Expect AUM growth of 20-30% in FY20: Karan Bhagat, MD & CEO, IIFL Wealth

We believe we have a good mix of client relationships and a set of relationship managers who have a deep expertise in managing clients for a long period of time, combined with the platform like ours, we should be able to leverage and make that business extremely successful, says Karan Bhagat, MD & CEO, IIFL Wealth 

Talk to us about the demerged wealth business and elaborate on the revenue drivers. Does it still continue to be the fastest growing business within capital markets? 

From a business perspective, the biggest two drivers for our business remain clients, as well as our relationship managers. From a client perspective, I am happy to share that our persistency ratio with clients -- essentially clients who continue to remain with us -- exceeds 99% over a long period of time. Even from a relationship manager perspective, our attrition ratios continue to be less than 2.5-3%. 
And these are the two biggest resources we have at our disposal which allows us to grow our business at an exceeding pace. From our side, as a firm we continue to invest in the products platform and research base as we go along so as to be able to maintain the platform available to our relationship managers as well as our clients to make the best use of our services. 

Wealth management businesses across India are transitioning to the trailing method. Could you explain this new method and how that transition process has been? 

I think we were the first proponents of a big shift from an upfront model to a trail model and actually, there are two shifts which are happening. One is the revenue recognition change from upfront to trail and that is a great and a much-needed change for the industry because it aligns the incentives of the relationship managers and makes it equal across all products. Now, whether he is really offering his client the mutual fund, alternative investment fund or a PMS, the fact that he is getting commissions on one as an upfront or a trail really should not influence his decision to offer his client’s that set of product. But more important than the change of revenue from upfront to trail is the effort of lot of wealth managers, led by us, to transition the business from a distribution model to that of an advisory model. Some of our firms are doing it under the portfolio management guidelines, some are doing it under the RIA guidelines. In either case, the principle of being a fiduciary advisor remains the same. As an advisor, our fee essentially moves on from being one we are charging the client, as opposed to a fee we are earning from the manufacturer. And that by itself is extremely powerful because suddenly, instead of sitting on the opposite side of the table of the client, we are able to sit on the same side of the table. 

In the pursuit of stable income streams, the company has also been aggressively marketing your flagship advisory platform apart from scaling up your AMC business. Tell us a little bit more about how the progress has been and what kind of contribution do you see coming in going forward? 

Broadly, we are breaking up our revenues into two big segments. One is what we are calling the ARR revenue, or in other words, the annual recurring revenue. Annual recurring revenue, as the word suggests, is essentially revenue which is a sum total of the revenue commissions and the net interest income we will earn on the stock of assets we manage. That essentially means that even if we do not do a single transaction, that is the pool of fees or pool of income we will essentially make. Ideally speaking, we would like that pool to increase as much as possible, which essentially makes our business model extremely stable and non-cyclical. Today it would be safe to say that we are already close to around about 55% of our revenues as ARR revenue. The remaining 40% to 45% of our revenues will be broadly transactional revenues which would be a mix of revenues across all asset classes -- equity, fixed income. But as time goes on, we would focus more and more on building our IRR assets. I think that on a steady state basis over the next couple of years we should be in a position to have nearly 75% to 80% of our revenues coming from ARR revenues and the remaining 20 to 30% from transaction revenues which typically will be the ideal mix. 

Given the market conditions right now, how is it that you plan to manage the volatility in capital markets and, consequently, the business as well because wealth management must be getting a little tough right now? 

So these market conditions we have seen over the last 20 years. I think that from a current market condition perspective, there are two things which make our business relatively less volatile, or more important than our business, our client portfolios are relatively less volatile. We have a very strong focus on a philosophy where we essentially represent to our clients that we are in the business of wealth management, as opposed to a business of wealth creation. That is very important because wealth creation, we strongly believe, for clients can only happen in the business they do as opposed to by investing money. And that has allowed us to build an extremely well-balanced asset allocation driven portfolio for our clients. And in the process of doing so, we have been able to maintain and contain the volatility on the portfolios over a longer period of time. A typical portfolio with us today would be 55-60% in fixed income, 30-35% in equities and 5-10% in alternates. Even in a stressed market situation like today, more often than not, last 12 months returns would be in the region of 4.5-5%. So our objective from a client money management perspective continues to be targeting, on a blended fixed income, equity and alternate basis put together in the region, a return of 9-10% on a yearly basis. For all the money we have managed over the large number of years, we would be averaging a return of close to 10% per annum and we would like to keep the volatility as low as possible. Having said that, there obviously will be a little bit of volatility in the transaction revenues which we get on a monthly/quarterly basis and the reason for that, obviously, is the risk appetite of clients go through changes. 

What is the profit growth trajectory that you are seeing for FY20-21? Do you see profits being impacted because of the current adjustment phase? 

We have gone out and broken up our financials for last year and in our first quarterly analyst call, which we had a month back essentially, indicated and gave out the impact of upfront revenues moving to trail. What would impact it, would also have impacted our revenues last year. So for example, our revenues last year were around a about Rs 1,067 crore. The revenue accounted for on a trail basis instead of the revenue recognition on an upfront basis last year. This knocks down our revenue by around about 260 crores for the last year. So our revenue, essentially, for the last year ends up being 810 crores and our profit after tax for the last year, assuming all things being equal, goes down from around about 385 crores to 210 crores for the last year. So the rebased number for the last year is really 210 crores of profit after tax. From here on, it is a one-time kind of adjustment because of the change in revenue recognition from upfront to trail. I think going forward, we will continue to believe that we will add assets both from organic, inorganic, as well as the natural mark to market growth perspective to the extent of 25-30% every year. And broadly, we will be able to maintain our broad retention ratios with a slight improvement in our cost to income ratios. I think we will be able to register a very similar growth, or a slightly higher growth on our profit after tax at the revised base of 210 crores. 

How has the profitability picture been looking across the different products that you offer and the kind of investor interest and participation that you are seeing across various product segments? 

As I said earlier, the product categories, in a sense, are becoming a little less important as we move on to an advisory mandate in terms of the revenue retention. But from an interest perspective, today I think most clients would like to start off with at least 60-70% of their new investments on the fixed income side. Even within fixed income, nearly 85-90% would be between AAA to sovereign. On the equity side, between 30-35%, most clients would like to follow a systematic investment plan approach even for the 30-35%. And even within that, the allocation would be 60-65% to large cap and 30-35% to midcap. So that is how the broad portfolios are positioned and unless and until we see valuations correct by further 10-15%, I really do not see that risk appetite of clients changing dramatically on one side or another. If we get a clearer picture on consumption and on the economy picking up, then clients may be willing to put more money in equities even at current levels. 

But are you well capitalised for growth? What would be your fund raising plans other than, of course, listing money that you raised for the rest of the fiscal? 

Not at all. We have no fun-raising plans. We are extremely well capitalised. We had raised 105 odd million dollars. So, 750 to 800 crores in June of last year, primarily for purposes of acquisitions. Post that, we have completed two acquisitions. One was a small company called wealth advisors in December last year and recently we also announced the acquisition of L&T Wealth two to three weeks back. We still continue to have some fun powder on the balance sheet if we get any other interesting acquisition opportunities. Otherwise, we are extremely well capitalised and as we go along we intend to follow a fairly aggressive dividend policy on our profits every year. So, all things being equal, we would like to distribute nearly two-thirds of our profits every year as dividends. 

You have recently acquired L&T Financials Wealth Management business. Can you explain the rationale of this deal? What is the growth that you think that this business would bring in? 

It is an excellent team. I have known the team for nearly the last 10 to 11 years and the team itself is within the wealth management business for nearly two odd decades. Within L&T, over the last seven to eight years, they have built a good business. Assets are in the region of 22-23 thousand odd crores. Outside of the L&T treasury also it continues to be in the region of 13 to 15 thousand crores. I think we will be able to potentially merge or leverage those assets in a more productive way by putting it on our platform. And we believe a good mix of client relationships and a set of relationship managers who have a deep expertise in managing clients for a long period of time, combined with the platform like ours, we should be able to leverage and make that business extremely successful. 

So finally then, your AUM growth guidance for FY20 and any strategy that you are looking at and anything that you would like to leave us with today? 

The AUM growth guidance which will be a combination of three things primarily will be a combination of net new money to the firm, a little bit of inorganic growth, as well as the mark to market growth of our existing assets. So, these three things put together should lead to an AUM growth of anywhere between 20-30% in FY 20. In terms of further growth trajectories, it is a market where there is a fair degree of friction in building large businesses like ours. A lot of investment today is required on the technology, compliance and a minimum size of assets needs to be there to be able to make the businesses viable. I think we have crossed that hump and we are well positioned to be able to increase our market share as the industry matures over the next 24 to 36 months. 

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Economic Times