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We welcome the idea of a fee-based advisory approach

Livemint, Apr 22, 2016

Sanctum Wealth Management’s Shiv Gupta speaks about the new venture, being out of the banking umbrella and industry trends.

When Royal Bank of Scotland Group Plc decided to pull back from foreign markets and focus on its UK business, it meant an imminent change of ownership for its Indian franchise, including private banking. The business, led by Shiv Gupta, needed to undergo a smooth transition. Gupta found an option to transfer the business and restructure it to ensure continuity. In September 2015, we saw the first management buyout in the Indian wealth management industry. RBS has now completed the transaction and transfer of business to Gupta’s Sanctum Wealth Management in India.

He spoke about the new venture, being out of the banking umbrella and industry trends.

How does this setup differ from being part of a bank?

It is somewhat different but in a good way. Clients will still come to us for wealth management services, but, yes, we aren’t a bank any longer. This is an opportunity for us to focus on primary services—wealth management, estate planning, real estate, and so on. It also allows us to focus on the services that we want to expand.

Being part of a global bank meant home market-driven regulatory and compliance requirements that weren’t always relevant to the local environment. That’s one change that allows us to focus more on the local marketplace. Also, in a big group, one is also competing for capital with other businesses. As an independent private-play wealth manager, we can direct capital in areas that are most impactful.

We intend to make the most of this and have a strong technology platform for clients and internal efficiency. We are also looking at forming alliances and partnerships with other firms.

Do you plan to add a non-banking finance company (NBFC) to give clients access to credit?

Typically, the business we do is offered through NBFCs; they can offer credit services to high net worth individuals (HNIs). We don’t do that from our own platform, rather, we act as curators for clients. We will try to form the right alliances. Being able to provide a solution using alliances actually opens up much wider avenues. This is how we are thinking about credit.

Foreign banks haven’t found their footing in India and the domestic market is fragmented. Is achieving scale a problem?

Many of the observations that we see right now are part of the industry evolving. This is true for financial services as a whole. Therefore, it’s hard to draw an industry wide inference with so many changes taking place simultaneously. The few who have been able to achieve scale are good examples to look at and understand. If one possesses the required attributes, scale shouldn’t be an issue. One such attribute is having a long-term view and remaining in the industry to take root so that you are able to benefit from the inflection points. The other is to keep investing in the business.

Every industry evolves as regulations evolve. There is plenty of scope and there are inflection points in the future where the numbers used to define scale may be redefined.

Why hasn’t the foreign private banking platform been successful in the Indian market?

You will have to concede to the fact that one of the larger banks in the industry is a foreign bank to begin with. Firstly, we need to attribute the outcomes to the right cause. Many of the exits that you have seen are a part of global restructuring rather than stand-alone exit decisions. Hence, it cannot be concluded that there is something unsuitable in the Indian market.

If I think about what foreign firms could do better to grow bigger and be sustainable, then what you have not seen is sustained investment from these companies over a period of time. They have not seen longevity of their strategies. Also, there needs to be sufficient focus on providing domestically relevant products and services. This is where domestic companies are score points; they have agility and can make decisions fast for clients. Many foreign firms have tried to use their global product suites in the domestic market. Now, while that does have value, it has its limitations.

In the HNI segment, how relevant is fee-based advisory? Is there an industry trend that favours an advisory-based model or a commission-based one?

It is difficult to discern whether a trend is emerging where everybody is converging on a particular approach. We welcome the idea of a fee-based approach. It allows you to take a longer-term approach and have relevant conversations with clients. The regulator’s motivation for introducing it is to increase transparency. This may result in a shorter-term reconfiguration of transaction-based business models. But in the long run, it introduces greater transparency and helps build trust between the client and the adviser.

The conversation on fees isn’t always easy, but I have seen evidence that clients do have a willingness to pay but the conversation around what value you are adding needs to be clear.

If you see the global regulatory trends around this (fee-based advice), the industry will eventually take this direction. The precise form can be open to definition but the increased transparency element is the direction.

Setting up a new business and interacting with various stakeholders including the regulator, how would you compare India with global best practices?

Overall, regulations in aggregate are positive. Several changes are happening simultaneously and one has to look at them together. The regulators here have a big challenge because of the fragmentation within the industry and the traditional approach of multiple regulators for different sections. Trying to address the needs of retail investors and HNIs under the same umbrella, for example, requires a balancing act.

Regulations aimed at expanding and deepening the market—Real estate investment trust regulations, and alternative investment funds guidelines—are hugely positive. Once they fully take hold, the impact will be big.

In the case of advisory regulations, in the long run, if the objective is transparency and that starts to take hold, then it makes for better communication and better trust.

Whenever a change is needed in business models where firms have been doing business in a certain way, it’s not going to be comfortable. You will have to consider each perspective, but for the industry as a whole, it will be positive.

What are some of the challenges for this business in the Indian market?

The big difference between the Indian market and what we see globally is that we are pretty much a domestic market. Other evolutionary challenges like availability of skilled professionals can be seen in other markets as well—maybe at a different scale but they are present.

However, the way the industry is at the moment, the breadth and depth of instruments that are available to populate a wealth management proposition, are narrow.

How do you plan to distinguish your proposition?

If you are trying to create differentiation, then ultimately it boils down to customer experience. This is usually a result of a number of different factors working together, rather than just one thing. It is about the people you have, their training, their interaction with clients, how well they are able to align their solutions to the clients’ needs, the range of your proposition, and increasingly in the use of technology.

Over a period of time, you develop a reputation for it that can speak for itself. You have to do is be consistent in the way you deliver service. That is how we are thinking about our strategy. We have expanded the range of our services, we expect to follow the best practices in managing people within the organisation and we are investing a lot in using technology. We have made provisions for continuous investment in technology over the next few years. There is so much innovation happening, you can almost just lift-and-shift new ideas and bring them to your clients to improve their experience.

Alliances and partnerships will also compliment us as a pure play wealth management outfit.

Source: Livemint