According to IBEF, the number of High net worth individuals in India reached 3,30,400 by the end of 2017. This is a steady rise at a CAGR of 18.67% between 2011 and 2017. It is also estimated that in the near future (2019), High net worth households would grow at an even faster CAGR of about 21.5%.
India has one of the fastest growing HNIs population in the world. This growing HNI segment presents an excellent opportunity for financial advisors to expand their business and make inroads into a lucrative space.
However, HNIs are rich, affluent, and successful individuals – what can you really offer them? You cannot have a plain vanilla financial planning and goal setting approach. The answer is simple – you can offer your money management skills and extraordinary service. As aptly summed by investment sage Warren Buffet, “Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway”.
Yes, building a portfolio of HNI clients is a different ballgame. These individuals know what they want, and their financial goals are unique. Hence, they warrant a different approach. Read on to know how one should go about building a portfolio for HNI clients.
Source : IBEF – Financial Services Industry Report July 2018
Focus on Wealth Appreciation and Preservation
HNIs have their wealth in billions of rupees, however, according to a study by Williams Group Consultancy, 70% of wealthy families will lose their wealth in the second generation and 90% by the third generation. This means, the next-generation HNI families run the risk of getting poorer. Hence, their focus is on ‘wealth appreciation’ and ‘preservation’.
Equity Investing.
Most HNIs have earned their wealth through business and entrepreneurship and appreciate the power of business to grow wealth. Hence, equity investing (which essentially means investing in someone else’s business) is generally their first choice for an investment asset class.
Maturing markets coupled with rising interest rates means fund managers would find it difficult to generate alpha from large-cap funds. In such a scenario, small and midcap funds can gain traction and play an essential role in generating returns. They have a higher potential for capital appreciation and data proves that they can generate returns higher than large caps in the long run.
On the other hand, debt funds are the good bet for limiting loss of wealth, as these funds invest in fixed-return instruments. Hence, one must plan a portfolio carefully and manage it actively.
Speak in the Best Interest of Your Client
HNI clients are sensitive. Aim to identify and serve their requirements and opt for a fixed or a performance-linked fee instead of a commission-based model. A moneyminded approach could not only ruin your relationship with your client but also create a trust deficit that would be extremely difficult to bridge. Hence, while building a portfolio for these clients, always speak in their best interest and back your ideas by facts and numbers.
For example, several HNI clients might be interested in investing in cryptocurrencies like Bitcoins because of their blockbuster returns. However, these asset classes are not recognised by governments of several countries and do not have a regulator backing. Hence, these are extremely high-risk avenues. As an advisor, you should not shy away from cautioning your clients about the potential pitfalls.
Trust – An Essential Element
A customised approach, speaking with conviction and putting your client’s interest above everything else are the key traits required to build trust, a crucial element for dealing with HNI clients. Note that the billions made by HNIs are a result of their years (or generations) of hard work. They put you in charge of their wealth, trusting you with your knowledge related to money matters.
The IBEF report suggests that advisory asset management and tax planning has one of the highest demand among wealth management services by HNWIs. This is followed by financial planning. Hence, your knowledge is your power while dealing with HNI clients. You have to make the most of it to build a rapport and leverage it for years to come.
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