Karan Bhagat, founder, managing director and CEO, IIFL Investment Managers shares his views with Asian Private Banker in the ‘Final Word’, a ten-part series where the industry’s leaders share their thoughts and opinions on key issues around industry trends, business performance, investment solutions, regulations and compliance, and technology.
Industry trends | What is the state of Asia’s talent pool and did your firm pay significantly higher for new talent? What is your view on private banking development in Asia?
We recently acquired Wealth Advisors, one of the largest wealth management firms in South India. We believe we have paid the right price for this acquisition as we’ve strengthened our reach and annualised revenues while bringing on board a great management team along with top-quality talent.
Private banking talent, primarily in India, is very hard to come by. Private banking requires a holistic approach alongside strong domain on the everchanging investment needs and opportunities that come up in a VUCA — volatile, uncertain, complex, and ambiguous — world. Quality talent often comes at a high price, but it is worth it.
Industry Trends | How important is it for your business to make substantial inroads in China to ensure sustainability and growth over the next decade?
We understand India and our focus would be more on India for now. The Indian market remains underpenetrated as far as financial services are concerned and a large part of the population holds savings in gold and real estate. As financialisation of savings increases, a lot of this will, directly and indirectly, aid financial services-related companies. With growth prospects for India remaining high, we would prefer to fortify our presence here before making any inroads into China.
Business Performance | In the midst of what has been construed as an increasingly difficult macroeconomic environment how do you think the private banking and asset management industry will perform in 2019? Will it be a year to separate the wheat from the chaff?
We see India on the brink of a quantum leap in wealth generation and the economy is home to wealthy individuals with a combined fortune close to INR 100 trillion. While it will be difficult to predict the growth for 2019, we see this figure almost doubling by 2022. The wealth creation exercise and the number of HNWIs are just beginning to grow, and there is a long-term path of compounding. As the financialisation of savings coupled with monetisation of assets continues to see an uptick, private banking and asset management are set to benefit immensely. At this stage, I would not see 2019 as a year to separate the wheat from the chaff. I would rather think the sowing has just begun.
Business Performance | What is the one revenue line that you must build up significantly in the coming few years to ensure business sustainability? What is your view on the revenue mix of the industry in general?
Clients recognise a devolvement of power is needed for them to receive the professional help they seek in managing their wealth. Fees attract scrutiny among HNWIs. As one of the leading companies in wealth management in India, we have recently announced a pioneering shift in the way wealth management is done. We launched IIFL One to migrate to an advisory and discretionary-led model from a brokerage-led one, across all our product offerings. The focus is on process-based delivery towards money management and not just product-based execution. IIFL-One would be our focus area in the years to come.
Investment Solutions | Though continued geopolitical uncertainty and volatility pose a challenge for DPM performance, will this ultimately prove to be a boon for the discretionary business, converting clients from trade to delegation? In these same market conditions, how critical will the alternatives business be for private banks in Asia moving forward?
A structural shift has been taking place towards the advisory-led engagement model over the last decade. The GFC and high market volatility only amplify this shift. Within advisory-led engagement, retaining final say on product/fund manager selection and TAA or delegating the same to one’s trusted wealth advisor within a well-structured institutional framework is a matter of personal preference.
Of late, many entrepreneurs and senior professional wealth clients see value in discretionary offerings. Most UHNW investors are increasingly getting sophisticated and often want to diversify their portfolios from traditional market-linked fund products to market neutral products like hedge funds, credit and real estate funds, venture capital, and private equity. Having the capability to source and even manufacture the right set of alternate products is today the key differentiator for any private bank as market-linked products have become extremely commoditised.
Investment Solutions | Ten years on from the GFC, how has your product shelf evolved and how has clients' perception of structured products changed since then?
We have seen strong growth in the breadth of our product offerings with the addition of many focused, managed account strategies on the listed equity side, and big additions on the alternate side. Structured products have continued to be part of our core portfolios right from 2008 — we, as well as our investors, have always stuck to products issued by highly rated issuers of structured products. Clients are comfortable with higher-rated issuers.
Regulations & Compliance | What’s the essential tool you have or are planning to create that will help your firm tackle the uptick in regulatory stringency and scrutiny? Do you think that the compliance costs of your business have peaked?
Technology’ and ‘risk foresight’ are the needs of the day for compliance and governance. We are constantly upgrading technology to bring a better experience to the customers and ease of operations. We have implemented suitable integrated systems for our wealth, asset management, and lending businesses to meet the customer and business requirements and to monitor the regulatory requirements including limit monitoring, customer profiling, and AML checks. We are constantly working towards making the system more control-driven, and alerts are near live rather than post facto.
Further, a dedicated risk management team is in place to understand the risk of products and processes to ensure a better governance setup, and audits have become an integral part of our compliance and governance framework. Any business which must grow over a period needs a strong compliance and corporate governance framework in place to ensure no regulatory bars are crossed. We would classify compliance as an investment rather than as a cost because you need a monitor to mind the class.
Regulations & Compliance | Are you satisfied with how regulators interact and solicit the industry for feedback?
SEBI [the Securities and Exchange Board of India] as a regulator has been a great stimulant and has been true to its vision by also promoting development and regulating the securities market. SEBI has started meeting independent directors and various intermediaries, having feedback meetings, and seeking comments and observations of market participants. It voluntarily meets market participants and intermediaries to hear difficulties and constantly endeavours to bring up the segment to its full-fledged potential.
Technology | What is your view on robo-advisors and is your firm developing capabilities of its own? Have you observed any robo-advisory developments that could materially disrupt the industry?
With more and more people fascinated by AI, robo-advisors have been successful in attracting investors’ attention. However, the key point on accuracy lies with the algorithms used and the design of the engine. We believe that faceless robo-advisors will not be the correct approach, but a hybrid solution is for the UHNW business segment. As such, we are investing in building platforms which arm RMs with quick and appropriate investment decisioning capabilities. To ensure complete transparency, we intend to these engines to clients also.
There are a good number of players in the robo-advisory space for retail clients and they have been regularly trying to make an advisory model supported by the banks through their distribution framework. Until now, we have not come across a model which can clearly emerge as a disruptor but given the number of players, we may start seeing some consolidation in the space of robo-advisors.
Technology | What emerging technology applications do you expect to reach an inflexion point in their convergence with private banking and wealth management? What impact will they have on the operational models of private banks and wealth managers? Who will be the biggest industry disruptors?
The emergence of cognitive AI tools with intelligent NLP and NLG [natural language processing and generation] engines may provide platforms which can be consumed across the private banking and wealth management business thus bringing the cost of advice and service down. These effective tools in a hybrid scenario will aid the relationship manager to garner more time to service a higher number of customers, thus adding to the bottom line contribution. The jury is still out on the point that robo-advisors may cause a serious dent to wealth managers. Even in developed economies, we haven’t seen a significant disruption in the robo-advisory space.