Session 1 - financial planning

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This is the first session of my 10 session course on wealth management - delivered in Sept - Dec 2012 in Christ Institute of Management, Bangalore

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1 Wealth Management 1 Welcome to Session 1 S G Raja Sekharan

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Session outline. A few thoughts on personal wealth management and cash flow planning for self Wealth Management industry in India –short history, existing players, business models and their dynamics. We will have a 10 min break and I will also talk about something outside the topic in “ what caught my eye ” 2 Session 1 - An Introduction to the landscape of the Wealth Management business in India

How do you define the term “Rich”:

How do you define the term “Rich” 3 A good definition has to be precise, preferably quantifiable and one should be able to visualize the state of being “rich”. “Having abundant wealth or assets” I believe a lot of people never become (or feel) rich because for them “rich” means “to have abundant wealth or assets”

How do you define the term “Rich”:

How do you define the term “Rich” 4 A good definition has to be precise, preferably quantifiable and one should be able to visualize the state of being “rich”. You define rich by specifying “a minimum amount of money or assets that you need to own”. This definition is not inflation proof and it takes people on a unending quest for money

How do you define the term “Rich”:

How do you define the term “Rich” 5 Rich is “someone who does not have to work for a living”

Definition of being financially independent:

6 Definition of being financially independent Financial independence is achieved when your monthly income from assets exceeds your monthly expenses Once you reach this – your trajectory is on the way up – beyond your imagination You Monthly Cash Inflow Cash outflow / Monthly expenses Savings = Assets Returns from assets

Steps to become financially independent:

7 Steps to become financially independent Know your Cash outflows Know your cash inflows Have a plan for building assets that yield a high income Monitor the situation monthly It is important how much you make and how much you save – but more important is what is the rate of return on your savings.

what is the rate of return on your savings:

8 what is the rate of return on your savings You Monthly Cash Inflow Cash outflow / Monthly expenses Savings = Assets Returns from assets Returns from assets >= Monthly expenses

The wealth management industry helps you get high returns on savings :

The wealth management industry helps you get high returns on savings 9

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Returns Safety of Money Liquidity 10 Investment Criteria

No single solution can address all 3 parameters :

No single solution can address all 3 parameters 11 GOI Securities, Liquid funds, SAFETY Returns not appealing RETURNS Risk might not be palatable Private Equity, Direct Equities Alternate assets Could prove to be illiquid Fixed income, Real Estate LIQUIDITY

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Phase I Phase II Phase III Birth & Education Earning Years Retirement Income 22 yrs 22-60 yrs Child’s Marriage Child’s Education Housing Child Birth Marriage Pension should ideally be close to 66 % of the pre-retirement income Over 60 - 85 yrs 22 yrs 60 yrs 12 Human Life Cycle

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Inflation @ 5% p.a Inflation – a devil that we need to beat 13 Value of Money over time

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Different investors too have different risk profiles

So we need to navigate through inflation, different life stages, differing risk profiles and plethora of asset classes to get rich:

So we need to navigate through inflation, different life stages, differing risk profiles and plethora of asset classes to get rich 15 Rich is “someone who does not have to work for a living”

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Individual Challenges Lack of Expertise Busy Schedules Ascertaining ones priority wrt to objectives- Wealth creation or wealth preservation. 16 Wealth Management add value because External Challenges Dynamic Market Conditions Dynamic Tax Environment Complexity of Products Many intermediaries

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Asset allocation Risk Profile Tracking & Rebalancing Financial Objectives The value add that a Wealth Manager provides Goals and priorities in life Determining the degree of uncertainty wrt objectives Safety, Liquidity, Returns Adapting to the dynamics

Let us take the case of RAJ and PREETI:

Let us take the case of RAJ and PREETI Raj is 25 years old – he is an MBA from CUIM He has a salary of 6 lacs per annum (post tax) He is getting married next year and his fiancé Preeti too has a salary of Rs 6 lacs per annum (post tax) They would be a DINK family and plan to be one for few years They plan to have two kids post that period She believes that kids are more important than career and hence will leave her career when she has kids.

Let us take the case of RAJ and PREETI:

Let us take the case of RAJ and PREETI But she plans to come back to contribute to society later when kids are in college Both of them love to travel and want to see and experience the world They want become financially independent as early as possible Let us make a financial plan for them

Cash flow plan:

Cash flow plan Cash inflows – Cash outflows -

Cash flow plan:

Cash flow plan Cash inflows – Salary Bonus /commissions Investment income Other income Cash outflows -

Cash flow plan:

Cash flow plan Cash inflows – Cash outflows – House running (food and utilities) House rent Clothing Transportation Communication Education Medical Entertainment Outstation holidays Car/ House EMI Assets Purchased Asset Maintenance expenses Social contribution Other expenses Investments made Special events

Cash flow plan:

Cash flow plan Based on current cash inflows and outflows -we can see the current savings For coming years, we will assume inflation % and salary hike % and use the same logic for seeing the savings Based on these assumptions, we will create a cash flow for the next 20 years for this couple

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There are different definitions of wealthy. “The Merrill Lynch - Capgemini World’s Wealth Report” has been one of the most widely used reports and they define HNI – some one having investable assets (financial assets not including primary residence) in excess of USD 1 million ( Rs 5 Cr) Ultra HNI - some one having investable assets (financial assets not including primary residence) in excess of USD 30 million ( Rs 150 Cr) 24 Estimate of the Wealthy in India

Cap Gemini –RBC wealth management World wealth report -2012:

Cap Gemini –RBC wealth management World wealth report -2012 25

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Indian HNI growth (past 5 years) Year of report India Asia-Pacific World 2005 70,000 2.3 mn 8.3 mn 2006 83,000 2.4 mn 8.7 mn 2007 1,00,015 2.6 mn 9.5 mn 2008 1,23,000 2.8 mn 10.1 mn 2009 84,000 2.4 mn 8.6 mn 2010 1,26,700 3 mn 10 mn Source: Capgemini , Merrill Lynch Wealth Management 26 Estimate of the Wealthy in India

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The number of Billionaires in the Forbes rich list is 42 in 2012 (second only to the US and China ) In 1996 - India had three Billionaires In 2004 – India had eight Billionaires 27

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Segmentation of wealthy by the Wealth management industry in India is normally done as follows : Mass affluent –25 lacs to 100 lacs of investible funds HNW – 100 lacs to 500 lacs of investible funds UHNW – 500 lacs and above of investible funds 28 Estimate of the Wealthy in India

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There are three broad categories of HNI’s The inheritors The self made The professionals 29 Estimate of the Wealthy in India

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Estimates of the number of households in each category vary -but every analyst agrees that the market is growing For example - ASK Wealth Advisors estimates the number of households in the segments of Mass affluent ( Rs 25 -100 lacs) and HNW ( Rs 100 – 500 lacs) to be around 15 lacs and has shown a growth in assets at a CAGR of 20% p.a 30 Estimate of the Wealthy in India

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Estimates of the number of households in each category vary -but every analyst agrees that the market is growing For example - Karvy Private Wealth estimates 1000 families with net-worth > 30 $ Mn (Rs 150 crores) and 25000 families > 1 $ mn ( Rs 5 crores) Less than 5% of this wealth is managed by the organized faction of the wealth mgmt Industry ( source : Karvy Private Wealth ) 25 pvt banks cater to around 15000 families only 31 Estimate of the Wealthy in India

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Kotak Wealth / Crisil has recently come with a wealth report where they studied the Ultra High networth households – defined as those with min. net-worth of Rs. 25 crores . As per them, there are an estimated 62,000 Ultra HNH households in India (2011) This number will grow three times to 219,000 Ultra HNH by 2015-15 (29% CAGR) In the same period, the net worth of these Ultra HNH will grow five times from Rs 4500 Cr to Rs 23500 Cr. (39% CAGR) 32 Estimate of the Wealthy in India

Estimate of the Wealthy in India:

33 Estimate of the Wealthy in India These Ultra HNH only invest 20% of their income – of which 37.2% goes to Real estate 33.1% goes to Equities 20.4% goes to Debt 9.3% goes to alternate investments (Kotak Wealth CRISIL report TOP 11)

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India has had rich people for centuries but the wealth management industry is just about 20 years old 34

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35 Watershed mark in the history of corporate India 1991-92 The herald of economic reforms and liberalization

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36 Pre Liberalization Economy GDP of $300 Bn License Raj: Most industries regulated Protectionist economy: Foreign trade Rs. 75,600crs Capital Markets Controller of capital issues Obsolete practices in equity market: Physical ->bad delivery, badla Investors Income tax rates at 50%: Conducive for non disclosure of income Lack of bandwidth in terms of investment options for the HNW’s. Absence of professionalized fund management

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37 Post Liberalization Economy Today GDP at $1,700 Bn (566% in 21 years) Most of the industries opened for private and foreign investments FDI inflow into India $16093million (2009-2010)- in 1991-92 it was $133million (121 times in 20 years) Foreign trade has grown to Rs. 24,42,403 cr ( 75,600 crores in 1991) (32 times in 20 years) Capital Markets SEBI and its initiatives on transparency, protection of clients interests. Indian equity market transactions amongst the most technologically advanced in the world. De-materialized holdings and electronic settlements Investors Tax rates rationalized Organized wealth management practices available pan India Impressive record of professionalized fund management

Current wealth management industry landscape in India:

Current wealth management industry landscape in India 38 Classification in terms of Assets under management (AUM) Classification in terms of specialization in Equity oriented solutions Classification in terms of focus on market segments – mass affluent vs HNW vs UHNW

Current wealth management industry landscape in India:

Current wealth management industry landscape in India 39 Players Leading players in terms of Assets under management : ICICI Bank , HDFC Bank , Aditya Birla Money , HSBC Bank Citi Bank , Deutsche Bank , Kotak Bank

Current wealth management industry landscape in India:

Current wealth management industry landscape in India 40 Players Leading players : Equity Oriented ENAM , JM Fin , Kotak Wealth , Anand Rathi, Motilal Oswal Securities

Current wealth management industry landscape in India:

Current wealth management industry landscape in India 41 Players Leading players : Mass affluent ICICI Bank , HDFC Bank , Kotak , HSBC Premier, IIFL

Current wealth management industry landscape in India:

Current wealth management industry landscape in India 42 Models Private Banking / Private Wealth Divisions of Banking relationships : Fulcrum of relationship is the Banking relationship with client Higher degree of dependence on “ Open Architecture “ or 3 rd party products Focus on liabilities management Strong IT interface/ Net banking facilities

Current wealth management industry landscape in India:

Current wealth management industry landscape in India 43 Models Pure bred Brokerages with existing in-house research divisions : Higher focus on equity oriented investments and derivatives Customized or tailored approach Strong in-house Equity Research divisions Lesser focus on IT interface

Current wealth management industry landscape in India:

Current wealth management industry landscape in India 44 Models Hybrid model : Which offers both customized proprietary solutions as well as 3rd party products Strong dependence on open-architecture Fair bit of equity research coverage Liability management through NBFC’s Strong IT integration

Current wealth management industry landscape in India:

Current wealth management industry landscape in India 45 Models Boutique Standalone Wealth Mgmt Firms : Germinated from existing long standing relationships Absence of in-house research and proprietary solutions. Normally regional origins

Current wealth management industry landscape in India:

Current wealth management industry landscape in India 46 Dynamics of the industry Mkt share : Clearly relationships with pivot based on existing banking relationship are in favour Captive customer base where cross selling is facilitated UHNW’s prefer niche equity oriented wealth management firms IT integration a big factor for the mass affluent Open-architecture in more effective in increasing share of wallet

Current wealth management industry landscape in India:

Current wealth management industry landscape in India 47 Dynamics of the industry Positioning : Mass Affluent accounts : HSBC Vantage, HDFC Privileged HNW accounts : HSBC Premia, HDFC Imperia UHNW accounts : HSBC Private Banking, HDFC Pvt Banking One off transaction oriented/ niche : Edelweiss Capital, JM Financials

Current wealth management industry landscape in India:

Current wealth management industry landscape in India 48 Dynamics of the industry Investment Suite : Alternate assets gaining momentum : Thematics too Structured notes Offshore funds

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49 Perception of HNI’s that success in their own business proves their own ability to successfully manage one’s wealth. Challenges faced by Wealth managers

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50 Challenges faced by Wealth managers

What a wealth manager should be:

What a wealth manager should be 51

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52 Free tips and advice from brokers . Proves not to be a good fit in one’s strategy every time, since such advice lacks risk diversification , asset allocation strategies. Challenges faced by Wealth managers

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53 Pan Regional attributes and challenges - perspectives differ from region to region Challenges faced by Wealth managers

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54 Regulations and Accountability : Banking, Securities, Insurance and Mutual Funds regulators govern their respective Industries . India lacks a centralized Real Estate regulator . Besides, there is NO regulatory body for Wealth Management yet. Challenges faced by Wealth managers

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55 Wealth Managers now have to be geared to offer offshore opportunities . Challenges faced by Wealth managers

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Wealth management is at an early stage of development in India. Will evolve with better practices and regulations. It is underpenetrated - It will grow deeper and wider in the years to come The market for Wealth management will also grow due to growth of Indian economy and the demographic wave in India. There will be increasing global opportunities for Indians to invest – plus there will be more options of themes /structures to invest. 56 The road ahead…..

Thank you:

Thank you 57

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