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Banks move towards advisory for HNIs, distribution for retail


The shift by banking groups into advisory has come up against the barrier of the ever-growing regulations by the Securities and Exchange Board of India (Sebi) on advisers. This has pushed some banks to wrap advisory into portfolio management services (PMS) and alternate investment funds (AIFs), which come with high-ticket sizes. The net result has been an advisory market confined to the very rich and distribution services for the retail investors.

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Rules roadblock

In 2013, Sebi created RIAs, who are paid fees instead of commissions, the former being more transparent and potentially lower cost. RIAs also owe fiduciary responsibility to customers. However, this structure has largely been avoided by banks, except for their super-rich clients.

The Sebi rule, which will come into force in October, bars intermediaries from offering advice and distribution to the same client and has a host of other rules on areas like employee qualifications.

HDFC Securities may close advisory business due to this and move closer to distribution. “HDFC Bank’s advisory business was reorganized under HDFC Securities in line with RBI regulations around 1.5 years ago. On an average, our clientele had a family net-worth of 10 crore. With the new Sebi rules requiring providers to offer either advisory or distribution to the same client at a group level, we are evaluating our proposition including helping clients achieve financial goals,” said Raveendra Balivada, head, investment advisors, HDFC Securities.

Some other banks are separating advisory and distribution.

Advice for the rich

To escape RIA rules, some banks are expanding into advisory through PMS and AIFs, which are governed by different Sebi rules.

In December 2019, Kotak, one of the largest banking groups in India’s wealth management, launched an AIF called Optimus. The AIF wrapper was actually an attempt to create a standardized advisory product across asset classes. Its pitch is a fee of 1-1.5%, including underlying product expenses. Kotak already had a bespoke advisory service launched in 2008 which currently has assets worth around 25,000 crore. However, Optimus democratized and packaged its older tailored counterpart. RBI rules do not allow banks to offer investment advice and, hence, both services are offered through a subsidiary, Kotak Investment Advisors Ltd (KIAL). “Kotak Mahindra Group started offering advisory services in 2008. The advisory moved to KIAL in 2019,” said Srikanth Subramanian, head, private wealth, investments and advisory, KIAL.

Axis Bank launched its counterpart in August 2020, albeit under RIA rules, placing it within Axis Securities. “Our advisory service stems from an internal survey which showed huge buying sentiment among customers but no scientific approach towards investing. Our idea was to fill this gap. Our focus is on stocks but we can encompass direct mutual funds also,” said Pritam Patnaik, head, acquisition and relationship, HNI and NRI, Axis Securities. Axis offers three portfolios under this service—growth, contra and retirement. “For portfolios above 2 crore, we will even look at setting up customized portfolios, for a fee of 2% of the assets annually,” said Patnaik.

ICICI’s old bespoke model which resembles Kotak’s old advisory service is housed in ICICI Investment Management Co. Ltd, a subsidiary of the bank. It mostly caters to clients with more than 15 crore in assets. A spokesperson for the company spelt out a long list of services, including helping clients to draw an investment charter, offering investment solutions per charter, portfolio construction and asset allocation.

In addition, the bank’s broking arm ICICI Securities also offers investment advisory. “ICICI Securities Private Wealth management has an AUM of around 1 trillion and an HNI client base of 34,000. HNI here is defined as clients with investment of more than 1 crore. The advisory business is focused on UHNIs and family office clients and offers bespoke solutions,” said Anupam, head, private wealth, ICICI Securities. The pricing depends on the type of underlying products and the engagement level. “Typically, it is up to 2% per annum. The proposition covers bonds, stocks, ETFs, mutual funds, PMS, AIFs, overseas investments, private equity and value-added services like estate planning, among others,” said Anupam.

“The business has been in operation since 2013 but the focus has shifted to advisory in the last two years. It has grown to around 2,500 crore over this period,” said a senior executive at the firm, on the condition of anonymity.

Other options

Banking groups are now focusing on HNIs but large wealth management companies and family offices are already in the fray.

“Ultra HNIs are looking for specific things. First, they want larger exposure directly to equities and bonds rather than using mutual funds. Second, MFs (which were earlier a predominant part of their portfolios) have been losing favour due to lack of alpha. Third, they want access to private markets (private equity, debt). Fourth, they want international diversification and, hence, a firm which is able to do it efficiently. Advisory arms of large banking groups are not geared for these requirements,” said Nitin Singh, managing director and CEO, Avendus Wealth Management.

Family offices are other major competitors. Nimish Shah, chief investment advisor, listed investments, Waterfield Advisors, a family office, doesn’t believe banks have the relationship advantage. “With regard to the argument that an advisory relationship can’t get you better deals with loans or overdrafts, I think that the market for loans is largely about rates. If you have a good quality collateral, one can go elsewhere,” he said.

All in all, HNIs are spoilt for choice for advice, but retail investors are just left with distribution.

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