Adviser Perspectives: Understanding client psychology is essential

By Ravi Samalad |  07-06-22 | 

Anuj Arora, Anish Uthaiah, Harsh Kumar and Megha Malpani are among the growing breed of bankers bidding adieu to their lucrative jobs to set up their own wealth outfits in a bid to provide a more holistic solution to high-net-worth families.

According to Knight Frank Report, India ranked third in billionaire population globally in 2021. The number of Ultra High Net Worth Individuals (UHNWIs) in India grew to 13,637 in 2021 from 12,287 in 2020. UHNWIs are defined as those having assets worth Rs $ 30 million or more.

Not surprisingly then the race to acquire a slice of HNI’s wealth pie is growing as India is witnessing a swift rise in the number of HNIs who are scouting for customised solutions to manage their complex needs.

Breaking away from the shackles of canvassing a whitelist of products, Harsh Kumar and Anuj Arora thought of turning the table by giving clients what they truly needed. The duo started their venture just one week after demonetisation in November 2016. Demonetisation was a catalyst for the country’s shift toward digital transactions and marked a dramatic shift from physical assets to financial assets. The mutual fund industry’s asset base increased by compound annual growth rate of 15% every year from Rs 19.26 lakh crore in April 2017 to 38.88 lakh crore in April 2022.

Initial journey

Harsh, Anuj, Anish, and Megha quit their jobs and started Zvest Financial Services LLP, a firm that caters to the wealth management goals of high-net-worth individuals. The firm operates from Bengaluru. “We were quite apprehensive as to how the market will evolve but in hindsight, it has been a blessing in disguise. There were other challenges like covid and market correction but having a long-term vision helped us.”

The four partners had cultivated a good rapport with many clients at the bank and most of them were happy to continue their investment journey with Zvest.

Their client base consists of CXOs, self-employed professionals such as doctors, lawyers, entrepreneurs, and a few small and medium enterprises (SMEs).  The firm runs two verticals – Registered Investment Adviser (RIA) and Mutual Fund Distributor (MFD). The firm manages Rs 600 crore worth of assets under MFD and Rs 500 crore under the RIA vertical.

They offer the entire gamut of services to serve the overall goals of their clients.

Stick to basics

While they cater to clients who are open to experimenting with unconventional avenues of investments, they steer clear of relatively newer products that don’t have a track record. They have zero exposure to new-age themes like cryptocurrency and non-fungible token (NFTs).

Zvest operates a boutique wealth firm with a lean team which helped them keep fixed costs in check and sail through tough times like the pandemic.

Set reasonable expectations

Harsh says that advisers need to set the right return expectations among clients as markets have delivered outsized returns, especially post the Covid pandemic. “Many new investors who have entered the market during lockdown have not seen a bear market. They are not aware of asset classes beyond equity and cryptocurrency. They have not fully familiar with hedging the portfolio through commodity and the benefit of fixed income investing. A lot of education is required to the bottom of the pyramid market.”

Behavioural coaching

It is well documented that investment decisions can be emotion-driven, which can lead to wrong outcomes. Harsh says they are primarily behavioural managers more than money managers. “Investors may not rightly identify their risk profile. For instance, an aggressive investor could turn into a risk-averse investor when the market turns volatile. We spend a lot of time decoding client behaviour. You can’t understand the risk appetite of clients by just getting answers to ten risk-profiling questions. Rather, it is only through constant interactions with clients you get to know them.”

Harsh sees that understanding client psychology is the toughest part of his job while deciding asset allocation and product selection is the easiest.

“Most people are today focusing on the nitty-gritty of product selection in a bid to generate higher alpha. This is why you see a lot of Systematic Investment Plan (SIP) pauses when the market turns volatile. Our differentiating factor is in building solutions tailored for clients after understanding their behaviour."

In addition to behavioural biases, Harsh says investors today are inundated with information overload through different sources which alter their judgment and urge them to act on stimuli like news or events.

Harsh says that clients who have seen the past market cycles do not hit the panic button when they face a similar situation in the future as they have made money by riding the volatility. That said, he agrees that clients who have just started their investment journey during Covid are a bit worried about their portfolios. But Harsh doesn’t blame these investors as they need to go through this experience to understand how markets behave.

Road ahead

Understanding and providing bespoke solutions to each client is demanding. This is why the firm has outsourced many of its activities which requires manual intervention. They have digitalised a lot of activities which allows them to dedicate time to nurturing client relationships.

Going ahead, the firm plans to build research capabilities to offer niche products/themes from different geographies. “Few years down the line, we would be able to offer our clients products which are beyond mutual funds, cryptos, and other conventional asset classes."

They plan to run the firm as a boutique wealth outfit that caters to a limited set of clients by offering them all-round solutions enabled by tech and a human touch.

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