Paradigm Shift in Indian Ultra HNI's & Family Offices - Broking to Advisory

Amit Jain, Co-Founder & CEO, Ashika Wealth Advisors

Amit Jain, Co-founder & CEO, Ashika Wealth Advisors

The broking era in financial product industry was at the peak from 1996 – 2008. Those days Indian financial market was evolving with innovative products like United Linked Insurance Plans (ULIPs), Mutual Funds, PMS & other financial products. Investors were excited about these products, but were not aware of the compositions & pre built expenses in these new products, so they invested trusting their old traditional brokers. From 2003 to 2008 Indian Stock Market had dream run, so everything was going up, wherever investor invested, they made money, so they never felt a need of advisors & continued to invest through their traditional brokers. This trend ended in 2008, when Global markets crashed. None of the traditional agents could envisage this crisis, hence investors portfolio were down by 30 percent to 50 percent across all equity products including (ULIP’s). In a post by First Post, allegedly ULIP’s investors had suffered huge estimated loss of about 1.56 Lakh Crore, as agents had mis-sold the ULIP Product due to disproportionately high commission offering. Investors were also lied of the tenure being 3 years, while it was actually a long-term product. To curb these malpractices, SEBI had come out with Registered Investment Advisors (RIA) guidelines. It was a milestone step by regulators to protect the right of investors.

Post 2008 Global crisis learning, investors start asking questions to their tradition brokers about the product composition & expense ratio, as they realised their lack of knowledge & blind trust on traditional brokers had made them suffer huge losses . Investors also realized that none of the asset classes can always go up, so it is advisable to diversify across asset classes. Investors showed a huge shift from brokers to advisors, who is competent & can advise without having any bias for any product or company. Post 2011“unbiased advisory model “becomes much stronger as Indian stock market corrected once again by (-24 percent) along with
recessionary environment in real estate investments. This phase was even tougher for Indian investors, as their traditional investment asset classes i.e. Real Estate & Gold also generated -ve ROI post inflation. These asset classes are still in bear market even after seven years.

A Talk about My Personal Experience
We advise large family offices for their investment management. On reviewing investment portfolio for one of our prospective Family office, we had below observations:

Key Observations:
•Portfolio was invested with 4 different agents with a view of diversifying funds, where none of the agents know about each other’s investment objective.

•The portfolio consisted of investment in 13 AMC’s & 37 Mutual funds schemes including AIF & PMS.

•On detailed X – Ray report of portfolio we found correlation of underlying holdings in common companies and related industry up to 60 percent to 75 percent on overall portfolio basis. Also top 16 Stocks of all mutual funds schemes formed 67% of overall portfolio.

From above observation we can easily make out that in self-view of above Family office, they had well diversified their funds across 4 agents, 13 AMC’s & 37 schemes, but the fact of the matter is they have not diversified at all even within equities as an asset class, forget about other asset classes. At portfolio level, their top 16 stocks were forming 67 percent of his overall portfolio across all AMC’s & schemes.

In view of above, all of us need to ask a constant question “Are we actually diversified enough to mitigate our risks or too much concentrated with any specific asset class, product,sector or a company“?

Now we are the 5th largest economy in the world & increasingly it shall be challenging for fund managers to generate alpha over benchmark. We all had excellent ROI’s on our investment when we were on curve of moving from under developed economy to a developing economy. However, it shall be challenging to have same historical ROI with passive fund management style from here-on. All old business models are ageing. Increasingly margins in old business models are getting narrower with steep rise in cost of business operations. Hence, we are advising Family offices to have active fund management strategies with periodic rebalancing across asset classes.