HNIs or high net worth individuals is a class of individuals who are distinguished from other retail segment based on their net wealth, assets and investible surplus. This is a very lucrative segment for financial advisors and there are many who have aligned their business model to suit the HNI client segment. However, as desired as the HNIs are, they are also peculiar in their characteristics and approach to managing finances.

HNI clients are also not easy to acquire. It would be also safe to say that almost all Ultra HNIs are clients of big wealth management firms and family offices. Fortunately, the size of the HNI market has been increasing very fast and today it is more spread-out and approachable for advisors. Today it is very much possible for small & mid-sized financial advisors to focus on and acquire HNI clients, in addition to their retail client base. In this article, we look at this HNI segment more closely and try to identify common profiles, characteristics, needs, problems and common solutions for the benefit of our readers.

Please note that this is a generalized piece meant for familiarizing you with a typical HNI client. It may be very much possible that your experience may differ with us but then, it will only help you get more clarity on the image of an average HNI in mainstream discussions.

Definition:
There is no standard definition of a High Networth Individual in India and the definition of HNIs varies with the geographical area as well as financial markets and institutions. Generally, the following definitions are the most common...

• Ultra HNI: Above Rs.25 crores of investible surplus
• HNI: Rs.2 crores of investible surplus
• Emerging HNI: Rs.25 lakhs to Rs.2 crores of investible surplus

Profiling:

• The Inheritor: Inheritors are born in rich families, having established businesses & social network with easy access to capital and then going on to inherit business /wealth.
• The Self Made: First generation entrepreneurs who have strived and build businesses and have created wealth through success.
• The Professional: Highly qualified, skilled professionals who have created wealth as they have reached leadership /top management positions in their companies which have grew big or have got big reputation and success as professionals in their field.

Depending on the nature /source of their wealth, the HNIs generally also differ in many other attributes regarding how they perceive and manage wealth. The wealth dynamics of each type of investor is unique. It would be interesting to decode their mindset on different parameters...

Characteristics & Trends of HNIs today:

• The number of HNIs & Ultra HNIs is rising at a fast pace (estimates range from over 17% to 22% annually)
• The age of HNIs falling with growth of the digital age & emergence of E-Commerce
• HNI segment today is heterogeneous; meaning HNIs are increasingly from all social backgrounds, unlike before
• Most HNIs are distinguished individuals in social networks of power and influence
• HNIs today are more outgoing, showcasing wealth and experimenting
• HNIs are more today more spread across Tier 2 & Tier 3 cities and not concentrated to metros
• HNIs are increasingly heavy spenders on high quality homes, luxuries, travel, entertainment and education
• HNIs have investments majorly into their own businesses and realty
• Growing companies and industries are putting many employees into the HNIs segments

Major objectives of HNIs:
While most of needs of HNIs are pretty obvious, the difference lies in the way they approach each area of finance its' background complexity. Typically HNIs are likely to be more aware of financial markets and products. They are also more like to have higher risks taking ability and willingness. Their financial background would also be likely to be deeper and more complex.

The following are the broad scope of needs of HNIs....

• Investments & wealth management: HNIs are looking primarily for
• Wealth accumulation
• Wealth preservation
• Liquidity
• Holistic view of personal wealth & business wealth
• Protection of wealth: HNIs are primarily looking for protection solutions to safeguard their wealth and assets against liabilities and business risks.
• Credit management: Here HNIs are mainly concerned about leveraging investments and managing liquidity with credit across personal space and business space (working capital, term loans, promoter funding, etc.)
• Inheritance planning: Here the primary objective is of smooth transfer of wealth to next generation in a tax efficient manner with appropriate legal structures.
• Tax planning: HNIs consider this as inherent part of any financial decision where they primarily look at post tax returns and tax deductibility.
• Charity and supporting social cause: Increasing more HNIs are also willing to support social cause like wild life, nature and education.

Common wealth management issues of HNIs:

• Wealth concentration on own business and no diversification
• Less consolidation /scattered investments with difficulty in tracking performance
• Personal assets likely to be provided as security to liabilities
• Too much complexity in holdings and investments
• No clear financial goals /objectives from investments
• Internal family dynamics affecting decision making
• Locked up investments in illiquid avenues

Common wealth management solutions for HNIs:

• Investments
  • Segregation of business and personal wealth
  • Consolidation of all assets & liabilities – business & personal
  • Identification of wealth goals /objectives
  • Diversification across asset classes /products
  • Monetisation of business wealth
  • Unlocking of illiquid wealth
• Protection
  • Ring fence personal wealth from business liabilities
  • Plan for financial independence of family members
  • Take insurance for assets and business /professional liabilities
  • Look at insuring life, health for all family members
• Inheritance
  • Write proper Wills for family members
  • Create structures like Trust for smooth transfer of wealth & assets

Challenges in acquiring HNI clients

• Not easy to get leads, references and appointments
• More relationship driven and have to like you first to do business
• Winning trust & confidence is a time taking process
• Competition from Family Offices, financial institutions
• Want single window solutions for all needs
• Expect good reputation, qualifications, infrastructure and high service standards

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Investors often misinterpret their risk taking ability or they may not be able to rightly communicate the same, and that's why it becomes imperative for the advisor to understand it on the client's part. Most times when you ask the investor about his risk tolerance, you'd get his Risk Appetite in response, that is how much risk he is willing to take and not how much he should take. Risk Appetite is the investor's attitude towards risk, it is a psychological factor. A number of factors influence the appetite or the willingness of the investor to take risk, some of them are:

The general nature of the investor determines his readiness to take risk. A bold and aggressive personality would be open to taking risks as against a timid person.

Secondly, someone with good prior Investing experience, would be more comfortable with risky investments as compared to someone who has had a bad prior investing experience.

Thirdly, product knowledge also makes a person amenable to a risky product, since he understands the underlying features and the risk return tradeoff.

A major driving force which can convert a pessimist into an optimist is the Market Sentiment. When everyone is buying, the most traditionalistic investor would pop out from under his quilt and be game for investing and of course, the other way round too.

Lastly, Age matters, young blood is more of an investment stuntman, because risk thrills him and moreover he has a major portion of his life lying ahead to make up for a wrong decision,

while the grey haired are cautious, since they cannot bear much volatility.

The above factors play a major role in influencing an investor's investing decision, yet it might not always be prudent. And the advisor has a crucial role to play here, the sum of the above, or the risk appetite is evident, you have to excavate the risk tolerance, that is the ideal risk taking ability of the investor. To arrive at the ideal risk-ability of the investors, you need to evaluate the following parameters pertaining to the investor:

Income: One, the advisor shall consider the income of the investor while evaluating his risk tolerance. The higher the inflow of money, the more risk the investor can afford. This is because a small pitfall will not pull the investor so deep that he's not able to stand up again. Along with income, take a look at the disposable income as well, if the investor has a high running income but equally high consumption, then the jolt from a risky investment can hit hard.

Age: Two, assess the risk tolerance with respect to age. Age is an element which affects both appetite as well as tolerance. A young investor has a leverage over an older investor and that's time. Time can heal the deepest cuts so even if the young investor suffers a loss, he has an entire life to recover from it and secondly, long time stabilizes the most volatile markets, it deletes the risk element from the investment. Therefore, a young investor has a high risk-ability as compared to his older counterparts.

Life expectancy of goals: Three, the advisor shall consider the distance of the goal for which the investor is investing. If the investor's goal is far enough, his risk tolerance is high, the investor should take risk and get the dual benefit of getting the maximum out of power of compounding as well as neutralize the volatility as explained in the above point as well. If the goal is short term, then volatility is capable of causing substantial corrosion to the Portfolio. This means your investor's risk tolerance will be different for different goals.

Financial Stability: Four, check for the investor's overall Financial Stability in determining his/her risk tolerance. Financial stability comes from the investor's level of preparedness, meaning if the investor has enough savings to take care of his liquidity needs, or meet any unexpected emergencies, he has a decent insurance backup, health, life and asset insurance, then he is considered financially stable. And such an investor can take more risk than someone who isn't prepared well. Because if risk poses a loss and there is a clash with an emergency, the latter investor would not be able to cope.

Dependents: Lastly, the number of mouths that the investor has to feed determines his risk tolerance. A person who has to take care of his two kids, spouse and parents, should be taking lesser risk as compared to a single investor or someone who has a working spouse and one kid to tend to. So, as an advisor it's important that you consider the investor's family stats before you attach risk to his Portfolio.

So, the above are some, among many factors which define the risk tolerance of an investor. There are various factors custom to a particular investor, that can play a role in determining the risk tolerance like expected inheritance, expected future earnings, etc., which need to be analyzed while assessing each investors Risk-ability. You must also remember that these are general ideologies and are not set in stone, these are standards which can have exceptions. There is a possibility that an old investor is financially stable, has enough assets and has secured his retirement. Although the age factor is not in the investor's favour yet the other factors negate the age, and allow him to assume risk.

Hence the above are subjective and interdependent and risk appetite too plays a major role here. No matter how tolerant the investor is, if he doesn't have the audacity, he won't able to digest risk. An investor may have a high risk tolerance but doesn't have the nerve to take risk, your job is to apprise the investor with what he/she is foregoing. Every investor must understand that returns come for a price, and the price is risk, and otherway round, there might be investors who have a low tolerance but a high appetite, so you need to apprise them with the potential risks. A balance need to be maintained. The bottomline is the Risk tolerance should be used in conjunction with the Risk Appetite of the client and the solution be applied in arriving at the Investment Strategy.

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The financial advisory business has been undergoing transformation of sorts in recent times. We have entered into a phase of unprecedented possibilities and opportunities in the financial planning / services profession. However this is also coupled with changes in the ecology of the industry. In addition to the challenges posed by the evolving industry, independent financial advisors of today are being faced with key generic challenges in the profession that will define their success. While the confidence level in the profession remains intact, there is now a sense of urgency on meeting these generic challenges. This blog shares some of the problems being faced by the financial advisors and some ideas on tackling them...

Challenge 1: Defining the Value & Fees
Defining the value proposition for the financial advisor and his services is the core of the advisory sales pitch. With easy product availability to the client no longer a challenge in most of the products, there is now a growing emergence of advisory oriented value proposition / offerings to the client.

Traditionally in India, the concept of the financial advisor is generic and is used synonymously by every other product distributor or agent & even accountants. But creating a strong offering with the client at the center in this environment can be seen not only as a challenge but also as an opportunity for new age financial advisors. The trend is towards greater professionalism, transparency and product neutral advice with a multi-asset & multi-product basket.

Increasingly, advisors are showing create inclination to offer holistic client advisory and financial planning services. Though pure fee-based advisory is a greater challenge in this country where advice is freely given rather than asked, advisors have started charging fees for their planning and transaction services. While one may segregate differing service offering for different client groups, the question is putting a right price on it. One may define a price based on the advisor's time / hours, and the actual transaction / operation costs for any service. The challenge here is to get the right mix of offerings / services that appeals to the client and rewards you for your efforts and expertise.

Challenge 2: Delivering Service Excellence
Being in the service industry, the client is the king. Every offering has to be designed keeping the client in mind and driven towards client's interest. But promising is not enough and every promise has to be backed up with proper infrastructure, process and the right people who would execute the promise on time. Here, It is better to under-promise and over-deliver rather than over-promise and under-deliver. Sooner or later, the client is wise enough to find out better service providers if you are not up to the mark.

The first step towards delivering service excellence is defining service standards. Remember, that being just good every time is much better than being excellent some of the times. Sticking to basics often works as clients over time value small things done properly. But for advisors today, this is only the starting point and with growing client expectations and growing exposure to services being offered by others, these service standards have to be revised from time to time. The best time to begin, is now.

Challenge 3: Maintaining Quality of Advice
In the business of advisory, the advice is the commodity that one is selling. Of course it is intangible, subjective and dynamic to the extent that one advisor may at different points of time give differing advise to a client in same situation. Defining quality of advice and maintaining the quality is then possibly the greatest intangible challenge for the advisor. Being in a fiduciary relationship, often undefined, with the client also places the advisor in an obligation to provide the best advice possible, which is at the heart of the profession.

The best way to ensure quality is to be institutionalist it – make the advice process driven, rather than advisor / person driven. Though this may sound a difficult, it is not impossible to achieve a certain degree of standardization, provided the advisor commits himself to this. One way of doing this is make standard advice / plans for standard situations / objectives or client profiles. Designing standard portfolios or methodology of arriving of portfolio or investment recommendations is part of this process. The idea is to look at every advice as result of some set of logics, assumptions, product preferences, client preferences, etc. Defining these components will throw up new realizations and increase productivity significantly. Although it is not possible to entirely replace the expertise & knowledge of any advisor.

Quality of advise is also a lot about keeping self and team updated, educated and skilled in advisory subjects. This is something that directly involves person commitment to continuous learning and education.

Challenge 4: Keeping Costs Low
Independent financial advisors have one huge challenge to grapple with. Managing operations in such a balance that the costs are under control and the service offerings are not compromised. Many advisors often tend to approach this challenge with breaking up the operational tasks, processes and handling each independently. While this micro-approach is effective, advisors must also look at the bigger picture. This entails creating of the client groups, defining of the service standards to the exact processes & frequencies and devising the plan for its execution. While many advisors, may even do this activity, most advisors often short of breaking it further into 'free' services and 'paid' services and putting the price therein.

Other than the above, costs can also be managed by smarter use of technology and automation. Making the most of what is available on hand is the best way to begin with. The question one should ask is – am I making the most optimum use of available resources for all my clients? Quite often, the answer will be No. Advisors often tend to skip activities that can be done easily with the technology at hand and rather look for newer and better packaged products in market. Quite often when evaluating new systems, rarely does one find solutions that meet all the needs of the advisor. After considering license & renewal costs, installation, migration / integration / customization costs, future integrations of other applications, etc., the ready-made solutions loose their appeal. The ideal option, as seen in trends in many markets, is being associated with large platform providers who provide advisors with a ready solution for implementation at much lower overall costs and with the promise of continuous additions on the product & the technology front.

Challenge 5: Managing Growth & Expansion
For a bicycle to stand alone on its two tires, it needs momentum to go forward. This is true for every business and not just for the financial advisory practice. However this is a greater challenge since financial advisory is a people driven or advisor centric profession where trust & personal touch is critical and time is limited. An independent financial advisor with focus on quality advisory can only handle a limited number of clients or households. Even this is subject to the range of financial products / asset-classes and the scope of services / advisory the advisor is dealing into. The larger the range and scope, the fewer would be the number of manageable clients, single-handedly.

In the end, there are two ways of expanding. One being increase in the time devoted to building of business and second multiplying the time available by recruiting manpower. It is a fact that the advisors devote a very large portion, up-to 60-80%, of their time towards non-productive, operational, servicing activities rather than on pure advisory and client acquisition activities. Advisors should be aware of where their time is being spent and should smartly delegate the non-value adding tasks. The second option of recruitment of quality manpower at reasonable costs is also a challenge, with still greater challenges appearing thereafter in terms of training, maintaining quality, measuring & rewarding performance & retention. Another way of looking at expansion is progression into newer product categories, newer services and newer customer segments. This though is more in nature of 'forced' evolution rather than expansion of the advisory practice.

Challenge 6: Building Customer Loyalty
Customer loyalty is the end result that boldly says the the advisor has successfully met all customer expectations over time. This statement itself lists the recipe for customer loyalty. The advisory should be careful that customer retention should not be interpreted as customer loyalty. While customer retention may be because of any reason, be it personal relationship, gratitude, non-availability of other options, customer in-activeness or indecision, reputation, etc.; customer loyalty is only for the reason of satisfaction. Always remember that retention is temporary and loyalty, though permanent, can never be taken for granted.

Building customer loyalty is being able to do the following continuously for long term...

• Providing right advice in client's interest

• Meeting most, if not all, of the client's needs

• Keeping client's trust and confidentiality, intact

• Having a larger share of the client's mind (brand recall)

• Maintain client relationship, with a personal touch / intimacy

Meeting the challenges of the evolving financial advisory business though, not an easy task, is also not something which cannot be done. Advisors often tend to evolve a smarter practice suited to them and their clients. The opportunity for financial advisors is huge if one is ready to the most in this transformation. In changing business dynamics, one thing is sure. People who mistakenly believe that they have reached such a degree of success that nothing much needs to be done, are sure to be left behind and advisors who anticipate and adapt to change would be the ones to reap the harvests tomorrow.

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When you are in business, you cannot apply a single strategy to handle your entire client base, since the clients belong to different backgrounds, different social statures, different communities, have different ideologies, and have different needs. No matter how big or small the business is, client segmentation is an integral part of all business strategies. Consider an everyday product like soap, Hindustan Unilever manufactures both Lux and Dove, but the marketing strategy for both soaps is night and day. Lux Ads features big bollywood figures, like Aishwarya Rai and Kareena Kapoor, while HUL keeps it subtle for Dove, they have real people, no glam, for their dove Ad. The brand positioning for both soaps is completely different, because the target segment for both soaps are distinct. Or be it any daily use product like an umbrella, if you google umbrella for kids, you'll see a variety of red, yellow and pink umbrellas with cartoon characters imprinted on them, and if you google umbrella for men you'll get black, blue and max brown.

The positioning, packaging, the marketing strategy differs, for different sets of people. The same logic applies to advisory business as well, especially because this is a service oriented industry. Here, the one size fits all approach doesn't work, you need to have a customized strategy for each client.

Each individual has a unique motive behind investing, it's important we understand that unique motive, and try to create a bridge between where the investor is today and where he wants to be in future. Even if the goal is same for two investors, the characteristics of the goal would differ. For one investor, his retirement goal is 20 years away, the investor is in a stable financial position, he can afford to take risks and invest in a product with a good growth potential over the long run. For another investor, retirement is just five years away, for him risk protection is the primary objective, it is ideal for him to start moving his other investments also from high risk asset classes to low risk ones.

Each individual has a different personality, which influences his/her investing. An investor may prefer investing a small SIP amount even though he needs to invest more and can afford too, but his preference is backed by his skepticism, he is scared because of his pressing fear of losing money. As a usual course of action, you explain to the investor, the need to increase his SIP amount, but in this case since the risk tolerance of the investor is low, don't push him so much that he quits altogether, let him begin with small steps, and gradually you shall advise him to take the next step.

Then you would come across diverse investors with varied investment needs and goals. There'll be old investors and young investors, men and women, clients with special needs, investors who are single, married, divorcées, widows, couples with kids, couples without kids, businessmen or salaried individuals, and so on. No two investors are the same, if you want to provide the best services to your clients, you must treat them differently. Preferences and expectations among different types of investors differ. Say for instance, Millennials, they are essentially looking forward to quick and hassle free investing processes, you don't have to be too formal in your approach, communicating through e-mail or WhatsApp works good with them. While if you are dealing with a Corporate HNI client, formal attire is the bare minimum. It's when you understand people's unique needs and preferences, then only these investors will be able to trust you, which is the center-point of any advisor client relationship.

These different types of people also extend to you an opportunity to develop your niche. It helps you in identifying your favourite set of people, the type of people with whom you are most comfortable working with and also the other way round. It may be because of certain common characteristics that you share, like similar community, similar educational background, etc., or because of the expertise that you have developed over time, after working with such people.

A general practice for effectively catering to different investors is client segmentation, that is creating buckets and putting the customers into those buckets on the basis of certain similarities they share, and then catering to each bucket of clients differently. However, within each of these buckets also, each individual is unique, two people with similar demographics and goals also, will react differently to a fall in the value of their investments, they will have different communication preferences, they will have different personalities, and hence different expectations from you.

So, people may be similar but they are not same, and the success of financial advisory practice lies in creating a pleasant investing experience for investors, by providing them personalized services, and gratifying the unique needs of each investor.

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