GOI as well as corporate bonds).

Another asset class that many do not consider is life insurance. It must be noted thatlife insurance should be considered as a unique asset class in itself, given that itcreates an asset in case of an eventuality like death or disability of the individual.This ensures that the goals are met for the individual if he/she is present or fordependants in his/her absence.

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HOW?

Once an individual has identified these asset classes, he/she needs to know how todivide his/her investments in these asset classes. The key considerations in choosingthe asset classes are the level of return and the risk. Liquidity, transaction costs andease of investment are the other considerations. To keep it simple, some investorsmay prefer to look at it as balancing the downside (protection against capital loss)with upside (potential for high returns), which is not entirely correct but a useful wayto look at investments. For instance, bank deposits may seem to provide a complete

protection against capital loss. This is not true as in highly inflationary times, thedeposits made at lower rates may not provide returns adequate to even beat inflation.This means that the capital value reduces in real terms even though in nominal terms

that is not the case.Also, research has shown that in general, people are more sensitive to losses than theyare to gains of the same magnitude.

The factors that one should consider in choosing exposures to different asset classesare as follows:1. Risk Tolerance: The degree to which one can tolerate risk varies for different

people, and depends on the following:

Stage in life: A younger person, having a safe livelihood and few dependents, hastime on his/her side can take more risk while choosing a portfolio.

Net-worth: If one owns lot of assets and have few liabilities i.e. have a high networth one can afford to take more risk as one has a cushion of assets that cansafeguard one from short term losses occurring in due to market fluctuations. Experience with investments: If one has prior experience in investing in financialmarkets and one is comfortable with short-term fluctuations then one can take more

risk and hence more exposure to equity/real estate.

2. Investment objective: This entails deciding the purpose for which the investmentsare being made. Different objectives would demand that one tailor their investment

portfolio to meet these goals.

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Objectives could be: A person nearing his/her retirement would want a regular stream of income from theinvestment, while preserving the capital value, and should hence choose a safer

portfolio.

If one is looking at growth along with preservation of capital, and is investing for agoal that is very important, such as saving for one's child's education, then one cantake some more risk in pursuit of higher returns, but not at such a high risk that itmight erode one's capital.

If one is looking at high growth and investing for a goal that is not very importantthen one can afford to take more risk.

3. Time Horizon: The time for which one would like to hold an investment alsoimpacts the level of risk that one can undertake. If the goal for which the investmentis being made is occurring after a long time, then one can pursue higher returns byinvesting in a more risky portfolio as over the period of time the risk reduces.However if one needs the money in the near future then one must invest in a safer

portfolio.For instance based on historic data for SENSEX, the chance that an individual wouldsuffer capital loss over a 10-year period is 1.5%. Once an individual has decided onhis/her asset allocation, the next step many ask is which securities within those assetclasses one should select, and whether one should change the allocation from time totime based on market conditions.

Research studies conducted from time to time have shown that over a longer periodof time (about ten years), one attains very little or nothing by market timing andsecurity selection as far as portfolio management is concerned.

An investor must maintain discipline while managing these investments. Once he/shehas determined the asset allocation, he /she should implement it using funds ratherthat direct purchase in the markets as it may be inefficient even when an individual

has the access and ability to do so. Thereafter he/she should not succumb to thetemporary blips in performance of various asset classes, and should instead use theconcept like Rupee Cost Averaging.

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Asset Allocation Clock

Different asset classes tend to outperform during the various stages of the classicbusiness cycle. Allocating your assets according to these phases is referred to as usingthe asset allocation clock

Oversimplifying, growth stocks do well during the early portion of the growth phaseof the business cycle. Commodities then tend to outperform as the business cyclematures and commodity prices zoom up due to inflation. Money market funds tend tooutperform as a recession starts to kick in. Bonds do well as inflation evaporates and

becomes disinflation or even a little deflation. This model is not guaranteed to workand every business cycle has its own quirky characteristics, but does help to explainsome of the investment and speculative behavior we see in the markets.

This model has been identified and developed by Merill Lynch. This model laysdown that various asset classes perform well in different stages of the economy. Thiscycle repeats itself over a period of time. This cycle is affected by the government

policies global demand and supply models and the stage in economic growth.

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Defining Portfolio Strategies and Portfolio ModelingAfter establishing investment objectives, a broad framework for harnessing possibleinvestment opportunities is formulated. This framework would factor for risk-returntrade-off of considered options, investment horizon and provide a clear blueprint forinvestment direction.

Investment strategy helps in forming broad level envisioning of asset class(Securities, Forex, Commodity, Real State, Reference and Indices, Art/Antique andLifestyle Assets (Car, Boat, Aircraft), market, geography, sector and industry. Eachof these asset classes is to be comprehensively evaluated for inclusion in portfoliomodel, in view of defined investment objectives.

While defining the strategy, consideration of client preference or avoidance forspecific asset class, risk tolerance, religious beliefs is the key element, which would

come into picture. Thus, for a client with a belief of avoidance of investment in sinindustries (alcohol, tobacco, gambling etc.) is to be duly taken care of. Likewise, for aclient looking for Sharia- compliant investment, strategy formulation should considerinvestment options meeting with the client expectations.

Determination of Portfolio Constituents and Allocation of Assets

Guided with the investment strategy, constituents in portfolio model are determined,which would directly and efficiently contribute towards clients investmentobjectives. Thus, a broad level investment guidance of investment in fixed incomein emerging market would further determine classification within Fixed Incomesuch as Govt. or corporate bonds, fixed or variable rate bonds, Long or short maturity

bonds, Deep discounted or Par bonds, Asset backed or other debt variants.

Return profile, risk sensitivity and co-relation of constituents within portfolio modelwould help to determine the size (weightage) of each individual constituent in the

portfolio.

Strategy Implementation

Having decided the portfolio constituents and its composition, transactions to acquirespecific instruments and identified asset class is initiated. As acquisition cost would

be having bearing on overall performance of the portfolio, many times process ofasset acquisition may be spread over a period of time to take care of marketmovement and acquire the asset at favourable price range.

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Portfolio Management

PORTFOLIO CONSTRUCTION PROCESS

Portfolio Administration

Portfolio Administration involves handling of investment processes and assetservicing. This would also require tax management, portfolio accounting, feeadministration, client reporting, document management and general administrationrelating with portfolio and client.

This function would involve back office administration and custodial services tomanage transaction processes (trading and settlement) - interfacing with

brokers/dealers/agents, Fund managers, Custodians, Cash Agent and many othermarket intermediaries.

Investment Selection

Investment selections are rigorously researched by a solid research team before theyare considered for authorization. The investment selection process:

Research by Industry experts

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NEEDS/OBJEC

TIVES/RISK

TOLERANCE

INVESTMENT

STRATEGY

PORTFOLIO

DESIGN

INVESTMENT

IMPLEMENTAT

ION

INVESTMENT

MONITORINGPORTFOLIO

REPORTING


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Use specialist external research as required

Investments are authorised by in-house Investment Committee

Investment Implementation

Investment implementation is undertaken on a regular basis and entails:

Access to deal flow - initial public offerings and placements

Access to mergers/acquisitions, purchase plans, etc

Staged implementation of strategy - entering the market slowly and systematically

Investment Monitoring

Daily monitoring of the portfolio/s is made possible by the use of real time marketdata by in house team who access specialty external research as required and otherresources available.Investment monitoring entails: Real time market data Input from Broker Panel Risk Management Guidelines Daily, weekly and monthly reviews Exceptions reporting Face-to-face meetings with fund managers and market analysts Quarterly re-balancing

Performance Evaluation and Analytics

Performance evaluation of the portfolio is an ongoing process. Portfolio return iscontinuously monitored and analyzed with respect to defined portfolio objectives.Analysis dimension could be varied simple and complex. These may include -

absolute return, relative return (in comparison to chosen benchmark), trend, pattern,cost impact, tax impact, concentration, lost opportunity and other form of sensitivityand what-if analysis.

Any deviation of portfolio performance observed during performance evaluationwould lead to strategy review and any possible alignment of portfolio strategy.

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Strategy Review and Alignment

Recalibration of Portfolio Strategy

Based on performance evaluation and future outlook of the investment, portfoliostrategy is evaluated on periodic basis. To keep it aligned with the defined investmentobjectives, portfolio strategy is suitably re-calibrated from time to time. Many times,review of portfolio strategy would be necessitated due to change in client profile orexpectations.

Rebalancing, Reallocation and Divestment of Assets

Any re-calibration of strategy and consequent change in portfolio model wouldrequire rebalancing of the assets in portfolio. This would be achieved through

rebalancing the asset (divesting over-allocated part and acquiring under allocated),relocation (from one sector the other or from one instrument to other instrument inthe same class) or complete divestment.

Key Challenge Areas

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While immense business potentiality of this emerging sector is a driving point formost of the firms, they face many challenges in formulating winning services offeringmeeting the client needs. In the following section, we would briefly take a look on the

key challenges area in the present context.

Highly Personalized and Customized Services: Unlike other stream of financialservices, mostly being transactional /commoditized in nature, wealth managementservices require client specific solution and service offering. No one solution exactlymeets the needs of other client. In a situation of highly personalized and customizednature of service offering, developing any form of generic service model does notsupport growth of the business.Personal relationship driving the business

To meet client expectation of personal attention, mode of communication in wealthmanagement services tends to be highly personalized. Thus, the conventional grids ofcommunication, such as call centre, data centre does not fit well. Success of wealthmanagement services heavily draws on personal interaction with the dedicatedrelationship manager, who takes care of whole investment management lifecycle for

bunch of clients on one-to-one basis. This essentially requires service firm to investheavily in human processes to groom and retain a team on competent relationshipmanagers with cross functional skills.

Evolving Client ProfileThe biggest challenge in providing wealth management service offering is to factorand reckon the evolving nature of client profile, in terms of investment objective,time horizon, risk appetite and so on.Thus, a service model developed for a particular client cannot remain static over a

period of time. Any service model has to be flexible enough to consider the dynamicnature of client profile and expectations arising out of it.

Client Involvement Level

The conventional adage the more money you have, more effort is needed to manage

it proves to be otherwise in case of HNWIs. Generally, client involvement inmanaging the finance remains on the lower side. This brings onus of managing thewhole gamut of investment and due performance single-handedly on the shoulders ofinvestment manager.

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Passion Investment (Philanthropy and Social Responsibility)

In the recent years a trend has been observed that bulk of investments by HNWIs hasbeen directed towards passion investments (art, antique, jewellery, coins, uniqueassets, luxury), philanthropy and social/community causes.

As per World Wealth report, 11% of HNW investors worldwide contributed tophilanthropic causes with a contribution over 7% of their wealth in year 2006. Ultra-HNWIs contribution was even more - 17% of Ultra-HNW investors that gave to

philanthropy contributed over 10% of their wealth. In total, this equates to more thanUS$285 billion globally. Against this backdrop, new breed of HNWIs expect tostrategically manage the wealth and personal resources allocated to philanthropy

purpose, in order to maximize its impact. This demands a relationship manager notjust to be a passive financial advisor rather a passionate partner sharing interest andinclination of the associated client.

Limited Leveraging Capabilities of Technology (as an enabler)

In the recent times, we have witnessed technology a key enabler to help business toexpand its market reach with reduced cost of services offering. Online banking andonline trading/brokerage services are the best examples in this regard. Technologyleveraging has helped services firm to achieve universal proliferation of market withsubstantially reducing transaction cost.

As business rules and service definitions to guide the applications tends to be quitecomposite in wealth management services, leveraging the capabilities of technologyto meet the business requirement may not be highly feasible in the initial years.

Technical Architecture and Technology Investment

As business architecture is still evolving, a proven basis of resilient technicalarchitecture and framework to support the emerging business greatly remainsmissing. In absence of this framework, any investment commitment towardsapplication development / system implementation would be fraught with severe risk.

Intricate Knowledge of Cross-functional Domain

By very nature of wealth management, it not just involves matters of plain vanillafinance but has intricate relationship with many elements of domestic / internationallaw, taxation and regulatory norms. In order to provide sound investment guidance, arelationship manager is required to have intricate knowledge of domestic/cross-

border finance, accounting, legal and taxation subjects.

The rising competition

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The results of the economic boom have now started showing up in semi-urban andlesser developed cities as well. These pockets also present increasing growthopportunities to the industry. Anyways with increasing competition, tapping theearlier untapped markets is now a matter of compulsion rather than choice! New

players have been granted licenses, few more are in the pipeline and thecompetitions just getting hotter. It may well become a survival of the fittest.

Growth versus Governance- A right mix

An increasing responsibility is being placed on the Managers to ensure that theoperations of the Portfolio Management Schemes are managed to the full benefit ofthe investors. As the number of players in the market increases, competition mayforce companies to comply not only with the laid down regulations and concentratemore on growth but endeavor in creating excellence in governance as well. In thischallenging environment, the debate of growth versus governance is surely set to

assume greater significance.

Solution Framework

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Generic services offering model is going to draw big blank in case of wealthmanagement services. A HNWI client expects exclusiveness in services in a normalmanner. In highly competitive market, key to success for a firm lies in offeringexclusiveness in services delivery (high quality services on most personalized basis),going beyond the client expectations.

A solution framework with considered inclusion of following key elements wouldhelp firms in meeting and exceeding client needs towards sustainable businessgrowth.

Quality of Service Level:

Quality of service level provided by the service provider firm would the keydeterminant of growth and success in client acquisition, client satisfaction and clientretention aspects.

In a sense, service offering could be developed in the form of partnership with theclient based on trust and integrity, where the relationship manager remains highlyresponsive to client sensitivities and expectations.Without over-emphasizing, a satisfied client would provide multitude of opportunitiesof growth of business through deepening the relationship, direct / indirectreferencing as well as cross selling of products. In the other situation of deficiency inservice level, he would not hesitate to move the business to another firm. This keepsstrong emphasis on continued engagement with the client on the aspects of clientexpectation and servicing, rather than showing extra attention only during the periodof client acquisition.

Focused around client needs, a broad framework of service offering during wholelifecycle of client investment management would be revolving around: Anticipate,Analyze, Advice, Act and Monitor cycle.

MONITOR

ANTICIPATE ACT

ANALYSE ADVICE

Universal Service Offering

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While business potential appears to be quite high, existing business architecture stilldoes not provide any sound basis to formulate technical roadmap. Added to that,dynamic characteristics of client profile bring an increased challenge in drawing afirm implementation blueprint.In the given situation, any big-bang commitment towards technical implementation

plan would not be a wise idea. A prudent approach would be to get started onmodular basis with progressive integration of functional components in order of itsfunctional significance. Gaining insight and confidence around the business

processes, this could be gradually scaled over the period of time.To meet the information technology requirements, a firm has several alternatives (orcombination of alternatives) to consider:

c) Integrated solution approach: Developing in-house applications to meet end-to-end new business requirements. These applications are based on existing technology

architecture of the firm and are closely integrated with the existing service models. Itwould be a least preferred choice in the current situation, on count of cost, time, lackof clarity and complexity of solution.

b) Service Bureau /ASP Model: A recent trend has been witnessed in the solutionproviders landscape. Many of information technology service providers have comeout with novel solution for investment management / investment processing platformin the form of service bureau / ASP. This platform provides integrated end-to-end

processing infrastructure and services including core of business processes of wealthmanagement.On the part of a wealth management firm, paying agreed charges to service bureau

provider, option of service bureau completely eliminates the requirement of ongoingresource commitment and cost of maintaining information technology infrastructure.While total cost of owning may be the key motivating point for a wealth managementfirm to adopt service bureau model, the key consideration of providing high quality ofservice level with enhanced responsiveness may not be adequately answered. Thequestion remains to be answered is what would be the key differentiator in serviceoffering of two wealth management firms operating from the same service bureau?

c) Stand-alone commercial software product/solutions: Pre-packaged solutionsthat can be focused to specific part of services or provide comprehensive end-to-end

processing. These can be deployed independently or could be integrated with existingsystems. Cost, customization and integration difficulties would be the challenging

points.A loosely oriented technical architecture with optionality and mix ofBuild Buy

Integrate components would be considered as a good beginning point. To provide

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enough resilience and high business relevance, any of the considered option andassociated structure should keep due provisions for the following key elements:

- Considering the complexity of business processes and involved business rules, rulebased processing would be the core of processing.

- Client profile acquires many new dimensions with plethora of attributes. Client datais required to be appropriately managed (aggregate / segregate) to build a profiledriven solution offering.

- Decision support and client oriented analytics acquire more importance.

- Applications should provide adequate flexibility to incorporate manual processinginterfaces.

CASE STUDY: ABN Amro Private Banking

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Netherlands based Dutch Bank with Global presence. AUM - $500 bn (globally).

In India AUM - $800 mn

Private Banking operations since 1992. Threshold level 2.5 cr

Services offered include Advisory on mutual funds, Direct Equity, Insurance, RealEstate, Direct Debt, Tax planning, banking solutions, Alternative investments,transaction execution platform and other structured products.

Features of ABN AMRO PB:

True Partnership Model of Private Banking

Self contained team approach to wealth management

Pricing Nominal Upfront fees and then service based fees

Private clients wealth mgmt is based on the 4 pillars:

Investment horizon

Risk tolerance

Liquidity needs

Performance expectations

Customer Segmentation at ABN AMRO PB:

TRUE PARTNERSHIP MODEL OF WEALTH MANAGEMENT

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The ABN Amro Wealth Management Services follows the True Partnership model ofwealth management. The striking feature of this model is that it provides immense

43

Understanding the investors profile

Construction of Financial Plan

Tax ConsultationLegal Advisory

Asset Allocation

Security Selection

Execution

Monitoring and Performance

DirectDebt

Insurance

Alternativ

e

EquityProducts

MutualFunds

Property


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flexibility to the service provider thus enabling it to provide customized services to itsindividual as well as corporate clients.

This model lays down that the wealth management process should ideally follow thefollowing steps.

Need Analysis: The first step in wealth management is the need analysis where the service provider tries to understand the profile of the client i.e. it tries to find out theimmediate, short term and long term needs of the client. The service provideranalyses the income source, life style, savings habit, future financial commitmentsetc.

Construction of financial plan: The next logical step in wealth management process is to construct a full fledged, relevant financial plan for the client. It is a jointactivity where the client and the wealth manager sit together and construct a financial

plan as per the future requirements of the client.

Decide the proportion of various asset classes (allocation): To construct a financial plan essentially means to decide the proportion of the asset classes in the portfolio ofthe client. The asset allocation decision is based on various factors such as the incomeof the client, his liquidity requirements, risk appetite, expected returns and expectedtax concessions.

Execution of the financial plan: This is the most important step in the entire wealth management process as the prime duty of the wealth manager is to exactly replicatethe financial plan in the paper in real life which is often a very difficult task.

Monitoring and performance evaluation: The wealth manager has to keep on monitoring the portfolio of the client. The wealth manager will be evaluated for

a) Protecting the wealth of the client

b) Increasing the wealth of the client.

The wealth management service is a continuous process. Its not a one time solution.All the above mentioned steps have to be performed on a continuous basis to attain

both the objectives i.e. wealth protection and wealth maximization.

Case study: Motilal Oswal Financial Services Ltd

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MOFSL offers customized investment management services to its retail customers Includes planning, advisory, execution and monitoring of a range of investment

productsThe wealth management philosophy is executed through strategic focus on:

Increasing distribution reach in terms of number of outlets and number of customers.

Customer segmentation (HNI Purple, Mass Affluent MOSt Select and MassRetail)

Wide bouquet of product offering (Direct equity, PMS, Mutual funds, Private equity,Commodities)

Representative office in Dubai to tap offshore businessProducts & services offered through physical as well online channels

Empowered, robust franchisee model

PMS Assets Under Management (Rs in Million)

The AuM OF Motilal Oswal Wealth Management Services has increased from Rs522 mn in 2004 to Rs. 8000 mn in 2008. This tremendous increase in the AuM is

because of the innovative and flexible service model followed by the company.

The service model adopted by MOFSL is called as The Private Client ServicingPyramid.

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Striking features of client servicing pyramid adopted by MOFSL:

Focus on advisory and product mix that leads to Client Profitability

Multi-disciplinary approach involving various elements of investment banking alongside private banking disciplines

3D Focal engagement strategy thereby consolidating clients needs across personal, family and business arena

Diversified solution management to cater to unique needs of clientsThe Relationship Manager is the single touch point to the client who manages and

processes the operational, intellectual and product specific inputs relevant to theclients portfolio. This saves lot of paper work, time and other resources.

Conclusion

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The middle class should drive growth in India

The growth of the middle class and the economic growth of India are in a virtuouscycle. Rising incomes lead to more consumption, which in turn leads to highereconomic growth, then more employment opportunities and subsequently higherwages and the circle starts again.Thus, as the middle class grows and continues to increase domestic demand, theeconomy will also continue to grow. In terms of consumption, real privateconsumption (including both households and private companies) accounts forapproximately 55% of GDP. The growth of the middle class will continue to increasehousehold consumption in the country. The middle class also demands betterhealthcare and education. In addition to the benefit of strengthening human capitaland thus productivity, this also leads to more private expenditure on healthcare andeducation and thus improvements in existing infrastructure. In fact, the CLSA surveyof middle income and upper-middle income behaviour showed that education was the

third largest household expenditure behind essentials such as rent/mortgage andgroceries. In terms of investment (already around 35% of GDP), the growth of themiddle class will also make an impact as it will force more business to expand or new

business to take root.The middle class is also increasing its share of financial investments and thus

providing new sources of capital for companies. Although household savings andinvestment rates as a % of GDP have remained relatively the same over the pastseveral years, investment in shares and bonds has risen over the past several years. Asthe middle class recovers from the crisis, this trend should continue.One key point to ensuring that the link between middle class growth and economicgrowth continues to strengthen is providing the right education and skills to themiddle class and creating enough opportunities in society to absorb these employees.Matching middle class skills with the demands of the growing economy.One benefit of Indias strong economic growth is that the economy has the potentialto provide employment for the growing middle class. The boom in call centers andother outsourcing industries helped many households to achieve higher incomes overthis past decade. However, one challenge is to continue increasing skills at all levelsof the income pyramid to ensure that the newly emerging middle class (or those onthe fringe of the middle class) are viable employees.

The second challenge, of a more general nature, is to increase the number of skilledprofessionals in the workplace to change the structure of the economy to a higher-skilled economy. Graduates often do not have the necessary skills to be effective inthe marketplace. For instance, the World Bank estimates that a threefold increase incivil engineering graduates would be necessary to meet Indias large infrastructureneeds.

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Sophisticated, discerning clients; complex services; and stiff competition are thehallmarks of wealth management firms. The stakes are rising anew, as globaleconomic and demographic trends produce new growth opportunities, forcing firmsto search for go-to market strategies able to attract new client segments throughorganic growth. In the process, firms are tackling an eternal dilemmaWealth management firms in India inevitably encounter challenges .Theattractiveness of the Indian Wealth market is readily apparent but misperceptionscloud many competitors understanding of their business. To operate more effectivelyin an industry that will likely continue to experience rapid change and growingcompetition, wealth managers need to understand the true economies of their business.In short, they must examine their offerings critically to bridge the gaps.A HNWI client expects exclusiveness in services in a normal manner. In highlycompetitive market, key to success for a firm lies in offering exclusiveness in servicesdelivery (high quality services on most personalized basis), going beyond the client

expectations. Service offering developed in the form of partnership with the clientbased on trust and integrity, with relationship manager remaining highly responsiveto client sensitivities and expectations becomes the winning point in clientacquisition, client retention and enhanced client satisfaction.Continued engagement with the client throughout the relationship lifecycle wouldgreatly help in understanding dynamic client expectation and providing desired levelof services. A broad framework of service offering revolving around: Anticipate,Analyze, Advice, Act and Monitor cycle, would provide a sound basis to caterevolving client needs.Organizational human process requires re-oriented strategy to attract, groom andretain a motivated team of relationship managers with cross-functional expertise, whowill make the real difference in delivering the service content.Considering the complexity of business rules and service definitions in the business

processes, leveraging the capabilities of technology to meet the business requirementmay not be highly feasible in the initial years. Further, in absence of proven businessarchitecture, basis for resilient technical architecture and framework to support theemerging business still remains desired. This requires adopting a cautious approachtowards investment commitment in technical implementation.

Generic services offering model is going to draw big blank in case of wealthmanagement services. A HNWI client expects exclusiveness in services in a normalmanner. In highly competitive market, key to success for a firm lies in offering

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exclusiveness in services delivery (high quality services on most personalized basis),going beyond the client expectations.Service offering developed in the form of partnership with the client based on trustand integrity, with relationship manager remaining highly responsive to clientsensitivities and expectations becomes the winning point in client acquisition, clientretention and enhanced client satisfaction. Continued engagement with the clientthroughout the relationship lifecycle would greatly help inunderstanding dynamic client expectation and providing desired level of services. A

broad framework of service offering revolving around: Anticipate, Analyze, Advice,Act and Monitor cycle, would provide a sound basis to cater evolving client needs.Organizational human process requires re-oriented strategy to attract, groom andretain a motivated team of relationship managers with cross-functional expertise, whowill make the real difference in delivering the service content.Considering the complexity of business rules and service definitions in the business

processes, leveraging the capabilities of technology to meet the business requirementmay not be highly feasible in the initial years. Further, in absence of proven businessarchitecture, basis for resilient technical architecture and framework to support theemerging business still remains desired. This requires adopting a cautious approachtowards investment commitment in technical implementation.A loosely oriented technical architecture with optionality and mix of Build Buy Integrate components would be considered as a good beginning point. Rule basedengine, profile driven solution offering, client oriented decision support and manual-

processing interface would be some of the key considerations in implementation plan.

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The Indian wealth management industry is at a new stage. Providers, products,

channels, technology, regulation, and clients are coming together in the wealth

management space to capitalize on this tremendous growth opportunity.

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The wealth management industry in India is experiencing an evolutionary phase ofdevelopment. With the liberalization of the Indian economy and subsequent growthand prosperity across sectors, the wealth management industry is poised to gaingreater traction in an expanding market. In a new report, Overview of the IndianWealth Management Market, Celent examines how the wealth managementindustry is enhancing its relevance in this dynamic marketplace.According to the report, India is slated to become a US$1 trillion market (in assetsunder management) for wealth management providers by 2012, with a target marketsize of 42 million households.The client segmentation schema promises growth across all the six categories:

Ultra-high net worth, or Ultra-HNW (in excess of US$30 million), will have atotal population of 10,500 households by 2012.

Super high net worth (between US$10 and $30 million) will have a totalpopulation of 42,000 households by 2012.

High net worth (between US$1 million and $10 million) will have a totalpopulation of 320,000 by 2012.

Super affluent (between US$125,000 and $1 million) will have a total populationof 350,000 households by 2012.

Mass affluent (between US$25,000 and $125,000) will have a total population of1.8 million households by 2012.

Mass market (between US$5,000 and $25,000) will have a total population of 39million households by 2012

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Bibliography

www.bseindia.com

www.nseindia.com

www.indiawealthnews.com

www.wealthzone.in

www.mofsl.com

World Wealth Report 2010 by Capgemini and Merrill Lynch

Wealth Management an introduction ICFAI Press
http://www.nseindia.com/http://www.indiawealthnews.com/http://www.wealthzone.in/http://www.mofsl.com/http://www.nseindia.com/http://www.indiawealthnews.com/http://www.wealthzone.in/http://www.mofsl.com/

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Santosh Final Winter Project