Ajay Bagga heads the private wealth management business of Deutsche Bank in India. In an interview with Somasroy Chakraborty, he shares the recent trends in the wealth management industry. Edited excerpts:
What is the growth outlook for Deutsche Bank's wealth management business in India?
Deutsche Bank has a very positive outlook on its wealth management business in India. The strong platform, wide coverage and client-centric culture gives us confidence that the private wealth management franchise will grow multifold in coming years. The next three years target is to double client assets under management (AUM) and client revenues with strong growth in both products offered and client coverage teams.
Many private firms are now offering wealth management services in India. Is competition eroding margins?
Globally, wealth management is a very fragmented business, with the top 10 banks serving a big chunk of the market and then a very long tail of small firms that each has a tiny market share. A similar market share distribution is emerging in India. There are over 100 "wealth management" firms, from single person outfits to dedicated family offices to boutique firms to large banks.
Given the strong wealth creation in the Indian economy and the savings culture of India, the wealth management market in India is thriving. It is viewed as very attractive by global firms as well. Hence we anticipate competitive intensity to keep growing in this market.
We forecast a deepening and widening of this market, with large numbers of Indians joining the Rs 5 crore "Dollar Millionaire" club and with global products being introduced in a fast liberalising India. Even though there is already intense competition, this is not eroding the margins of the wealth managers. This is because it is a huge and fast growing market with space for every firm with all kinds of business models due to the very beneficial macro conditions.
Banks are uniquely positioned as they enjoy deep trust of clients and are able to offer a very rich product platform with comprehensive services. Deutsche Bank for example offers over fifty different products to its wealth management clients, from current accounts to fixed deposits, mutual funds, insurance solutions, managed accounts, wealth planning services, escrow accounts, transaction banking, investment banking as well as the entire gamut of foreign exchange and lending products, as allowed by the Indian regulators. This is a sustainable competitive advantage in a huge and fast growing market for us.
Wealth managers in India are now moving to smaller towns. Is Deutsche Bank adopting a similar strategy?
It is true that the number of affluent individuals is increasing in non-metro centres. Still, around 70% of ultra-high net worth individuals are based in the four metros and in the next six cities namely Bangalore, Ahmedabad, Pune, Nagpur, Hyderabad and Ludhiana. Besides metros, we already have presence in Bangalore, Pune, Ahmedabad and Ludhiana. From that point of view, our coverage is quite extensive. As a foreign bank, our ability to further increase our footprint also depends on regulatory approvals to open new branches. As always, we will continue to pro-actively evaluate the potential of private wealth management business in new locations where we are allowed to open new branches. Having said that even in the existing top 10 centres, the wealth growth is huge and offers enough growth opportunities for wealth managers.
The perception is wealthy Indians do not spend much on philanthropic causes as compared to their global peers. Is this trend changing?
We feel this is not true. Indians have traditionally been very charitable, but in a private and unorganised manner. In developed markets, with estate duties and succession taxes, a lot of so called philanthropic trusts are actually tax planning avenues to avoid 50% and more estate duties on inter-generational wealth transfers.
With government resources constrained, in India it's the philanthropy which runs educational, health, religious and disaster relief initiatives to a large extent. The big difference is that Indians have traditionally been very reticent in making big announcements and slick marketing their donations due to cultural reasons and religious beliefs. Nearly all of the 100 richest Indians have trusts that offer health care, education, monetary relief and scholarships.
One of the organised measures of Indian philanthropy has been by Bain & Company. In their second India Philanthropy Report, Bain reported a significant rise in private donations to philanthropic causes by 50% between 2006 and 2011. In 2011, Bain & Company's research showed that India was a leader in private charitable giving among developing nations, with donations totaling between 0.3% and 0.4% of the gross domestic product (GDP). This is probably capturing less than a third of the actual philanthropy as a majority of donations are made anonymously and not through the banking channels.
What are the new trends that are emerging in the Indian wealth management space?
The macro is very positive with huge wealth creation and value unlocking happening in India. With a stock market capitalisation less than the GDP, India is still a very emerging market for wealth management and the future potential is huge. The focus by wealth managers is to expand the client coverage and deepen the product basket while enhancing the coverage teams continuously.
Various surveys have shown that less than 20% of the private wealth segment takes formal advice from financial advisors. With the emergence of certified and regulated financial advisors with cutting edge qualifications like CFP (certified financial planner), this trend will turn very positive for the future growth of this segment. The scale of wealth creation will rival that of the Asian tigers within this decade and reach developed nations' levels in the next two decades. As capital account convertibility further brings international products to India, there will be massive opportunities for wealth managers.
Indian clients are highly globalised, very aware of international trends and risk takers. This will help when international products are allowed to be offered in India as the adoption will be very quick and smooth. We view India as a very attractive, high growth market with immense growth potential for decades, not just years. The domestic consumption based economy, the strong service sector and huge young population make India one of the best opportunities of the 21st century for all service providers, especially so wealth managers, who remain the most cutting edge, client centric amongst financial service firms. This is not only the Indian century it is the Indian wealth management century.