The head of a financial services firm, who did not wish to be identified, found himself in a bind.
Investments made in other companies by his firm led to him becoming a
Well-heeled guidance: The funds try to fulfill the legacy requirements of individuals and families such as philanthropy, etc.
director on their boards. With every additional directorship, he began to fear that a legal dispute involving the company could potentially lead to his personal assets being attached.
He decided to insulate his personal wealth from job risks by transferring a significant part into a trust, where the beneficiaries would be clearly identified.
“The idea was to isolate legal ownership from actual ownership,” he said.
The trust is run according to clearly defined guidelines, which cover the way assets can be invested as well as the beneficiaries that include some charitable causes he supports.
He is not alone.
A growing number of wealthy Indians are looking at trusts as a way to manage money for the long term. The objective of such efforts is to fulfil the legacy requirements of individuals and families in areas such as philanthropy and also insulate family wealth from the fallout of professional hazards and breakdown in marriages.
Financial services firm DSP Merrill Lynch Ltd is among the first to set up a professional trust practice to manage the wealth of clients.
“We have already opened trusts for clients,”said Pradeep Dokania, managing director, head, global private client, at DSP Merrill Lynch. “We are being guided by Merrill Lynch.”
As prosperity spreads, the global trend of setting up trusts is picking up faster than people may think, said executives in India’s nascent but growing wealth management industry. The array of options is quite wide already, with firms such as DSP also offering regular money management options, which ensure higher returns on assets, to high networth individuals (HNIs). DSP Merrill Lynch, like others, keeps the identity of clients, and the amounts being managed, a secret.
The basic template for DSP Merrill Lynch’s trust practice is that of Merrill Lynch’s business in the US, said Dokania. DSP Merrill has a wholly-owned subsidiary that floats professional trusts to manage wealth and attendant legacies. “(The) trust concept will catch on; it is still early days,” he added.
Wealth management executives are unsure of the number of companies offering similar services because of the tremendous secrecy surrounding the industry. However, large global financial services firms are betting that the concept will catch on in India. Citigroup Inc. offers philanthropy advisory and wealth structuring services in Singapore and Hong Kong in the Asia Pacific region.
The company plans to extend its services to Indian clients in the near future, said Melanie Schnoll-Begun, the US-based managing director and head of Citigroup’s Citi Philanthropic Services.
When Citi’s philanthropy advisory services does come to India, the US template is likely to be used. “All types of people could fit into a philanthropic trust,” Schnoll-Begun said in a telephone interview. “Ultimately, people are people. There’s a universal portfolio of philanthropic trusts that, with some customization, can meet most clients’ needs.”
The interest of firms such as Citi is a function of the increase in the number of wealthy individuals in the country who are riding on the back of fast-paced economic growth and booming asset markets.
India, along with Singapore, Indonesia and Russia, had the highest growth in HNI population in 2006, according to the 2007 World Wealth Report, prepared by Merrill Lynch and Capgemini SA.
India had an HNI population of 100,000 in 2006, and the annual growth rate of HNI population in the country that year was 20.5%. The global growth rate in HNI population was 8.3% in 2006, which adds up to 9.5 million individuals, the report said.
In India, trusts are emerging as a vehicle to meet needs, such as legacy management, other than just tax planning, the earlier big challenge before HNIs.
One group of customers, said executives in the industry, with whom professional trusts will find favour is the new generation of entrepreneurs who belong to business families. The attitude of young owners of inherited businesses is markedly different from that of the preceding generation, on account of international exposure, several wealth management industry executives said.
The global trends in the attitude of the wealthy are already apparent in India too, with a significant number below 40 years in age. The Invest India Income and Savings Survey 2007, produced by Noida-based market research firm IIMS Dataworks, showed that a little over a quarter of the 8.87 lakh people, who earn in excess of Rs1 million a year, are in the age group 36-40.
Other studies suggest these trends will strengthen in future. A May 2007 study by the McKinsey Global Institute titled The Bird of Gold: The Rise of India’s Consumer Market, said that an assumption of an average growth rate of 7.3% between 2005 and 2025 would create a large number wealthy people in India. India’s actual economic growth in 2005-06 and 2006-07 was 9% and 9.4%.
The McKinsey study predicted that more than 23 million Indians—more than Australia’s current population—will be among the country’s wealthiest citizens by 2025. The study did not define “wealthy.”
V. Mahadevan, director and chief executive officer at Chennai-headquartered wealth management firm Wealth Advisors India Pvt. Ltd, said he has seen a change in the way the young generation of entrepreneurs in smaller industrial hubs relate to wealth management.
Wealth Advisors, too, is getting ready to extend its traditional services to managing legacies.
“It is going to take some time for acceptance,” said Mahadevan. “We are exploring this opportunity today and the time is not far when we (will) have to do it.”
