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Wealth Management Models in India By Riddhi Mody Student ID: 4056306

A Dissertation submitted in partial fulfillment of the requirements for the Degree of Masters in Finance and Investment at the University of Nottingham September 2007.


I would like to thank my supervisor, Ms Alyson McLintock, for her invaluable support and guidance throughout this dissertation. I am grateful to her for taking out time to respond to my emails and helping me decide the framework of the dissertation. Without her help, this research would not have been possible.

I would also like to thank Mr. Vodhisatta Chakravartty, Associate Vice President at Kotak Wealth Management; Poonam Kataria, Citigold Relationship Manager at Citibank Wealth Management; V.Sunithaa, Associate Vice President at Motilal Oswal Wealth Management; and Raman Grover, Investment Advisor at Standard Chartered Investment Services for taking out time to answer my questions and giving me a detailed significant insight into the wealth management procedures at the respective banks.

In the end, I would like to thank my parents and my brother for their never ending support and encouragement and having faith in me throughout this dissertation.

High performance levels and accelerating economic indicators worldwide has led to an increase in the number of high net worth individuals (HNWIs) and the amount of wealth they hold in recent years. After the economic reforms of 1991, the Indian economy has opened up gradually and there has been an increase in the inflow of foreign funds. As a result, investors in India and worldwide are worried about managing their wealth and looking at alternative ways to maintaining and creating wealth. Wealth management is defined as taking care of the needs of the affluent clients, their families and their businesses as part of a long term, consultative relationship. It is best conceptualized as a platform where a number of different sets of services and products are provided. It is a full service model that offers advice on investment management, estate planning, retirement, tax, asset protection, and cash flow and debt protection. This study draws comparisons between the wealth management models of four Indian companies and develops a comprehensive model based on the above four models. This study proves that the wealth management models used today are a combination of the Modern Portfolio Theory (MPT) and behavioural finance theory, hence bringing about a shift from the traditional models to a customer centric and needs based approach.


CHAPTER ONE: INTRODUCTION 1.1 Background of the Research Topic.7 1.2 State of the World Wealth.9 1.3 The Indian Scenario.....10 1.4 Research Motivation...11 1.5 Outline of the Study...12

CHAPTER TWO: LITERATURE REVIEW 2.1 A Changing Reality....14 2.2 A Gap Between Theory and Practice.15 2.3 Personal Risk Matters, Not Just Market Risk..16 2.4 Aspirational Risk...18 2.5 Limitations of the Modern Portfolio Theory.20 2.6 Behavioural Finance..21 2.7 Asset Allocation.24 2.7.1 Asset Allocation Strategies.25 2.7.2 Four Fundamental Goals..29 2.8 Risk Profiling...31 2.9 Risk Allocation...32 2.10The Wealth Allocation Framework..35 2.10.1 Classification of Assets.36 2.10.2 Benchmarks..37 2.10.3 Implementation of The New Framework..39 2.11 Market Timings and Business Cycle...40 2.12 Changing Business Model...42

CHAPTER THREE: DATA COLLECTION AND METHODOLOGY 3.1 Sample Selection44 3.2 Data Collection Methodology45 3.2.1 Qualitative Interviews.45 3.2.2 Advantages and Challenges of Qualitative Interviews..46 3.3 Data Description.47 3.3.1 Questionnaire....48

3.3.2 Purpose of Research..48

CHAPTER FOUR: ASSET CLASSES 4.1 Equities..50 4.2 Bonds..51 4.3 Cash.52 4.4 Mutual Funds...53 4.5 Real Estate.54 4.6 Commodities.54 4.7 Alternative Investments in Portfolios55 4.8 Investments of Passion56

CHAPTER FIVE: FINDINGS 5.1 Kotak Wealth Management Model..58 5.1.1 Customer Segmentation...58 5.1.2 Wealth Management Process...59 5.1.3 Asset Allocation.60 5.1.4 Product Offerings.62 5.1.5 Mutual Fund Recommendation Process.63 5.1.6 Portfolio Review.64 5.2 Citibank Wealth Management Model.65 5.2.1 Customer Segmentation.65 5.2.2 Wealth Management Process.66 Citichoice..67

5.2.3 Risk profiling and Asset Allocation.67 5.2.4 Product Offerings.69 5.2.5 Product Ratings.70 Rating Process..70

5.2.6 Portfolio Review.....71 5.3 Motilal Oswal Wealth Management Model...71 5.3.1 Customer Segmentation...71 5.3.2 Wealth Management Process.72 5.3.3 Risk profiling and Asset Allocation...73 5.3.4 Product Selection.74 5.3.5 Portfolio Review...74

5.4 Standard Chartered Wealth Management Model..75 5.4.1 Customer Segmentation..75 5.4.2 Wealth Management Process76 5.4.3 Risk Profiling and Asset Allocation77 5.4.4 Product Selection..78 5.4.5 Portfolio Review..79

CHAPTER SIX: ANALYSIS AND CONCLUSION 6.1 Comparative Analysis of Wealth Management Models..80 6.2 Comprehensive Wealth Management Model..85 6.2.1 Customer Segmentation.85 6.2.2 Wealth Management Process.86 6.2.3 Risk Profiling and Asset Allocation.87 6.2.4 Products Offered..88 6.2.5 Portfolio Review and Rebalancing89 6.3 Conclusion..92 6.3.1 Wealth Management Proposition/Recommendations.94 6.4 Limitations of Research..94

7 8

BIBLIOGRAPHY96 APPENDICES..........................................................................................100 8.1 Appendix 1: Citibank Risk Profiling Form..100 8.2 Appendix 2: Standard Chartered Score Based Questionnaire102 8.3 Appendix 3: Standard Chartered Customer Suitability Form...105


1.1 BACKGROUND OF THE RESEARCH TOPIC Koreto (2004a) defines wealth management as taking care of the needs of the affluent clients, their families and their businesses as part of a long term, consultative relationship. It is best conceptualized as a platform where a number of different sets of services and products are provided. It is a full service model that offers advice on investment management, estate planning, retirement, tax, asset protection, and cash flow and debt protection.

Hence wealth management is a comprehensive service model to optimize, protect and manage the well being of an individual, family or corporation. It is the next step in financial planning. It poses a challenge for the advisors in terms of combining all facets of a clients financial life into a single umbrella right from estate planning to insurance. The approach, components and intricacies however vary from each advisor in this area.

The role of the wealth manager can be defined as four fold. It involves mobilizing the clients financial resources effectively to achieve financial goals, helping achieve financial freedom, preserving the clients wealthy state and ultimately enhancing this state.

Client goals are the focus of the wealth manager. While any professional money manager does not know details of the clients life, goals and preferences, the process of wealth management is founded on the values of the client first. The wealth manager needs all the background information about the clients fiscal life as well as

Dun & Bradstreet Wealth Management Seminar, 2007.

detailed information about his goals, preferences, needs and fears. Hence, the practice of wealth management is often termed as holistic. [Koreto, (2004b)]

The Fidelity Investments Report (2005) describes the following three fold criteria to distinguish a firm as a wealth manager; the relationship that the wealth managers have with their clients, the specific products and services that wealth managers provide to clients, and the specific goals and objectives of wealthy clients as important components in differentiating wealth management from other practice models.

Wealth management is described as an ongoing process. It involves keeping track of the clients needs and goals to construct a portfolio for the client and constantly monitoring and reviewing the performance of the portfolio and investments therein.1 The basic steps include: Determining client needs Building an investment plan Asset allocation based on client goals Ongoing review of portfolio

A special report in the Financial Times by Larsen (2007), states that the private banking business is on a roll. Five years of strong markets and economic growth and accelerating globalization has now geared this industry to be one of the hottest growth areas.

Clients today are taking an increasingly broader view of their portfolios and are looking to invest in sophisticated investment avenues such as real estate, hedge funds, private equity and structured products. Hence, looking ahead wealth

management is proving to be far more difficult than it looks on the surface involving an in depth understanding of what actually matters to wealthy people. Wealth managers now have the opportunity to prove themselves to clients in a way that they had never before [Larsen, (2007)].

1.2 STATE OF THE WORLD WEALTH The year 2006 marked a year of high performance levels owing to accelerating economic indicators and High Net Worth Individual (HNWI) 2 population expansion. The two key drivers of wealth generation real GDP 3 and market capitalization increased during the year thereby increasing the number of HNWIs and their respective wealth (World Wealth Report [2007]). Figure 1: HNWI population, 2004-2006 (by region)

Source: World Wealth Report, 2007, by Capgemini and Merrill Lynch, p. 5.

2 HNWI is a term used in Private Banking indicating High Net Worth Individuals. Typically these individuals have investable assets (financial assets not including real estate) of 1 million USD. Source: 3 The number reached by valuing all the productive activity within the country at a specific year's prices. Source:

As can be seen from figure one, the global HNWI population grew by 8.3% in the year 2006 to touch a total of 9.5 million households. HNWI population growth was the strongest in Africa, Middle East and Latin America posting growth rates of 12.5%, 11.9% and 10.2% respectively, as depicted in the figure above. Global wealth also continued to increase in 2006, recording a growth rate of 11.4% over the previous year owing to the high flourishing prices in the oil and metals industry.

Globally, GDP growth increased due to strong performance in the Asia Pacific and Eastern European regions. Emerging markets such as China and India outperformed the rest of the world in 2006 sustaining Real GDP growth rates of 10.5% and 8.8% respectively, which had a favourable effect on wealth creation. Strong corporate profits, IPO activity and ongoing foreign investments led to rapid growth of market capitalizations in Europe, Asia Pacific and Latin America. Rising oil revenues and commodity prices accelerated economic growth thereby providing opportunities for HNWIs in these regions [World Wealth Report, (2007)].

1.3 THE INDIAN SCENARIO Taking a line from Shakespeares, Julius Caesar; There is a tide in the affairs of men, which taken at the flood leads on to fortune, we will witness how demographic India is now witnessing just that tide which leads on to fortune for investors.

The economy in India is at a very sweet spot. The engines of growth such as infrastructure, consumption, outsourcing and agriculture are making the 1 trillion nation advance rapidly at 9% p.a. Investments in infrastructure are estimated to be $50 billion per year for the next five years. Outsourcing from IT and auto components are expected to contribute another $30 billion per year to this growth.


Increasing private participation in agriculture inducing large supply chain expansions and growth in farm and income logistics has accelerated the growth rate for the agricultural sector to over 4% this year from the previous 2.7%. This growth rate translates into additional wealth being created for the Indian economy [Communiqu, (2007)].

The Indian economys growth rate has advanced rapidly since 1991, after economic reforms were initiated. The progressive opening of the economy to international trade and investment after the reforms in 1991 lowered trade barriers and helped boost exports. India is now the global arena for increased foreign investment both foreign institutional investment (FII) and foreign direct investment (FDI).

[Investments Commission Report, (2005)].

India has 100,000 HNWIs with each having at least $1 million worth of financial assets. These numbers have increased the aspiration level of many individuals who wish to create wealth and stay rich. Sociologists feel that the aspiration level of an average Indian has moved up manifold. Sociologist Dr. Satish Deshpande argues: We need to redefine Indias middle class. I feel many of our so called middle class people have moved up to the rich category. [Dhall and Tiwari, (2007), p.12] Hence, there has been a wealth explosion along with an increase in the HNWI population in the economy, which requires disciplined and focused expertise in the area of wealth management.

1.4 RESEARCH MOTIVATION Keeping in mind the above illustrated world wealth and Indian wealth scenario, a new league of wealthy individuals is growing around the world and there is increased competition amongst private bankers to supply sophisticated investment advice


[McCrary, (2000)]. The Chinese have a saying; Fu Bu Guo San Dai or Wealth never survives three generations [The Economist, (2001)]. This statement holds true today and the wealthy are looking for alternative ways to retain and manage their wealth.

As people are getting richer and richer, the task of managing and holding their wealth gets increasingly difficult and hence the need for sophisticated wealth management. With increasing global players penetrating the Indian market such as Citibank, HSBC, UBS, and Standard Chartered and so on, wealth management has taken a new dimension and private banks are now scrambling to provide an expertise in this area.

In this backdrop, this dissertation attempts to understand the rationale behind constructing portfolios in the wealth allocation framework, different asset classes used while constructing portfolios, the wealth management models employed by Kotak bank, Citibank, Standard Chartered and Motilal Oswal and a comprehensive wealth allocation model that can be employed by private bankers in todays competitive arena.

1.5 AN OUTLINE OF THE STUDY This dissertation is divided into six chapters. Chapter one provides a general overview into wealth management and the reasons behind the research. Chapter two discusses the two contrasting methods of constructing portfolios, one based on the Markowitz efficiency theory and the second based on the behavioural finance theory based on past literature review. Chapter three talks about the methodology employed in the research and a description of the data collected. Chapter four discusses the various asset classes used in portfolio construction. Chapter five


discusses the wealth management models employed by four companies namely, Kotak Bank, Citibank, Motilal Oswal and Standard Chartered. Finally, chapter six draws comparisons between the four models and discusses the comprehensive wealth allocation model built on the above four models.



Traditional finance assumes that we are rational, while behavioural finance assumes we are normal Mier Statman4

This chapter builds on the above quote to discuss the views of Harry Markowitz (1952) in his landmark paper that laid the foundations for the Modern Portfolio Theory in contrast to the views postulated by notable behavioural finance theorists such as Kahneman and Tversky (1970), Statman (1999;2002) and Curtis (2004). The chapter expands on the Markowitz framework of diversifying market risk to include the concepts of personal risk as well as aspirational risk. In conclusion, the wealth allocation framework as a way of meeting the investors needs for diversification, protection and aspiration is discussed. This framework combines the Modern Portfolio Theory with the work of several behavioural finance theorists who have tried to understand and explain investor choices.

2.1 A CHANGING REALITY Chhabra (2005) has discussed some of the major changes in the financial sector that have recently occurred and have posed fresh challenges for individuals in terms of managing their investments amidst a general rising level of prosperity.

Organizations have moved from defined benefit plans to defined contribution plans, resulting in lump sums of liquid assets in contrast to stable pension incomes. This has transferred risk from the capital markets to the individual making their well being dependent on the correct investment of these assets. Also, constant

Quoted in Jean Brunel, Revisiting the Asset Allocation Challenge Through A Behavioural Finance Lens, Journal of Wealth Management, Fall 2003, p. 10.












instruments such as hedge funds and structured products are now presenting complicated risk reward opportunities to the individuals. These changes have placed greater responsibility upon individuals to manage their financial future.

2.2 A GAP BETWEEN THEORY AND PRACTICE Harry Markowitz (1952) outlined the Modern Portfolio Theory and the benefits of portfolio diversification in his paper. There is an optimum way to create a portfolio by combining different asset classes and this construction depends not only on the market risk and return of each asset class but also on the correlations between the different asset classes. These optimal portfolios, once mapped on a risk return plane, result in a curve known as the Efficient Frontier. Risk and return are related by this efficient frontier that gives the investor exactly how much return he earns for the amount of risk he is willing to bear. Each investor can find a point on the efficient frontier that reflects his desired combination of risk and return, thereby helping him determine his optimum allocation between the different asset classes.

Markowitzs theory explains the diversification of non systematic (market) risk and involves an understanding that stocks, bonds and cash are not perfectly correlated. Therefore, one can derive significant diversification benefits from holding the right combination of these asset classes. This is further postulated by Chhabra (2005) who holds that in order to achieve a truly diversified portfolio, it is necessary to diversify within each asset class also. He explains that equity portfolios should be composed of a large number of minimally correlated stocks and bonds should be diversified across maturities and credit ratings.


However, in spite of the above, there are a vast number of investors around the world who are not well diversified. As Zweig (1998) suggests, its easier to talk about building a diversified portfolio than to actually build one.

Although investment advisors unanimously support diversification, the advice on implementation supplied by them is often inconsistent and in conflict with the principles of Markowitzs theory. As a result, investors fail to understand the true meaning of diversification and employ several portfolio selection methods that address only the perception of diversification than reality. [Rode, (2000)]

Rode (2000) stresses the fact that the important information provided to investors must explain why Markowitz diversification works. Experiments carried out in his paper demonstrated that investors did not make a clear connection between risk reduction and diversification and hence they were unable to utilize the advice they received on portfolio management to make effective decisions.

Rode (2000) hence states in an environment characterized by uncertainty, where there is considerable pressure on investors to acquire information in a form they can quickly, correctly and consistently interpret, advice given to investors must be built around simple strategies that produce nearly as good results as the Markowitz optimum, rather than complicated investment strategies.

2.3 PERSONAL RISK MATTERS, NOT JUST MARKET RISK Markowitzs efficient frontier approach optimizes a portfolios value at a single future point in time, for example a future projected date of retirement. The idea is to invest today so that there is enough money when approaching retirement to live comfortably for the rest of ones life. Although this approach may be sensible, it is


lacking in two respects. Firstly, the investor does not know at the outset what the specified time period will be, i.e. from the time of retirement to how long he will live and secondly, investors need to maintain their lifestyle and meet their financial obligations from today to the specified time period.

Figure 2: The Journey Matters

Source: Chhabra, A B (2005), Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors, The Journal of Wealth Management, Spring 2005, p. 4.

All paths in Figure 2 above, lead to success but the one that dips below the clients minimum acceptable wealth level is a dangerous path. For instance, an overly volatile investment strategy may sink an investor before he gets to reap its anticipated rewards. Personal risk is thus an additional dimension that must be accounted for in constructing appropriate portfolios for individuals. The deterministic approach represented by the dotted line is the approach adopted by the individual to


determine the amount of wealth he will individually need till a specified future time period [Chhabra, (2005)].

Although, there have been several extensions of the Modern Portfolio Theory that have tried to improve the depiction of market risks [Fabozzi et al, (2002)], the same emphasis has not been placed on interpreting personal risk in terms of portfolio diversification. Recent innovations in the market place as outlined in section 2.1, should allow for the creation of portfolios that are more sensitive to individual risk tolerances, and hence the importance of personal risk [Chhabra and Zaharoff, (2001)].

2.4 ASPIRATIONAL RISK Individual investors consider their success and wealth not just in absolute terms but also relative to the standards of living they observe around them. There is a natural urge to improve ones well being, whether that means having more money in a bank account, giving more away for donation or better lifestyle such as food and clothing. For individuals, aspirational risk is therefore an important element. Among all levels of individuals, aspirational risk taking is quite common. Every time a member of the peer group succeeds in his/her aspirational risk taking, difficulty of remaining in the peer group is raised for those who did not do the same. It is common to see how the urge to maintain ones relative standard of living can increase the pressure on the general level of risk taking in a group of people [Chhabra, (2005)].

The three objectives of an ideal portfolio incorporate the three dimensions of risk; personal, market and aspirational.


1. Personal Risk: Protecting from personal risk means protecting oneself from anxiety/poverty regarding a dramatic decrease in lifestyle. [Chhabra and Zaharoff, (2001)]. 2. Market Risk: This risk is essential to take on in order to maintain lifestyle and standard of living and grow with the respective wealth segment. 3. Aspirational Risk: Such risk is necessary in order to break away from current wealth segment, increase ones wealth substantially and thereby enhance ones lifestyle.

The ideal portfolio therefore provides protection from anxiety/poverty (personal risk), the ability to maintain the current standard of living (market risk) and status in society and providing an opportunity to increase wealth (aspirational risk)

substantially or to meet aspirational goals [Chhabra, (2005)]. Figure 3: Three Dimensions of Risk

Source: Chhabra, A B (2005), Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors, The Journal of Wealth Management, Spring 2005, p. 6


Figure 3 above illustrates each risk dimension with its corresponding objective and trade off. In summary, allocations to the personal risk bucket will yield below market rates of return, the market risk bucket will yield risk adjusted market returns and the aspirational bucket will yield higher than market returns.

2.5 LIMITATIONS OF THE MODERN PORTFOLIO THEORY Modern Portfolio Theory operates within a set of limited assumptions5 to select an optimal portfolio along the efficient frontier. However Curtis (2002) states that there are several events that occur outside the Modern Portfolio Theory (MPT) for which the theory does not provide any significant insight.

The point that Curtis makes is that although the Modern Portfolio Theory is an essential tool in the design and management of client portfolios, advisors who rely blindly on this theory may not be serving their clients fully. There are various events that occur that do not fall within the principles governed by the Modern Portfolio Theory, but are governed by very different rules and can be understood only by reference to very different theories. MPT is only a theoretical concept that attempts to describe how capital markets operate and hence far from perfect.

The Modern Portfolio Theory only recognizes market risk and seeks to minimize it through diversification. It does not incorporate the dual aspects of safety and aspiration [Lopes and Oden, (1999)]. Therefore, we need a new framework that either replaces or builds upon the Modern Portfolio Theory. This new framework is known as wealth allocation [Chhabra, (2005)].

5 MPT assumes continuous pricing, a world in which markets are free, societies are free and stable, minimal transaction costs and investors are rational wealth maximizers. (Curtis 2002)


However, before going into the depths of this new framework, we will try to understand investor behaviour through the findings of various behavioural finance theorists. Behavioural finance runs contrary to the standard finance literature and in the next few sections of this chapter I will attempt to explain how the psychological preferences are embraced and incorporated into the new expanded framework of wealth allocation.

2.6 BEHAVIOURAL FINANCE Behavioural finance picks up where modern portfolio theory leaves off, thereby completing the circle. The essence of behavioural finance is that it describes how investors actually behave rather than how they should behave. The foundations of behavioural finance were established by the work of Kahneman and Tversky, the founders of prospect theory, described further on.

Kahneman and Tversky (1979) in their famous paper laid the groundwork for the prospect theory, which attempts to understand and incorporate actual investor behaviour. They present a critique of the expected utility theory (standard finance) as a descriptive model of decision making. Kahneman and Tversky supported several important factors such as certainty, probability and possibility that dominate decision making in a risk reward setting. They asserted that people will more often prefer lower but certain payoffs, rather than higher payoffs with less than certain probability. This means that individuals under weigh outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, known as the certainty effect leads to risk aversion whilst making choices involving sure gains and to risk seeking in choices involving sure losses.


Behavioural theorists Barberis and Thaler (2003) have described the direction of behavioural research as follows: We have now begun the job of trying to document and understand how investors, both amateurs and professionals make their portfolio choices. Until recently some research was notably absent from the repertoire of financial economists, perhaps because of the mistaken belief that asset pricing can be modeled without knowing anything about the behaviour of the agents in the economy.

Nevins (2004) in his article suggests that behavioural finance should play a critical role in wealth management. Although standard finance and behavioural finance are often seen as competing philosophies Nevins (2004) believes that there is value addition from both the disciplines and recommend that advisors should follow an approach to wealth management that is a blend of both the disciplines. This is in line with the views of Curtis (2004) who speculates on the possibility of combining rational Modern Portfolio Theory (MPT) and arrational behaviour finance process into one advisory process, hence suggesting an iterative combination of both theories. Curtis (2004) then suggests a three step process to design the clients portfolio.

Step one would be to design the traditional MPT portfolio. This portfolio is based on the forward looking view of capital market expectations and the degree of risk necessary to grow the individuals asset base faster than inflation, spending taxes and so on. However, the portfolio is uncomfortable for the individual partly because the portfolio may comprise of asset classes he will not fully understand and partly because the portfolio is likely to experience periods of short term underperformance that will test his investment patience. Step two would be designing the behavioural finance portfolio which has the benefit of being comfortable for the individual and representing a strategy that he is likely to stick with. However such a portfolio


incorporates the individuals inherent biases which may result in a less optimal portfolio. Step three would be merging the two portfolios, which involves the individual starting with a portfolio that is close to the behavioural finance model and over time iteratively evolving toward the MPT model. By combining both MPT and behavioural finance models, advisors stand the best chance of designing,

implementing and maintaining portfolios that prove acceptable to clients.

At a time when failed strategies have forced investors to rethink their plans for their lifestyle and family, the investment industry needs to produce better solutions. Nevins (2004) hence emphasizes an approach to wealth management that draws from traditional investment theory and the newer thinking of behavioural finance, one that closes the gap between the practitioner and advisor and helps meet the above challenge.

Parallel to the views proposed by Curtis (2004) and Nevins (2004), Chhabras (2005) wealth allocation framework, combines the Modern Portfolio Theory with the work of several behavioural finance theorists.

The wealth allocation framework identifies three different risk dimensions namely, personal risk, market risk and aspirational risk and seeks to address all three of them simultaneously. It expands on the Markowitz framework of diversifying market risk to include concepts of personal and aspirational risk as well. In the very simplest case, this wealth allocation framework can be reduced to a standard diversified portfolio with downside protection and enhanced upside potential [Chhabra, (2005)].

Section 1.10 builds on this wealth allocation framework. However, before going into the implementation of the new framework, we first need to understand a few


intricacies of wealth management such as asset allocation, risk profiling and allocation.

2.7 ASSET ALLOCATION For most investors, the act of investing typically begins with one stock or mutual fund. However, as time progresses other investments are added because many investors then realize the fallacy of having all their eggs in one basket, i.e. investing everything in a single security.

One of the most important steps to building a successful portfolio is properly dividing assets among different types of investments. Brinson et al (1991) for example claim that approximately 91 percent of most portfolio returns can be attributed to the portfolios asset allocation. The most important asset classes are stocks, bonds, and cash, which are elaborated later on in chapter four. Because these investments perform differently depending on economic conditions, a good balance among these asset classes can keep a portfolio strong in a wide range of economic situations. In this sense, asset allocation is the most important for diversification. Building a successful portfolio is dependent on a number of factors and it is important to remember that the portfolio should be constructed according to individual needs and goals.

When formulating an asset allocation plan, the most important aspects to consider are investing goals, risk tolerance, and time horizons. All three of these factors are closely related and they allow the investor to determine how much money he will need at certain points in his life and how much uncertainty he can tolerate while moving from one life stage to the next. Investing goals are closely related to age and


family situations. Younger people generally have a greater tolerance for risk in their investments because they can afford to wait out bad periods and make up the difference later. Long time horizons allow for riskier investments because temporary downturns will not ruin the long-term plan. Once the time horizons and the level of risk are decided by the investor his next step is to decide which investment options are best for his profile.

In short, asset allocation helps determine how much of a portfolio should be invested in each asset category and it is more of a personal process depending on each individual. Creating a successful asset allocation strategy involves striking the right balance between the investors tolerance for risk against the volatility levels of various asset classes.

2.7.1 Asset Allocation Strategies There are a few asset allocation strategies and outlined below are some of them as described by Bergen (2004).

Strategic Asset Allocation Strategic asset allocation is a method that establishes a 'base policy mix'. This is a proportional combination of assets based on expected rates of return for each asset class. A required rate of return is defined and asset classes are combined in various proportions to achieve this desired rate of return. For example, if stocks have historically returns of 20% per year and bonds have returned 10% per year, a mix of 50% stocks and 50% bonds would be expected to return 15% per year.


Constant Weighting Asset Allocation Strategic asset allocation generally implies a buy-and-hold strategy, even as the shift in the values of assets cause a movement away from the initial base policy mix. For this reason, a constant-weighting approach to asset allocation is desired over strategic asset allocation. With this approach, the investor constantly rebalances his portfolio.

There are no hard-and-fast rules for the timing of portfolio rebalancing under constant-weighting asset allocation. However, a standard rule is that the portfolio should be rebalanced to its original mix when any given asset class moves more than 5% from its original value.

Tactical Asset Allocation Over the long run, a strategic asset allocation strategy may seem relatively rigid. Therefore, the investor may find it necessary to occasionally engage in short-term, tactical deviations from the initial mix in order to take advantage of exceptional investment opportunities. This intoduces a component of market timing to the portfolio and allows the investor to participate in favourable economic conditions.

Tactical asset allocation can be described as a moderately active strategy, since the overall strategic asset mix is returned to when desired short-term profits are achieved. This strategy demands some expertise, as the individual must first be able to spot when such short-term opportunities occur, and then rebalance the portfolio to the long-term asset position.


Dynamic Asset Allocation Another active asset allocation strategy is dynamic asset allocation, with which the individual constantly adjusts the mix of assets as markets rise and fall and the economy strengthens and weakens. With this strategy he sells assets that are declining and purchase assets that are increasing, making dynamic asset

allocation the opposite of a constant-weighting strategy.

Insured Asset Allocation Under an insured asset allocation strategy, a base portfolio value is established below which the portfolio should not be allowed to fall. Active management is exercised to ensure that the portfolio earns a rate of return above its base value. However, if the portfolio value drops below the base, then it becomes necessary to invest in risk free assets so that the base value becomes fixed.

Insured asset allocation is most suitable for risk averse investors who desire a certain level of active management strategies but value the security that offers a predetermined floor value, below which the portfolio value is not allowed to drop.

Integrated Asset Allocation All of the above mentioned strategies take into account future market returns and expectations, but fail to account for investors risk tolerance. With integrated asset allocation, both economic expectations and risk tolerance is considered while deciding an asset mix. Therefore, integrated asset allocation is a broader asset allocation strategy incorporating aspects of all strategies and including not only expectation but also changes in capital markets and individual risk tolerances.


Bergen (2004) however says that the above strategies are only general guidelines on how investors may use asset allocation as part of their core strategies; and choosing a single asset allocation strategy or a combination of the above is dependent on the investors goals, age, market expectations and risk tolerance.

Brunel (2003) looks at asset allocation from a behavioural finance perspective. He introduces a simple framework which is applicable across a number of different individual circumstances and allows each investor to feel that relevant light has been brought onto the asset allocation process.

Statman (1999) postulates that one can view a portfolio as a pyramid comprised of several layers, each of which is meant to fulfill a distinct investment goal. Each layer of the pyramid is associated with broad categories of investments and fulfills goals of downside protection right from the base of the pyramid to the upside potential layer at the top. Figure 4: The Wealth Pyramid (US$)

Source: Global Private Banking Survey (2007), by PriceWaterhouse Coopers, p. 9.


In contrast to this, the global private banking survey by PriceWaterhouse Coopers (2007) presents a wealth pyramid which segments customers into 5 different wealth bands as depicted in Figure 4 above based on the individuals financial asset base. Each wealth band as depicted above has different needs and preferences and assets are allocated accordingly.

Brunel (2003) applies a more detailed strategic asset allocation process, using it to define the asset mix most likely to help the investor achieve his investment goals. In this framework, rather than focusing on the suitability of each investment or strategy to a specific pyramidal layer, the investor is invited to quantify the relative importance of four distinct investment goals (liquidity, income, capital preservation and growth) in his circumstances. After prioritizing and quantifying the importance of these goals, the advisor then simply combines various sub portfolios designed to meet each of these individual goals in the appropriate proportions.

2.7.2 Four fundamental goals Brunel (2003) depicts the individual needs of a vast majority of investors as a combination of the four fundamental goals described below.

Liquidity is designed to include the funds that the investor will need over some relatively short period of time, measured in months. The implications of this goal are that the liquidity oriented investor cannot bear any downward volatility that will risk losing his principal and that all investments must be easily marketable so that the investor will have cash in hand at any required time.

Income represents the cash flow needs of the investor required to maintain his lifestyle. Having cash in hand for living expenses is of prime importance to the


income oriented investor. Depending upon each individuals circumstances, these needs may either be very small or very large, depending on the investors asset holdings. In situations when those needs are relatively small, generation of income may not be very important and in situations where those needs are large, generation of income will be an important phenomenon and the investor may also have to indulge in significant cash flow planning activities.

Capital preservation defines the needs of those investors who do not wish to bear the risk of losing even a small portion of their capital or principal. For every capital preservation oriented investor, it is important to keep in mind that the probability of increasing the value of the portfolio is related to the risk of a rise or fall in the value of the market. Such investors are generally very risk averse and they preserve capital for important reasons such as purchasing property, childrens education and so on and hence cannot risk losing any part of their principal. However, they face the risk of the value of the principal eroding as time progresses.

Growth refers to a need to see the investors capital appreciate. An important consideration to keep in mind here is that the capital markets are a place where wealth is preserved and not where wealth is created in contrast to the need for significant returns for growth oriented investors. Such investors are generally aggressive, risk takers and are interested in creating wealth.

After defining each of these component goals, the investor then begins to allocate his or her assets among them. The focus remains on the goals of the investor and not on a strategic allocation benchmark as proposed by an advisor. The approach described above can thus be categorized as influenced more by behavioural finance than pure investment theory.


2.8 RISK PROFILING Risk profiling, which is the primary link between the client and the investment recommendation is used to establish the clients level of risk tolerance. It is an important step in financial planning but is sometimes poorly implemented. Two difficulties in building an effective risk profiling process are; one that the information people provide about their attitudes towards risk can be deceptive and tough to interpret and second that it is not easy to combine risk tolerance estimates with other factors affecting investment selection, such as client goals [Nevins, (2004)].

Proper risk profiling requires some form of questioning, either orally or in questionnaire form, with most advisors employing both methods. Callan and Johnson (2002) also suggest that risk profiling requires a scientifically developed measure of risk tolerance, generally obtained using a questionnaire. Nevins (2004) points out that it is vital that the questions for risk profiling should be framed carefully to gauge the investors true attitudes without introducing biases into the risk profiling process.

Pompian and Longo (2004) believe that the popular methods of client profiling today have resulted in weak investment outcomes for a large number of investors. They suggest that many investors lack behavioural control; investors and advisors continue to implement investment programs that consist mainly of risk tolerance questionnaires, without incorporating other important measures such as personality type and gender. They verify that by profiling investors by personality type and gender, advisors can create programs that reduce individual biases by encouraging investors to observe their long term strategies thereby saving them the costs of rebalancing their investments in case of unexpected market movements.


They suggest the following four step method for advisors to consider while assessing risk tolerance for their clients. Step One: Ask the client to take a personality type test. Step Two: Evaluate responses to determine personality type Step Three: Assess risk tolerance using type and gender based risk tolerance scales, incorporating other aspects of the clients profile into the assessment such as the investors life cycle stage and other qualitative measures. Step Four: Execute investment program.

2.9 RISK ALLOCATION Individuals have complex wealth profiles. They often have multiple and conflicting goals and their portfolios include several different kinds of assets. All these factors need to be considered simultaneously designing client portfolios. Chhabra (2005) thus introduces the concept of risk allocation. According to him, portfolio assets as well as appropriate risk adjusted benchmarks need to be assigned to the each of the personal risk, market risk and aspirational risk buckets.


Figure 5: Dynamic Risk Allocation

Source: Chhabra, A B (2005), Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors, The Journal of Wealth Management, Spring 2005, p. 10

The investors optimal risk allocation depends not only on the risk return characteristics of the markets, but also on how much wealth an investor has relative to what she needs and how far away from the danger zone he/she is. This is illustrated in the Figure 5 above. It is important to note that the minimum level of wealth as shown above will often vary based on the current wealth of the investor as opposed to a fixed number based on the actual amount needed to maintain a lifestyle. This is consistent with Kahneman and Tversky (1979) who observe that gains and losses by investors are viewed in relation to a reference level.


Figure 6: Sample Risk Allocations Investor Personal Risk

Do Not Jeopardize Basic Standard of Living

Market Risk
Maintain Lifestyle

Aspirational Risk
Enhance Lifestyle

Conservative Affluent Wealthy

60% 40% Small/Medium

30%-40% 40%-60% Medium/Large

0%-10% 0%-20% Medium/Large

Source: Chhabra, A B (2005), Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors, The Journal of Wealth Management, Spring 2005, p. 20

The author points out that if an individual is in the danger zone, he should be more conservative and should value investments that do not go down more highly. This means the relevant risk measure is the possibility or danger of negative returns, rather than the possibility of upside returns. As illustrated in Figure 6 above, this risk allocation will be dominated by personal risk.

If the investor has a decent cushion from the danger zone, then his allocation is similar to the aggregate market and the appropriate risk measure is similar or identical to the one used by financial markets i.e. volatility. Figure 6 above depicts that this risk allocation will be over weighted by assets in the market risk bucket. The benefits of being in this zone are that, since one has similar risk return characteristics as the market, one invests in liquid and low transaction cost securities such as stock and bonds. However, Chhabra (2005) notes that as investors get wealthier, they begin to look for avenues that allow for further upside potential. In this region they are willing to take greater risks and bear a possible loss of principal. This risk allocation will be over weighted by assets in the aspirational bucket as shown in the figure above.


Bien and Wander (2002) introduce a risk allocation framework that focuses on risk exposures instead of asset class exposures. They propose an integrated framework that allows investors to integrate active management decisions into the asset allocation process leading to greater portfolio flexibility and improved risk/return trade offs. They further emphasize that most individuals and consultants follow the conventional asset allocation approach which fails to incorporate the risk and returns of the active part of the portfolio into the asset allocation decision. On the contrary, in the integrated risk allocation framework, active risk and systematic market risk are both part of the asset allocation process.

2.10 THE WEALTH ALLOCATION FRAMEWORK Chhabras (2005) wealth allocation framework builds upon, complements and adds several benefits to the classic asset allocation approach. The framework makes it easier to use non traditional assets such as alternative and structured investments, annuities and insurance together with traditional assets, such as stocks and bonds. It supports a long term diversified approach to investing and it allows the indivudal to pursue and protect lifestyle and wealth level goals, in addition to investment diversification and performance. Most importantly, it allows the individual to bring all the aspects of his/her financial life under one simple organizing umbrella.

This section focuses on the implementation of the new framework, the first being a methodology to classify all of the investors assets into the three different risk buckets and the second dealing with choosing appropriate benchmarks for the overall performance of the assets in each of these risk buckets.


2.10.1 Classification of assets Under the wealth allocation framework, both the asset type and the role it plays in the portfolio determine the placement of each asset into one of the three different risk buckets. Therefore, as rightly pointed out by the author, the same asset can be a part of different buckets for different individuals.

An important point illustrated by Chhabra (2005) is that under this framework, the portfolio will often be mean variance inefficient - that is, off the efficient frontier. However, when viewed overall it provides greater protection and upside potential with wide range of outcomes.

Figure 7: Asset Classifications for Each Risk Bucket Personal Risk

Protective Assets Cash Home Purchase

Market Risk
Market Assets Equities Fixed Income Cash (Reserved for Opportunistic Investments) Strategic Investments

Aspirational Risk
Aspirational Assets Alternative Investments Investment Real Estate Investment Concentration Small Business Concentrated Stock and Stock option positions

Home Mortgage Safe Investments Principal Protected Funds Annuities to provide safe source of income Hedging Insurance Human Capital

Source: Chhabra, A B (2005), Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors, The Journal of Wealth Management, Spring 2005, p. 11

As Figure 7 clearly illustrates, securities that provide some degree of principal protection fall in the personal risk category. Examples are cash, short term government backed treasury bonds, inflation indexed bonds, principal protected


mutual funds, annuities of certain kinds and risk management instruments and strategies. Such instruments are a part of this category because they protect the value of the principal and are conservative investments that help sustain the basic standard of living. Most conventional securities fall in the market risk bucket, since they follow the market. Alternative instruments like fund of hedge funds,

commodities etc belong to this category since they imitate the market risk return pattern. Executive stock options, concentrated stock positions, single manager hedge funds, leveraged investment real estate and call options are examples of investments that fall in the aspirational risk bucket since these investments provide an opportunity to significantly enhance capital and provide greater returns [Chhabra, (2005)].

2.10.2 Benchmarks Investors have very different performance expectations for the assets allocated to each of the three risk buckets and these expectations must be benchmarked against appropriate indices. The idea of having a different benchmark for each of the three sections of the portfolio is important. In the first bucket, the investor pays for and receives safety. In the third bucket, he gets a chance to earn significant returns, accompanied however with a significant probability of loss of capital.


Figure 8: Performance and Risk Measurement for Each Risk Bucket Personal Risk
Protective Assets

Market Risk
Market Assets

Aspirational Risk
Aspirational Assets

Expected Performance
Below market returns for below market risks

Expected Performance
Market returns and market risks

Expected Performance
Above market returns and high risks

Sample Benchmarks
Consumer Price Index 3 month LIBOR

Sample Benchmarks
S&P 500 Lehman Agg.Bond MSCI World Index

Sample Benchmarks
CLEW Index Absolute Return Value

Risk Measures
Downside Risk Scenario Analysis

Risk Measures
Standard Deviation Sharpe Ratio Beta Scenario Analysis

Risk Measures
Upside Return Measures Manager Alpha Scenario Analysis


Risk/Return Spectrum


Source: Chhabra, A B (2005), Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors, The Journal of Wealth Management, Spring 2005, p. 10

As Figure 8 above depicts, we can see that assets in the personal risk bucket should be expected to appreciate at below market rates since they are conservative investments. Suitable benchmarks are the consumer price index or 3- month LIBOR. Suitable risk measures could use downside risk rather than volatility. Assets in the market risk bucket follow the standard Markowitz framework. Their performance can be compared to a standard benchmark constructed from appropriate weighting of the S&P 500 and an aggregate bond index. Assets in the aspirational risk bucket should significantly outperform standard market indices. Example of such benchmarks could be the Forbes Magazines Cost of Living Extremely Well Index (CLEWI), a hedge fund index or a large alpha over a standard market index [Chhabra, (2005)].


2.10.3 Implementation of the wealth allocation framework Chhabra (2005) has outlined an implementation schema for the wealth allocation framework as depicted below: 1. Gather complete diagnostic information: This involves understanding lifecycle details, determining client goals and priorities, assigning cash flows and timelines to each goal and using risk questionnaires to determine client risk factors and personal danger zone. 2. Perform risk allocation, asset allocation and portfolio construction 3. Compute probability of achieving goals using scenario analysis and Monte Carlo simulations. 4. Readjust: risk allocation, client goals and asset allocations within each risk bucket 5. Repeat steps one to four till success and optimum balance are achieved. 6. Check robustness of solution to market and client risk factors. 7. Implement 8. Review and readjust as needed.

This implementation schema is important and is the basic process of wealth management followed by most private banks today. In Chhabras (2005) article however, it is mentioned only in the appendix and not elaborated upon. I have therefore looked at the wealth management process in depth in chapters five and six.

Under this wealth allocation framework, risk allocation precedes asset allocation for the individual investor. The ultimate goal of this framework is to allow for the optimum allocation of risk and to meet the investors safety and aspirational goals while still benefiting from efficient markets. By combining Modern Portfolio Theory and behavioural finance models, gives advisors the opportunity to design portfolios


that will be well accepted by clients as well as work towards generating superior returns for them.

2.11 MARKET TIMING AND BUSINESS CYCLE Some portfolio managers claim that market timing is also a determinant of generating superior returns. Although several researchers agree that it is not possible to predict market timing, Larsen and Wozniak (1995) claim that market timers alter their asset allocation mix to reflect the investors perception of their short term relative performance. Investors often believe that advisors and managers can predict market movements and are intrigued by advisors who can take advantage of a bull market as well as protect portfolio value in times of a bear market. [Cooper and Cheiffe, (2004)].

Although various methods have been proposed for forecasting market timing by researchers such as Arnott and von Germeten (1983) and Larsen and Wozniak (1995) none of the studies have been able to provide a strategy that helps generate returns above the normal. Cooper and Chieffe (1995) attribute this to the simple reason that for an asset class to give higher returns a major shift in the economy is required. Though, business cycle changes are not recognized till a much later date, they hold that for an investor to earn abnormal returns these business cycle changes must be recognized within one month of transition.

Wealth management supports active asset allocation and many studies in active asset allocation measure the spread between stocks, bonds and cash against a determined benchmark. Studies such as these by Arnott and von Germenten (1983) and Einhorn and Shangquan (1984) conclude that active asset allocation can be executed by closely watching the relative returns of stocks and bonds and reacting


accordingly. However, another study by Brinson, Hood and Beebower (1986) contradicts these results proving that market timing does not play a significant role in the returns of a pension fund portfolio. Clinebell, Kahl and Stevens (1991) also conclude that using the spreads between stocks and bonds do not serve as a sound basis for active asset allocation.

Jones (1987) adopts a business cycle approach to wealth management, while managing client portfolios. His paper makes use of economic statistics to determine the current phase of the business cycle.

Every industry has its own business life cycle. Ineichens (2004) article talks about the three stages of the asset management industry. He puts forth the view that the asset management industry is about to move from the second stage to the third. He defines the first stage as a holistic one, where individuals and investors created a single balanced portfolio of stocks, bonds and cash to generate returns. However, lack of specialization and manager accountability generated average returns and resulted in the industry shifting to the second stage: the relative performance game. Under this relative return approach, passive market indexes acted as benchmarks against which performance could be measured and investment managers were held accountable. This second stage fit nicely with the Modern Portfolio Theory, with market indices used as benchmarks. However, with the evolution of performance evaluation and outperforming the benchmark being the focus of only a minority of managers again led to low returns in the industry.

The absolute return approach, the third stage in the industry, introduces an absolute yardstick against which managers are measured. Ineichen (2004) states that under this approach active asset managers are hired and paid to balance investment


opportunities with an absolute measure of risk. Under the absolute return approach, risk is viewed as the total risk faced by the investor and not the market risk under the relative return approach.

2.12 CHANGING BUSINESS MODEL The Global Private Banking Survey (2007) by PriceWaterhouse Coopers reveals a period of unprecedented growth opportunities for wealth managers. The survey emphasizes the move towards a more client centric approach and today, private banks and wealth managers are moving towards this realization that the changing business model involves not only understanding products but also client service and their needs.

Central to this new model, is improving client overall client experience thereby increasing client satisfaction. Segmentation also is now client centric designed to serve clients better not shifting focus from cost savings for wealth managers. The survey also emphasizes on the importance of capturing client feedback; wealth managers understand the implications of putting clients at the heart of their organizations and therefore the need to listen and respond to feedback.

The spotlight section of the World Wealth Report (2007) also focuses on client service models and how they are changing from traditional models. As the needs of the high net worth individuals (HNWIs) are becoming increasingly complex, the wealth management firms are realizing that the quality of their service models is tied to their continued success.

Leading firms are now adopting a dynamic needs based approach to increase client satisfaction. Taking a needs based approach allows firms to better satisfy client


needs, thus increasing client satisfaction, retention and acquisition. Firms are now assessing clients using a more fluid, in depth and iterative needs based approach. In this enhanced model, both clients and wealth management firms benefit from the optimization of initial pairing and revaluation of client needs with firm offerings. [World Wealth Report, (2007)].

Both the above findings are consistent with the views proposed by Lucas (2006) in his book that talks about the transition from classic wealth management to strategic wealth management. He emphasizes the strategic approach to wealth management instead of the classically flawed approach, which is a holistic approach and focuses on the clients interests. The book explores all the strategic options while putting the client in the drivers seat and enabling the client to employ their advisors to the fullest. The clients values, skills, resources and how they relate to their family are at the core of the strategic wealth management approach. In short, the strategic approach requires the client to take control of the wealth management process.

As can be evidenced from the works of the different authors above, Gallagher (2004) rightly concludes that although the wealth management industry is now undergoing a huge change, it is at a critical juncture. As investors needs are changing, more demands are placed on the role of the advisor and the key to success for advisors will lie in their adaptability to the changing environment. Advisors will need to tailor their services to their clients total wealth management needs to meet their shifting demands.



This chapter discusses the samples selected, the methodology employed in data collection, advantages and disadvantages of the same and the data collected through a semi structured questionnaire.

3.1 SAMPLE SELECTION In my dissertation, I have looked at four companies namely, Kotak Bank, Citibank, Standard Chartered Bank and Motilal Oswal. Kotak, Citibank and Standard Chartered have an international presence and are established in the field of wealth management. Motilal Oswal however, is a new entrant in the field of wealth management and has only a domestic presence. Kotak and Citibank are known for their aggressive approach in the market whereas; Standard Chartered adopts a mellow approach to wealth management. Comparing the four companies gives an insight into how the international approach differs from the domestic approach.

Although, the wealth management models employed by the four companies are broadly similar, there are various intricacies in these models which differ from company to company. Where Citibank and Standard Chartered have the most comprehensive risk profiling system, Kotak and Motilal Oswal have the most comprehensive asset allocation system. In terms of portfolio tracking and reviewing, Citibank and Standard Chartered make use of sophisticated tools and mechanisms for monitoring client portfolios. Product offerings are the widest in Kotak and Standard Chartered. This can be attributed to the international expertise. However inspite of these intricacies which differ from company to company, an important similarity between all the four companies is that each of them adopts a very customer centric attitude and offers flexible and customized solutions for their clients.


These four companies were selected carefully to bring out clearly the differences in the approaches to wealth management and the wealth management models employed.

3.2 DATA COLLECTION METHODOLOGY In this dissertation I have employed the qualitative research methodology of data collection. Qualitative research is mainly concerned with why and involves gathering information that is varied, in depth and rich. The information relates to how something is experienced, opinions and values rather than facts, figures and statistical data.7

There are a variety of methods used in qualitative research. Below are a few of the common methods: 8 Participant observation Direct observation Unstructured interviewing Case studies

3.2.1 Qualitative Interviews I have employed qualitative interviews as my research methodology. Qualitative interviews are of various types ranging from:9
7 8 9

Qualitative questions added to structured surveys and questionnaires Semi structured interviews Open ended but probing interviewing Open ended ad hoc conversations


Here, I have used semi structured interviews for my data collection. Semi structured interviews comprise of various open ended questions and responses to such questions are recorded in detail. Enough space is left for unexpected issues to arise in the course of the interview. Qualitative interviews involve continuous probing and cross checking of information. Good interpersonal skills and careful documentation are crucial features of qualitative interviews.

3.2.2 Advantages and Challenges of Qualitative Interviews The very essence of a qualitative interview is its openness and flexibility which creates a variety of opportunities for the researcher [Botha, (2001)]. The researcher works directly with the respondent and hence it is a far more personal method. The researcher also has an opportunity to probe and gain further information into the area of interest. It also helps clarify or explain questions, increasing the likelihood of gathering correct information. It therefore helps gather rich data, explore topics in depth and gain new insights. Qualitative interviews are easier for the participants too since opinions and impressions are sought for. 10 The participants can express themselves freely in their own words rather than being restricted to predetermined categories and hence they feel more relaxed and are more candid. This method hence provides high credibility and face validity.11

Qualitative interviews are however very time consuming and expensive. The interviewer requires considerable expertise in human interaction and must be trained to respond to any contingency. There is therefore a need for well qualified and highly trained interviewers [Botha, (2001)]. Also, a lack of a structure, excessive openness and flexibility can lead to inconsistencies across interviews. The participants may

10 11


distort information based on selective perceptions and desire to please the researcher. The participants moods and personality must also be taken into account. Data gathering, analyzing and interpreting qualitative interviews is also very time consuming. The volume of information may be large and it is difficult to interpret and evaluate such large masses of data.12

The data regarding the wealth management practices in the four companies was collected by interviewing people from the respective companies. Employees from the wealth management or private banking divisions were interviewed. After taking prior appointments with the companies, direct interviews were held with the concerned employees. A series of open ended questions were asked, the answers to which were recorded in detail. Issues other than those pertaining to the questionnaire were also discussed to gain further insight. The people interviewed included Mr. Vodhisatta

Chakravartty, Associate Vice President at Kotak Wealth Management; Poonam Kataria, Citigold Relationship Manager at Citibank Wealth Management; V.Sunithaa, Associate Vice President at Motilal Oswal Wealth Management; and Raman Grover, Investment Advisor at Standard Chartered Investment Services.

3.3 DATA DESCRIPTION The data in this dissertation pertains to the wealth management practices and models followed by the four companies. A varied amount of data was collected which included, the various types of customers who can avail wealth management services and the minimum investment limits, if required, the basic process of wealth management followed by each company, the risk profiling and know your customer (KYC) systems followed, the asset allocation models used while determining the clients investment ratios and whether they are flexible or standardized, the different


product offerings and asset classes used while constructing the clients portfolio, how these products are selected and the fund house rating process and finally the procedure for updating clients and reviewing and monitoring portfolios.

3.3.1 Questionnaire In order to collect the data described above, an open ended questionnaire was formulated which is listed below:

1. What are the different kinds of customers for the company? 2. Are there minimum investment limits for these different kinds of customers? 3. What are the different asset classes used by the company? 4. What are the steps used in the wealth management procedure? 5. How is the profiling of customers done and how are the different profiles ranked? 6. How the assets allocated to different clients? 7. What are the different products offered to the customers? 8. How are these different products e.g. insurance, equity, debt chosen? 9. Who does the research for the company? 10. How are the portfolios reviewed and investors updated?

3.3.2 Purpose of research In this dissertation I have attempted to understand the wealth management models and intricacies followed by four companies and then draw comparisons between all of them. After comparing the four models, I have formulated a comprehensive wealth management model based on the insights drawn from the four models. This model builds on the weaknesses and incorporates the strengths of the four models studied and hence will prove to be a robust and effective model. This study aims to highlight


how companies are now using behavioural finance theory as well as the efficient market prognosis in their approach to wealth management, thus staging a revolution from traditional wealth management models to dynamic client centric models.



This chapter briefly explains a few, commonly used asset classes while constructing a client portfolio by investment advisors.

An asset class is simply a category of an asset. Each asset class has different qualities and strengths. Getting to know their risk reward characteristics helps advisors work out a suitable strategy for the investors.13

The most popular and traditional asset classes are cash, bonds and shares but many more assets are also considered in an investment portfolio. These range from commodities, art, structured products to even classic cars and fine wines. These are also termed as alternative investments [Guide to Asset Classes, (2007)].

4.1 EQUITIES14 Equities also known as stocks or shares represent an ownership in the company and a share in the companys assets through the share price. Equities can provide a source of income for investors, because they get a share in the companys profits through dividend payments. Dividends, although not guaranteed are paid out of the companys profits, normally twice a year.

Investors can also earn or lose money based on increasing or decreasing share value. Stock prices rise when the company grows and the demand for its shares rise and vice versa. A common idea is to buy the stock when the company is small, hold on it for a number of years while the company grows and then sell it for a profit when the company is doing well. Stocks however are most volatile in the short term. Although

13 14


over long periods of time they offer the potential of significant growth, their value can go up or down dramatically over a short period of time, making them the riskiest asset class. An important point to note is that returns and the principal value of the investment fluctuates, and when the shares are redeemed they may be worth more or less than the original investment.

4.2 BONDS Bonds are a conservative and guaranteed form of investment. They represent loans to a government or a company for a set period of time. They offer a predetermined rate of return and repayment of original investment on a set date, known as the redemption date or the date of maturity. Bonds are alternatively known as fixed income investments because they make regular interest payments until the date of maturity.

Bonds from a company are known as corporate bonds and bonds from a government are known as government bonds. Government bonds offer the greatest degree of security since they are backed by the full faith and credit of the government.16

Bonds are a good way of making income from savings because they offer higher rate of returns than banks and are more stable than equities. They are however, riskier than cash because the company issuing the bonds may default in interest payments. In general, the longer the bonds maturity, the more its price will be affected by fluctuating interest rates. To compensate for this, long term bonds offer higher interest rates than short term bonds.
17 17




4.3 CASH Cash as an asset class refers to money that is invested in banks, building societies and other organizations to produce interest. Although it does not offer the best potential return, it is the least risky asset class. Cash and cash equivalents are safe, short term, very liquid investments. They serve as excellent savings vehicles for short term goals.

Treasury bills, certificate of deposits (CDs) and other short term securities are known as cash and cash equivalents. They earn money through interest, which is generally a predetermined rate of interest. This rate of interest must always exceed inflation to help maintain the purchasing power of money.

Figure 9: Risk Vs Return of Cash, Bonds and Shares

Source: Guide to Asset Classes (2007), By Insight Investment, p. 10. 19



Figure 9 above shows the risk reward characteristics of the three basic asset classes. Where cash and bonds have relatively low risk reward characteristics, shares are the most volatile offering the greatest returns coupled with high risk.

4.4 MUTUAL FUNDS A mutual fund is managed by an investment company, where investments are held by a large number of people and the company invests that money in a selection of various assets. Investors pool their money together and entrust it to a professional money manager who buys and sells securities based on the funds objective. The shares of a mutual fund are purchased and redeemed upon demand, based on the funds net asset value.

Each fund has a predetermined objective such as, a predetermined rate of return to be achieved, that tailors the funds investments. Also, each fund has different risk and reward characteristics. The higher the potential return, the higher is the risk of loss.

The greatest advantage of investing in a mutual fund is that it is inherently diversified; holding shares in a great number of securities. The investor also receives professional money management and expertise, which would otherwise be costly to avail.

20 21 22


4.5 REAL ESTATE23 Real estate as an investment class usually means investing in commercial property such as offices, retail developments, leisure and industrial developments. Real estate returns can run counter to conventional investments such as stocks and bonds and hence are helpful in diversifying the investors portfolio. A major attraction of investing in this sector is that the success of the venture depends on professional property management; successful maintenance and repairs can add value to the capital value of the property.

However, the value of the property is not guaranteed and can rise or fall depending on market conditions. The investor can get back less or more than the value of the original investment. The real estate sector is subject to various risks such as movements in property prices and earthquakes and so on. environmental liabilities such as floods,

As reported in the World Wealth Report (2007), increased transparency and improved liquidity in the real estate market led High Net Worth Individuals (HNWIs) to increase their allocations to real estate in 2006. Infact high net worth individuals liquidated their investments in alternative assets to increase investments in the real estate sector.

4.6 COMMODITIES Commodities are raw materials such as crude oil, base metals such as gold, silver, agricultural commodities, industrial and soft commodities. Commodities present an attractive investment opportunity because they behave differently from other asset



classes and adding commodities to a portfolio can help diversify a portfolio and reduce overall risk exposure of the portfolio.

Commodities unlike shares and bonds react well to unexpected inflation and hence provide a good vehicle to protect the portfolio and diversify investment risk. The shortage of supply to meet the growing demand has created a strong commodities market. Commodities however have a high risk return profile like shares and therefore it is most advisable to spread the commodity exposures over a wide range of sectors. They are also very dependent on economic conditions and hence can suffer when economic growth is slowing down [Guide to Asset Classes, (2007)].



are usually used by collectors and hobbyists but can also

provide significant diversification benefits in large portfolios as compared to traditional assets. These investments are more suited to the wealthier and more experienced investors as they are volatile and of high risk in nature. Due to various market imperfections in information and market liquidity, alternative investments offer unique risk reward opportunities not easily available through the inclusion of traditional assets in the portfolios [Schneeweis and Pescatore, (1999)].

24 Although there is not set definition for alternative investments, they generally include art, structured products, hedge funds, private equity, and venture capital and so on.


Figure 10: HNWIs allocation of financial assets, 2004-2008F (%)

Source: World Wealth Report (2007), by Capgemini and Merrill Lynch, p. 17

Figure 10 above highlights the percentage allocation of the High Net Worth Individuals portfolio to various asset classes. As can be seen from the figure, in the year 2006, allocations to the alternative investments segment fell from 20% to 10% mainly because the HNWIs liquidated their holdings in the alternative investments to increase investments in the real estate sector. However, the report mentions this only as a temporary tactical move in response to the higher performance currently yielded by the real estate sector, rather than a long term asset allocation shift and therefore projects a greater allocation to alternative investments in 2008.

4.8 INVESTMENTS OF PASSION The World Wealth Report of 2007 took a detailed look at the High Net Worth Individuals (HNWIs) portfolio allocations in investments of passion. These


investments of passion include: luxury collectibles, jewelry, art, sports related investments and other collectibles. Using data from the Forbes Cost of Living Extremely Well Index, the survey revealed that the cost of luxury goods and services rose nearly twice as fast in 2006 than the cost of consumer products, signaling that the demand for luxury goods is surpassing the demand for everyday consumer goods.

Among these investments of passion, high net worth individuals allocated the most money to luxury collectibles, including automobiles, boats and airplanes. They allocated 26% of their investments of passion dollars to luxury collectibles in 2006, 20% to art and 18% to jewelry, the report said.

According to Merrill Lynch analysts, although only a few wealth management firms provide services for investments of passion, the potential for growth of these items will trigger increased focus on this segment in the coming future.

However, even though the report classifies automobiles, boats and airplanes as investments of passion, according to me such classification is questionable since these so called investments of passion, depreciate in value as time progresses and hence cannot prove to be true investments.



This chapter discusses the wealth management models employed by four different companies namely, Kotak Bank, Citibank, Motilal Oswal and Standard Chartered. The customer segmentation, wealth management process, risk profiling and asset allocation systems, product offerings, review and monitoring of portfolios are discussed with respect to each of the four models.

5.1 KOTAK WEALTH MANAGEMENT MODEL The Kotak Wealth Management Group today is one of the oldest and most respected Wealth Management teams in India. Today they manage the wealth of over 3700 families. Of these, 93 are part of the top 300 families in India.

5.1.1 Customer segmentation

Pvt Bank ing

Priority Banking

Retail Customers

Figure 11: Types of Customers at Kotak Bank

The retail customers represented by the lowest layer of the pyramid in Figure 11 are those who have maximum investments of Rs. Half a million (Rs 500,000). The second layer incorporates customers who have investments between half a million to


Rs. 10 million (Rs 10,000,000). This segment represents the Priority Banking Arm of the Kotak group. The topmost layer represents the Private Banking/Wealth Management arm of the Kotak group and includes customers who have investments of Rs 10 million (Rs 10,000,000) and above.

5.1.2 The Wealth Management Process

New Goals or Priorities

Define major life goals

Monitor Progress

Desired Rate of Return

Implement Asset Allocation

Evolve an Asset Allocation

Conducting Risk Profiling for clients

Figure 12: The Investment Process Flow

As can be seen in Figure 12, the investment process flow for Kotak starts with defining the clients major goals. Extensive consultations with clients are held on investment goals, horizons and desired rate of return. After defining these parameters, Kotak conducts risk profiling for the client and based on client inputs, the clients risk profile and market conditions it designs an asset allocation plan for its client. Once this asset allocation plan is approved by the client, Kotak implements this allocation in terms of the various products offered by it. Continuous portfolio


monitoring is done to keep it attuned to market changes and client goals. Any new client goals or changing goals as defined by the client are then constantly incorporated into the portfolio.

5.1.3 Asset Allocation Based on the risk profile of the client and his specific needs, Kotak has segregated their product offerings into four basic buckets namely: Capital protected with fixed returns, capital protected with no fixed returns, capital at risk and other asset classes. However, a client is not restricted to a particular bucket only. A portfolio can be constructed comprising a mixture of assets from all the four buckets. At Kotak, there is no set model or asset allocation plan to which the client can be allocated to; it is a highly customized process and differs from client to client.

Following are the asset categories that fall into each of the risk buckets. Capital Protected with Fixed Returns Here the client is assured of recovering his capital as well as a fixed rate of return. This bucket is generally favours conservative customers. Table 1: Capital Protected with Returns Bonds Fixed Deposits Fixed Maturity Plans Liquid Funds

The products in the above table all guarantee fixed returns to the client. Capital Protected with No Fixed Returns This bucket entails full capital protection but here the client is willing to forego fixed returns for the opportunity to earn higher returns.


Table 2: Capital Protected with No Fixed Returns Structured Products Nifty Debentures Flexi Fund of Funds

The two structured products in the table 2 offer the client customized investments to meet his/her specific objectives. These are products are not directly available in the market, but in house products are particularly designed for customers of Kotak Bank only as per their needs.

The nifty debentures provide capital appreciation with upside Nifty participation. The Flexi Fund of Funds series is a three year close ended scheme which aims to preserve capital and provide upside participation on the equity markets. Capital at Risk This risk bucket comprises of clients who are willing to forego their capital for earning high returns. This bucket entails high risk and aggressive customers. Table 3: Capital At Risk EQUITY Relative Return Portfolio - Diversified Mutual Funds - Index Funds Absolute Return Portfolio

As table 3 explains, this risk bucket comprises mainly of equity which is broadly classified into relative return portfolios and absolute return portfolios. Where relative return portfolios are beta based and consist mainly of diversified mutual funds and


index funds, the absolute return portfolios are alpha based and are more concentrated portfolios of about ten to twelve stocks. Other Asset Classes Table 4: Other Asset Classes Commodities Art Fund Real Estate Private Equity

As can be seen from table 4 above, this bucket mainly comprises of what we term as alternative investments. These alternative investments are new avenues for investments and their inclusion into portfolios depends on the client.

5.1.4 Product Offerings Kotak provides one of the widest range of products to invest in Portfolio Management Services Kotak offers the construction and management of equity portfolios using their expertise in equity capital markets. Structured Products Kotak offers structured products such as nifty debentures and flexi fund of funds explained in table two. Mutual Funds Kotak offers research based recommendations on various mutual funds. It has tie ups with the following mutual funds: DSP Merrill Lynch Mutual Fund HDFC Mutual Fund Fidelity Mutual Fund


Birla Sunlife Mutual Fund Reliance Mutual Fund Prudential ICICI Mutual Fund HSBC Mutual Fund Tata Mutual Fund Besides tie ups with the following mutual funds, Kotak has its own in house mutual funds too such as Kotak 30 Fund, Kotak Mid Cap Fund, Kotak Global India and Kotak Liquid. Private Equity The private equity fund aims to achieve long term capital appreciation through investments in privately negotiated equity and equity related investments in emerging public limited companies. Real Estate The Kotak India Real Estate Fund has been organized as a scheme of the Kotak Mahindra Realty Fund, a close ended venture capital fund with a focus on the Indian real estate and allied sectors.

According to Vodhisatta Chakravartty, Associate Vice President at Kotak Wealth Management, At Kotak, we offer everything under one umbrella and cover all asset classes right from art to debt instruments.

5.1.5 Mutual Fund Recommendation Process Recommendations at Kotak are based on an extensive analytical process which has been developed in house. Emphasis is given for consistency in performance, a sound and consistent investment philosophy and portfolio quality. The process has four stages:


1. Due diligence on Asset Management Companies (AMCs): Kotak focuses on various qualitative parameters such as AMCs pedigree, assets under management, service capabilities and management team. 2. Classification as per the nature of the scheme: The classification is based on the nature of investments made by the scheme, such as debt funds, short term income funds, liquid funds etc. 3. Analyzing consistency in performance: Kotak follows the risk to reward ratio for analyzing consistency in performance. They rank funds on the Excess Returns Potential (ERP) ratio. This measure helps them determine how consistent the fund is in generating returns and showing lower downside. 4. Analyzing portfolio risk: A detailed study of the portfolio is undertaken to assess how the returns were generated and how much risk the fund has taken to earn that return. Both the market risk and the credit risk is analyzed.

Based on an extensive analysis of all these parameters, Kotak recommends those schemes which show higher consistency in performance with lower or reasonable portfolio risk.

5.1.6 Portfolio Review Client portfolios are reviewed based on market conditions and client goals. Normally, portfolios are reviewed once a month but frequent reviews can also be done depending on the clients needs. The clients are sent updates regularly generally

every two weeks. Kotak also has a management information system (MIS) in place which automatically updates client portfolios.


5.2 CITIBANK WEALTH MANAGEMENT MODEL The wealth management group of Citibank is known as Citi Investment Services.

5.2.1 Customer Segmentation


G2 - Citigold

G1 - Citigold

G0 - Citiblue

Figure 13: Types of Customers at Citibank

As can be seen from figure 13 above, Citibank segments its customers into four categories. G0 customers are those who have financial assets less than Rs 3 million (Rs 3,000,000). G1 have financial assets in the range of Rs 3 million to Rs 10 million (Rs 10,000,000). G2 have financial assets between Rs 10 million to Rs 25 million (Rs 25,000,000) and G3 are those who have financial assets of over Rs 25 million. The G1, G2 and G3 customers are known as Citigold Customers (CG) and are managed by the Citigold Relationship Managers. The G0 segment is known as Citiblue (CB) and customers in this segment are managed by the Citiblue Relationship Managers.


5.2.2 The Wealth Management Process


Customer Profiling Portfolio Allocation


Product Selection Portfolio Review Rebalancing

Figure 14: Citibank Wealth Management Process

The Citibank wealth management process is broadly classified into two steps. The first step begins with Citipro, the in house Financial Managing Tool. It helps assess the clients existing wealth, cash flow requirements, risk appetite and investment horizon. The clients profile and cash flows determine the optimal portfolio allocation into liquid assets, medium term and long term investments. It also helps rationalize the clients existing liabilities and determine his insurance requirements. It thus enables the client to preserve, protect and grow his wealth.

The second step pertains to product selection and portfolio review and rebalancing using Citichoice. The client can select from a shortlist of top performing mutual funds in each of the liquid, debt and equity fund asset classes from leading fund houses in India. Depending on his risk tolerance (termed as appetite in Citibank), a variety of


other products are also offered such as government of India fixed income securities, treasury bills, structured products and so on.

At Citibank, the wealth manager actively monitors the clients portfolio and keeps him abreast with the updated status of his investments. The client also receives a portfolio tracker that contains details on his portfolio performance against his financial plan and provides a systematic opportunity to rebalance investments. Citichoice Citichoice is the fact sheet of various funds, published by Citibank every quarter. At Citibank, they guide their customers to the right choice of investment funds through their globally renowned fund selection process, Citichoice. In depth research based on fund ratings is conducted. The Citi Investment Analysts then conduct a detailed analysis of the fund performance and thoroughly examine the fund management team. The results are then reviewed by an advisory committee who decides which funds to make available for recommendation to customers.

Strategic Citichoice funds are funds selected on comprehensive parameters such as superior return score, industry concentration, company concentration, liquidity and asset size. Apart from these strategic Citichoice funds, other funds such as the dividend yield, mid cap funds and focused funds form a part of the tactical allocation of Citichoice.

5.2.3 Risk Profiling and Asset Allocation Citibank administers a paper based questionnaire to gauge the risk profile of its customers. This questionnaire is the personal investment risk profile and consists of


seven questions. Four of these questions carry scores. Once the client has filled this questionnaire, based on their answers their total score is computed.

Based on these scores, Citibank has designed investment profile and risk ranking for the scores obtained. Each investment profile has different allocation to bonds, equities and recommendations for global investment products.

Table 5: Profile and Asset Allocation Models at Citibank Investment Profile P1 P2 P3 P4 P5 P6 Risk Averse Income Conservative Balanced Growth Enhanced Growth Risk Ranking 1 2 3 4 5 6 Portfolio Solution Liquid 100% Bonds 100% 80% 50% 30% 10% Equity

20% 50% 70% 90%

As can be seen from table 5, Citibank has six customer profiles and based on these profiles it has recommended sample portfolio solutions for each of them. For example, if the customer is P5 then 30% of his portfolio should be invested in bonds and 70% in equities. The risk ranking is based on the risk profile. The higher the ranking, the riskier the customer and therefore higher the profile. For a detailed understanding on each profile and its associated investment products, please refer to the attached personal investment risk profile form in appendix 8.1.

However, it is important to note that strict adherence to these profiles and allocations above are not mandatory. The profile does not cover all issues to be considered while investing, but offers a general framework. Various other aspects


such as the clients need base, profession are also covered and incorporated into the asset allocation process.

5.2.4 Product Offerings Citibank offers a variety of products which are listed below: Bonds Insurance Mutual Funds Structured Products Direct Equity Advisory

Citigold makes use of the in house tool, Wealth Planner, to construct clients portfolios. Once the goals and profile of the client is determined, they use the Wealth Planner to build a diversified and efficient portfolio of different asset classes. At Citibank, they make use of sophisticated investment tools so that the client is aware of the potential risks and rewards.

Citigold wealth management also offers exclusive privileges that comprises of tax and estate advisory services, free for life Citibank international gold credit card, updated information on treasury and currency markets and free access to airport lounges at domestic and international airports in India.


5.2.5 Product Ratings Citibank has an in house research base known as the Citigroup Global Market, which evaluates the performance of various products. It also has access to the award winning global market research of Citigroup Smith Barney. Rating Process At Citibank, mutual fund house rating is a five step process which is illustrated in the diagram below:


Quant. Screening

Qualitative Screening

Fund house Screening

Universe of Funds

Figure 15: Citibank Fund Rating Process

As the above figure depicts, the process starts with screening of funds from a universe of funds available. A qualitative as well as quantitative screening is then done based on various parameters such as risk adjusted return, liquidity risk, asset quality, average maturity and mark to market component, asset size and many others. Once the funds are rated quantitatively and qualitatively, they are published in Citichoice.


5.2.6 Portfolio Review Reviewing and rebalancing of portfolios is done regularly, depending on the client. Clients are updated regularly and face to face meetings are held with the client every fortnightly.

Citibank also has a Portfolio Tracker system which is an automated system that generates a one stop report of the clients assets, liabilities and investment performance. It gives simple to understand assessment of the clients finances and performance. This helps the clients monitor their portfolios regularly and fine tune their investments as when required.

5.3 MOTILAL OSWAL WEALTH MANAGEMENT MODEL Motilal Oswals newest platform: wealth management provides comprehensive wealth management solutions to cater to the clients wealth management needs.

5.3.1 Customer Segmentation

Super HNI

Mass Affluent

Retail Segment

Figure 16: Types of Customers at Motilal Oswal


As can be seen from the above pyramid in figure 16, Motilal Oswal segments its customers into three tiers. The bottommost layer is the retail segment and comprises of customers with financial assets of less than Rs 1 million (Rs 1,000,000). The second layer is the mass affluent segment, alternatively known as the Mid Tier Millionaire (MTM) segment, consisting of clients with financial assets between Rs 1 million to Rs 50 million (Rs 50,000,000). The topmost layer is the super high net worth individuals (HNI) who have financial assets of over Rs 50 million.

5.3.2 The Wealth Management Process Cash Flow Analysis

Need Analysis

Risk Profiling

Assign to category

Asset Allocation


Figure 17: Wealth Management Process at Motilal Oswal


The wealth management process at Motilal Oswal starts with conducting a review and analysis of the clients existing portfolio along with his cash flow analysis. A needs analysis is then carried out through consultations with the client on investment goals and horizons. After defining the clients goals and needs, Motilal Oswal conducts risk profiling for its customers to determine the clients appetite for risk. The client is then assigned to the appropriate category i.e. risk averse, conservative, moderate or aggressive risk taker. Depending on his risk category, an asset allocation plan is implemented for the client. Continuous portfolio reviewing and rebalancing is done to keep it aligned to the clients goals, needs and expectations.

5.3.3 Risk Profiling and Asset Allocation Motilal Oswal profiles its clients into various risk categories by administering a paper based questionnaire, prepared by the compliance department. Although the questionnaire was not disclosed to me, the questions asked revolve around the clients age, objectives, investment horizon, dependants and preferences. These questions help categorize the client into one of the four risk categories.

Asset allocation at Motilal Oswal is based on two parameters: Profile of the customer Expectation of the customer

The asset allocation advice aims to create a balance between the above two parameters. For example, if the profile of the customer is a conservative risk taker but the customer has expectations of very high returns, then the wealth manager at Motilal Oswal through extensive reviewing with the customer either tones down customer expectations or increases his risk appetite. Hence, the asset allocation process is an extremely customized process, unique to each customer. For example,


two customers both with aggressive risk profiles could have different asset allocations to their portfolios.

5.3.4 Product Selection Motilal Oswal has an internal research team comprising of 40-50 people that conducts research on various product offerings. The research is sector based. Besides this, an internal product team headed by the product manager decides the product mix. Finally the investment advisors, based on the profile of the customer recommend such products to the client.

Motilal Oswal offers a variety of products which are listed below: Bonds Equity Advisory Commodities Mutual Funds Insurance Derivatives

Structured products and alternative investments such as real estate and private equity do not form a part of Motilal Oswals product base, since it is a new entrant in this field and hence still developing its product base.

5.3.5 Portfolio Review Portfolios are reviewed once a month for the MTM segment as well as the retail segment. However, while updates are sent via mail to the retail segment, the advisors meet with the MTM segment personally to review their portfolios. For the super HNWI segment, meetings are held with the clients once every two weeks.


Quantitative as well as qualitative portfolio reviewing is done. The qualitative mechanism deals with a customer relationship package for advisors which updates them on the status of client portfolios and generates reminders for the advisors. The quantitative mechanism deals with a Wealth Management Software at Motilal Oswal, which generates net consolidated statements of the clients holding and his portfolio.

Hence, constant reviewing and rebalancing of portfolio is done to keep it aligned with market conditions and clients needs and goals.

5.4 STANDARD CHARTERED WEALTH MANAGEMENT MODEL Wealth management at Standard Chartered is known as Standard Chartered Investment Services (SCIS).

5.4.1 Customer Segmentation


Retail Customers

Figure 18: Types of Customers at Standard Chartered


Standard Chartered broadly segments its customers into two categories. The retail segment can avail branch banking services at Standard Chartered, whereas the High Net Worth Individuals (HNWIs) can avail of the Priority Banking services. The minimum investment limit for these high net worth individuals is Rs 2 million (Rs 2,000,000) and above.

5.4.2 The Wealth Management Process The wealth management process at Standard Chartered is a three step investment process.




Figure 19: Wealth Management Process at Standard Chartered

As can be seen from figure 19 above, the three steps in the wealth management process are plan, build and protect. In the first stage: plan, Standard Chartered uses various financial tools to analyze the customers current situation, needs, risk appetite and charts out the best plan to meet the clients goals. Under consultation with professional, competent and certified relationship managers, they help work out the clients investments with investment profiles reflecting his risks and preparing a strategy combining several investments that fulfill the clients financial requirements.

In the second stage namely build, SCIS the plan to grow the customers wealth through a wide range of portfolio management products and solutions. A series of integrated investment products are used that gives the client an opportunity to develop his assets for optimum results.


In the third stage, Standard Chartered helps maintain the value of the portfolio that is built in the previous stage and ensures sufficient protection for the client by constantly reviewing his investments. Review of the clients investments, observation and adjustment on a periodical basis all form a part of this last stage.

5.4.3 Risk Profiling and Asset Allocation Standard Chartered does its profiling in two parts for its customers Know Your Customer Common Transaction Form

Know Your Customer (KYC) is carried out through a customer suitability assessment form. This is a paper based questionnaire containing questions regarding the investors background, investment objective, risk preferences and so on. There are two separate forms, one for investments above Rs 2.5 million and one for investments below Rs 2.5 million. For investments below Rs 2.5 million, a score based customer suitability assessment form (see Appendix 8.2) is used where scores are assigned to each question and based on the total score of the investor, investments are recommended by the advisor. For investments above Rs 2.5 million (see Appendix 8.3), the questionnaire comprises of qualitative questions to find out the investors risk appetite and classify him accordingly.

After the customer suitability assessment, each investor is required to fill out the common transaction form which records all the personal details of the investor and his dependants.

After profiling the customer into the respective risk categories, asset allocation is carried out by the bank in two parts, i.e. strategic allocation and tactical allocation.


Strategic allocations are carried out for long term investments and tactical allocations are carried out short to medium term investments. There are no set asset allocation models prescribed by the bank, the process is customized and unique to each customer and his needs.

5.4.4 Product Selection Standard Chartered offers one of the widest ranges of investment products to its customers. These are: Mutual Funds Standard Chartered has tie ups with various mutual funds such as Birla Mutual Fund, DSP ML Mutual Fund, Fidelity MF, Franklin Templeton Mutual Fund, HDFC Mutual Fund, HSBC Mutual Fund, Prudential ICICI Mutual Fund and Reliance Mutual Fund. Portfolio Management Services Real Estate Structured Investments Standard Chartered has the widest structured products programme that caters to both sophisticated and new investors. Its structured products are divided into capital protected products and non capital protected products. Insurance Bonds Commodities

These products are carefully chosen after feedback from research team and once approved by the product team.


5.4.5 Portfolio Review Client portfolios are reviewed and updated regularly to keep it aligned with market conditions and client goals. Weekly review of the markets and monthly broker polls are conducted. The bank also makes use of an in house fund analyzer that gives an in depth review of various schemes.

Standard Chartered has a in house developed wealth management software that provides clients with regular updates and consolidated statements of their net holdings in their portfolio. Regular review meetings are also held with the clients on a face to face basis. Besides this, a monthly magazine called Invest Pro is published by the bank for its clients, which consists of market reviews, sector and company analysis and star ratings.



The table below summarizes the key differences between the four wealth management models explained in the previous chapter based on seven different parameters, i.e. customer segmentation, the wealth management process, risk profiling, asset allocation, products offered, research and portfolio reviews and updates. After which, I have attempted to expand each of these parameters and explain in detail the key differences.



KOTAK Retail: upto Rs 5 Lakhs

CITIBANK G0:< 30 lakhs G1: 30 lakhs - 1 crore G2: 1 - 2.5 crores G3: 2.5 crores +

MOTILAL OSWAL Retail: <10 lakhs Mass Affluent: 10 lakhs - 5 crores Super HNWI: 5 crores +

STANDARD CHARTERED Retail: Nil HNWI: 20 lakhs and above

Customer Segmentation

Priority Banking: 5 lakhs - 1 crore Private Banking: 1 crore +


Define Major Life Goals Profiling Evolve an Asset Allocation Implement Asset Allocation Monitor Progress New Goals and Priorities

Profiling Asset allocation Product selection Portfolio review Rebalancing

Cash Flow Analysis Need Analysis Risk Profiling Assign to Category Asset Allocation Tracking

Plan Build Protect

Not disclosed

Score based personal investment risk profile questionnaire 6 profiles

Paper based questionnaire prepared by compliance dept

2 parts: KYC(Know Your Customer) Common Transaction Form Two separate forms: above Rs 25 lakhs below Rs 25 lakhs

Risk Profiling 4 risk categories

4 asset buckets Capital protected with fixed returns Capital protected with no fixed returns Capital at risk Other asset classes Asset Allocation

Each of the six profiles has different allocations to bonds and equities

2 factors: profile of customer expectation of customer

2 kinds: strategic asset allocation tactical asset allocation


Flexible and customized


Customized and unique to each customer No set allocation models

Customized No set allocation models


Bonds Mutual Funds Equity Private Equity Real Estate Commodities Art Structured Products

Bonds Insurance Mutual Funds Direct Equity Structured Products

Bonds Insurance Mutual Funds Equity Commodities Derivatives

Bonds Insurance Mutual Funds Equity Real Estate Commmodities Structured Products

In house research dept Research

In house research dept known as Citigroup Global Market Access to global market research of Citigroup Smith Barney

Internal research team of about 40-50 people Sector based

Internal research team

Review and updates

MIS Updates sent to clients every two weeks

Citichoice Portfolio Tracker Face to face meetings held fortnightly

WMS Review meetings once a month for MTM Review meetings once every two weeks for super HNWI

WMS Fund Analyzer Invest Pro

Regular meetings


6.1 COMPARATIVE ANALYSIS OF WEALTH MANAGEMENT MODELS While dealing with customer segmentation, only Standard Chartered has a two tier segmentation. The remaining three banks have either a three or four tier segmentation, which makes it a comprehensive system of segmentation and allows the bank to cater to the needs and goals of each class more specifically. It is important to note that all the four banks follow the fixed investment model, while segmenting clients and not the revenue based model, i.e. they segment clients on the basis of their investments rather than the client profitability generated for the bank. Following a revenue based model while segmenting clients is a subjective process and hence not a very effective process. In my model therefore, I have employed the fixed investment model of segmenting customers to reduce

subjectivity and implement a standard system of segmenting customers.

The wealth management process followed by each bank is quite similar. All of them start with an analysis of the clients existing cash flow needs and wealth situation, move on to risk profiling and asset allocation and then to the final step of reviewing and rebalancing the clients portfolios. Although the broad outline of the process remains the same, the intricacies within each step differ from bank to bank For example; Citibank and Standard Chartered make use of sophisticated tools to analyze the clients existing wealth and cash flow requirements. On the other hand, Kotak and Motilal Oswal conduct such analysis through extensive consultations with their clients. In my model I have employed sophisticated tools along with extensive consultations with clients as part of the wealth management process.

The risk profiling system followed is quite different too. Although all the banks have a paper based questionnaire administered to their clients, Citibank and Standard Chartered follow a quantitative method of risk profiling. They have a score based


questionnaire through which they categorize their clients into risk categories based on their total score. Standard Chartered has the most comprehensive risk profiling system, with two separate forms for investments above Rs 2.5 million and below Rs 2.5 million. However, it is important to note that although all the banks administer questions revolving around the clients age, investment objectives, horizon and risk preferences, none of them actually administer any personality tests to gauge the true personality of the investor which allows for better categorization into different risk profiles. This issue has been considered while developing my model. In addition, in my model risk profiling has been addressed using a blend of both quantitative as well qualitative approaches.

Asset Allocation in all the banks is quite flexible and customized to a clients needs. Although Kotak and Citibank have sample asset allocation models, strict adherence to them is not necessary. Asset allocation at Motilal Oswal is the most customized as it formulates a model for each customer separately based on the risk profile and the expectation of the customer. Hence all the banks follow an integrated asset allocation strategy as discussed in chapter two which integrates client risk tolerance along with client goals. A constant weighting allocation strategy is also followed by all banks where client portfolios are regularly reviewed and rebalanced in contrast to the buy and hold strategy. In my opinion, having sample asset allocation models proves to be a beneficial strategy, in terms of having an established framework to refer to. However, such models should not be rigid; considerable flexibility should exist to alter the models according to each clients specifications.

In terms of product offerings, Kotak and Standard Chartered offer the widest range of investment options for its customers, right from bonds to structured products. This is also because they have considerable expertise in the field of wealth


management. Citibank however has limited product offerings inspite of its existing expertise and age. Motilal Oswal also offers fewer products and alternative investments and structured products do not form a part of its product portfolio. This is however attributed to the fact that it is new entrant in the field of wealth management.

In terms of research, all the banks have internal research teams. I feel however, tie ups with external research houses/rating agencies would help give an unbiased view on product selection besides providing additional expertise. This however would prove to be more expensive and only well established companies would be able to afford such extensive tie ups.

Review of portfolio and updating clients is a regular procedure in each of the banks. Citibank and Standard Chartered however make use of sophisticated tools such as the Portfolio Tracker and Fund Analyzer in addition to the wealth management software and also have publications such as Citichoice and Invest Pro for its clients. Such publications keep clients well informed about market

performance and consist of important information to help clients make well informed decisions.


6.2 COMPREHENSIVE WEALTH MANAGEMENT MODEL Having analyzed the differences between the four models, I have developed my own comprehensive wealth management model incorporating the key points of the four models studied above.

6.2.1 Customer Segmentation

50 Mn

Rs 10 Mn Rs 50 Mn

Rs 2.5 Mn - Rs 10 Mn

< Rs 2.5 million

Figure 20: Types of Customers












segmentation in contrast to the revenue based model to eliminate subjectivity and implement a standard method of segmenting customers. Here customers are segmented into four tiers in terms of their investments. The bottommost layer represents customer who have investments upto Rs 2.5 million, the second layer includes customers having investments in the range of Rs 2.5 million to Rs 10 million. The third layer comprises of customers who have investments in the range of Rs 10 million to 50 million. The fourth layer, i.e. topmost layer represents customers who have investments of Rs 50 million and above.


Each tier will have a separate channel of relationship managers. By segmenting customers into four tiers, the company will be able to understand the needs and goals of each segment better and therefore allow for better service and client satisfaction.

6.2.2 Wealth Management Process In this model, the wealth management process is divided into three broad phases, namely: defining client profile, portfolio construction and portfolio review. Each phase in turn is divided into sub steps. Let us now look at the model in detail.

WEEK 1-2



Phase 1 Defining Client Profile

Existing Portfolio review and analysis Client goals and horizons Personality testing Assign to category

Phase 2 Portfolio Construction

Phase 3 Portfolio Review

Asset allocation model Setting up a strategy Product selection

Changes in client goals Market changes New goals Rebalancing

Figure 21: Wealth Management Process

Phase 1 begins with using in house developed sophisticated financial tools such as those employed by Citibank and Standard Chartered to assess the clients current situation, existing wealth and cash flow requirements. Consultations are held with clients on their goals, needs and investment horizons. After establishing these parameters, appropriate risk profiling is carried out to establish the clients tolerance for risk. Clients are put through a personality test to accurately determine their tolerance for risk. Based on their tolerance for risk, the clients are assigned to the appropriate risk category. In our model, we have five risk categories i.e. risk averse,


conservative, balanced, aggressive and very aggressive, elaborated later in the next section. Phase one is carried out in the first one to two weeks once the client opens a wealth management account with the bank.

Phase 2 involves construction of an appropriate asset allocation model based on the clients tolerance for risk and the risk category he falls into. A strategy is formulated for the client for tactical divestments or exit from current investments, for plugging gaps in the current asset allocation and for planning cash flows for future allocations. Once the asset allocation model is determined, implementation of the asset allocation model is carried out in terms of the various products offered by the bank. A diversified and efficient portfolio of various asset classes is built for the client. Phase two is carried in week three and four after the client opens an account with the bank.

Phase 3 involves portfolio monitoring, reviewing and rebalancing. Changes in client life cycle, new goals and preferences are all incorporated into the portfolio. Client portfolios are reviewed regularly to keep it aligned to changing market conditions and client goals. Reviewing and rebalancing, when necessary, of portfolios is generally carried out every month once the clients portfolio is built.

6.2.3 Risk Profiling and Asset Allocation In this model, risk profiling is carried out in two steps: Risk Profile Form Personality Testing

The first is a basic risk profiling form, which is a paper based questionnaire and consists of questions such as investors age and background, investment objectives,


future plans, risk preferences, past investment patterns and so on. Like the Citibank and Standard Chartered questionnaire, it is a score based questionnaire where scores are assigned to each question and based on the clients responses, the total score is computed. This is the quantitative approach to risk profiling.

The second step involves profiling investors by personality type. This step is carried only for the top two layers of the customer pyramid, since it requires considerable time, expertise and money. These customers are asked to take personality tests such as the Myers Briggs Type Indicator which helps gauge the customers true personality. This enables advisors to create strategies for customers that eliminate individual biases introduced during the basic risk profiling stage and save them the frequent costs of rebalancing their portfolio. Personality testing in addition to basic risk profiling will help the advisor categorize the customer more effectively into one of the five risk categories. This is the qualitative approach to risk profiling.

Hence by employing, quantitative as well qualitative approaches to risk profiling in my model, risk profiling is carried out in a more accurate fashion than in any of the previous models studied.

The five risk categories in my model are: 1. Risk Averse This category includes investors who are not willing to accept any risk and any short term fluctuation in returns. 2. Conservative This category includes investors who are willing to accept a very slight short term fluctuation for potential higher returns. 3. Balanced/Moderate Investors here are willing to accept occasional short term losses for potential higher returns.


4. Aggressive This category includes investors are willing to accept significant fluctuations in returns and losses for potential higher returns. 5. Very Aggressive Investors here are able to accept significant fluctuations in returns and also forego their capital for earning higher returns.












recommended in the table below. The table below integrates the risk allocation framework by Chhabra (2005) and the asset allocation goals by Brunel (2003) to develop sample asset allocations.

Table 6: Sample Asset Allocations Profile Three Dimensions of Risk Personal Market Aspirational
All Large Medium Small-Medium Small-Nil Nil Medium Medium-Large Medium-Large Medium-Large Nil Small Small-Medium Medium-Large Large


Risk Averse Conservative Balanced Aggressive Very Aggressive

Liquidity Capital Preservation Income Growth Growth

Table 6 above, highlights the five risk categories and their allocations to each risk dimension along with their matched goals. A risk averse investor will allocate his entire portfolio to the personal risk category to minimize downside risk and for safety purposes. This helps achieve the goal of liquidity which cannot bear the risk of any downward volatility. The conservative investor has allocations mainly to the personal and market risk category to preserve and maintain lifestyle and standard of living. This is consistent with the goal of capital preservation which avoids significant decrease in the value of his capital. The balanced investor has more allocations to the aspirational risk bucket, since he takes measured risk to earn higher returns, thus corresponding to the income goal which represents the need for higher cash


flows to maintain lifestyle.

The aggressive investor has large allocations to the

aspirational risk bucket to enhance lifestyle and break away from the current wealth segment. The very aggressive investor too has a major portion of his portfolio

allocated to the aspirational risk segment and very small or almost nil allocations to the personal risk bucket since he is willing to forego capital to earn higher potential returns. Both the aggressive and very aggressive investor has needs that

correspond to the growth goal, which allows for capital appreciation.

It is important to note that the table above is only a sample asset allocation model and strict adherence to the table is not necessary. It only offers a general framework and client inputs and preferences must be taken into account while implementing the asset allocation plan. Hence, it will prove to be a flexible and customized process.

6.2.4 Products Offered This model will offer the widest range of investment products to invest in: Bonds Insurance Mutual Funds Direct Equity Advisory Commodities Derivatives Real Estate Art Private Equity Structured Products

Hence, this model will include the entire gamut of investment products available today right from basic investment vehicles such as bonds to upcoming investment


avenues such as art and structured products. By including the entire range of investment products, this model will be able to cater to every segment effectively by offering products for every type of customer.

Product ratings and recommendations will be based on an extensive research process carried out by the in house research department as well as an external agency. I believe that a tie up with an external agency, although expensive, will

provide an unbiased view on the entire range of investment products.

6.2.5 Portfolio Review and Rebalancing In this model, portfolio review and rebalancing revolves around three main aspects. The first, portfolio tracking, involves regularly monitoring the portfolio as against its stated goals and objectives. It includes using state of the art and sophisticated analytical tools to closely monitor the progress of the portfolio. It also involves generating net consolidated statements of the portfolios holding and a one stop report of the portfolio performance. For the topmost two segments of the customer pyramid, monitoring of the portfolio will be done more frequently as compared to the bottom two layers, for whom monitoring is generally carried out once a month.

The second aspect involves face to face meetings with the clients and sending updates to the clients on their holdings. Regular review meetings are held only with top two layers of clients. Updates via mail are sent to the bottom two layers of clients. Consultations with clients about their changing goals, horizons and preferences are all incorporated into the portfolio while rebalancing.

The third aspect relates to investor magazines and publications that comprise of weekly review of markets, broker pools, market conditions, and sector and company


analysis and so on. These publications give the client an in depth view of the market condition and happenings that help make informed decisions.

6.3 CONCLUSION Having studied the strengths and weaknesses of the four company models along with the comprehensive wealth allocation model, I now wish to conclude by stating that the wealth management models in practice today are broadly consistent with the theories outlined in chapter two.

Chapter two talks about integrating the Harry Markowitz Modern Portfolio Theory (MPT) along with the works of various behavioural finance theorists in building an effective portfolio. All the models discussed in chapter five are consistent with the works of Daniel (2004) and Curtis (2004) who suggest combining the Modern Portfolio Theory along with the behavioural finance theory into one advisory process. The wealth management process followed in the banks is similar to the three step approach recommended by Curtis (2004) in designing client portfolios.

By understanding client goals, needs and profiling them into various risk categories and then implementing sample asset allocation models to achieve efficiency combines the efficient frontier theory by Harry Markowitz along with the behavioural finance approach, thus merging both the approaches into the wealth management process.

A wide range of investment products are also offered by most banks, studied in chapter four. All the banks except Motilal Oswal offer the widest array of investment products right from the basic products such as bonds and mutual funds to newer investment avenues such as structured products, art and real estate. Hence all the


companies are incorporating the three dimensions of risk proposed by Chhabra (2005) in his wealth allocation framework i.e. personal, market and aspirational risk by offering the most basic products such as bonds and mutual funds that protect from downside risk (personal risk) to products that significantly enhance lifestyle (aspirational risk) such as structured products, art and real estate.

Also, as can clearly be seen from the models, companies are increasingly moving from traditional investment models to client centric, needs based, dynamic models of wealth management as explained in chapter two. By segmenting clients beyond demographics, based on behavioural characteristics and aspirations, by offering products on a needs based approach and conducting ongoing reviews based on behavioural dynamics and analysis, leading firms are adopting a dynamic needs based approach by attempting to understand clients needs beyond just products and services.

In conclusion, after studying the four models described in chapter four, my comprehensive wealth management model seeks to address an important weakness inherent in the above four models, that is, differentiating between the various segments of customers. In the comprehensive wealth management model, the two top customer segments are treated differently in terms of risk profiling and reviewing of portfolios than the bottom two customers segments. This model, therefore aims to provide a robust model which can be employed by private banks today.


6.3.1 The Wealth Management Proposition/Recommendation Based on the analysis of the four company models and after developing the comprehensive wealth management model, I have identified five different

parameters that make up the wealth management proposition and help create a successful wealth management practice for a firm.


Systematic Approach

Quality People

Innovative Products

Servicing Team

Figure 22: The Wealth Management Proposition

Client relationships should at the core of every wealth management model. Companies are now recognizing the importance of client feedback and satisfaction and transforming their models from traditional investment models to needs based client centric models. Building long term and quality relationships with clients is an important determinant of client satisfaction. Emphasis should be placed on a structured and systematic investment approach that is based on a detailed step by step investment process. Quality people should be recruited to ensure that correct advice is provided by them. Investment advisors should undergo mandatory training before they can serve clients and on going training programs should be rendered all throughout the year. A wide range of investment products should be offered for investment to clients. This should also include recent innovative products such as art funds, hedge funds, private equity and structured products that are now upcoming investment avenues. A dedicated servicing team of

investment advisors, relationship managers, back end research and tie up with an external research agency should be operational. Investment advisors along with relationship managers should provide the entire gamut of investment services along


with financial planning. The research department should ensure stringent quality checks on products, conduct in depth research to aid decision making and publish accurate ratings and recommendations on investment products.

Hence in todays wealth management industry, in order to be successful advisors of tomorrow, companies must alter and expand their services to include the above parameters and respond to the constantly changing industry dynamics.

6.4 LIMITATIONS OF THE RESEARCH This dissertation is based on the models of four banks only. As I have employed the qualitative methodology, considerable time was required for prior appointments and interviews and hence the analysis is based on the models of four banks only. This is my first attempt at a qualitative research project. Considerable expertise and skill are required in conducting interviews and hence, the results in this dissertation may not be the same as those conducted by a skilled researcher There are various asset classes used in constructing portfolios but only the basic ones have been discussed in this study due to time constraints. Due to compliance issues, banks may not have disclosed all the information necessary; analysis may be based on part information and therefore not completely accurate.


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8.1 Appendix 1: Citibank Risk Profiling Form



8.2 Appendix 2: Standard Chartered Score Based Form




8.3 Appendix 3: Standard Chartered Customer Suitability Form