New doors of opportunities in investment and wealth creation will open if the financial sector stakeholders put their sincere efforts in developing wealth management services.
 

--BY SAURAV POUDYAL

Wealth management is a service that encompasses the overall financial requirement of affluent individuals including investment advisory services. Based on the client’s needs, wealth management provides a tailored solution to address the different stages of a person’s financial life. The core idea of wealth management is to provide a tailored solution from one window rather than integrating and involving various products and solutions which may involve multiple professionals or service providers. Thus, affluent individuals can benefit from a tailored solution to manage their money and plan for their own or family’s current and future needs from a single window.

Now, the question may arise what is the difference between wealth management and financial planning? Both wealth management and financial planning are the components of financial advice. However, there are underlying differences between these two. Financial planning is primarily focussed on lifestyle planning of individuals and is focussed on budgeting, saving for particular goals, retirement planning etc.

Financial planning basically caters to the middle class or the middle-income group whose requirement is to make the most out of their limited income. On the other hand, wealth management deals with the requirements of high net worth affluent individuals. It provides tailored solutions for managing their existing wealth. Thus, in plain words, financial planning provides solutions for managing day to day finances, whereas wealth management deals with managing the wealth of an individual.

In developed markets like Singapore, Malaysia, Hongkong, etc., wealth management contributes significantly in any financial institution’s revenue stream. On an average, in developed markets it contributes up to 35-40 percent of revenue generated by the financial institutions. There is a whole array of wealth management products that individuals can opt for as per their requirements. There is a structured presence of dedicated wealth management advisors and investment advisors in these markets. Individuals can avail wealth management advisory services from such advisors without visiting individual brokers, firms or fund managers. Even financial institutions have dedicated and expert resources in their teams to cater to the wealth management requirements of their clients. Wealth management in developed markets is not just limited to financial advice but also includes tax advice. Thus, wealth management provides an end to end solution for an individual in the true sense.

In Nepal, the concept of wealth management is yet to germinate. There are a few wealth management tools or products available. However, a single advisory window that can provide holistic wealth solutions is completely non-existent. Individuals cannot get proper advice on how best their wealth can be managed for their specific needs. Due to the absence of such advisory solutions, fixed deposits in financial institutions and investment in real estate are the most preferred investments for affluent individuals. Tailor made wealth solutions is something that one can only imagine for now.

Some banks and financial institutions do provide wealth solutions to some extent in the form of insurance products, forex, bonds, debentures; and mutual funds from their subsidiary capital markets and investment firms. However, there is no product diversification and portfolio management at the source. Some of the wealth management tools available in the Nepal’s wealth market can be summarised below.

Equity: The equity market in Nepal has good prospects. There are many brokerage firms for secondary market trading to facilitate share transactions. Also, periodic IPOs and FPOs also provide opportunity for individuals to directly invest in equity. However, due to the lack of fund managers and wealth advisory professionals, individuals must do their own analysis and select the right option on their own or through brokers.

Mutual Funds: Although the introduction of mutual funds in Nepal dates back 25 years, there has been no significant growth in this period. Almost all the mutual fund options available in the market are close ended options. Due to high interest rates on fixed deposits that financial institutions offer, mutual funds have not been able to attract the general mass market.

Insurance: The insurance market in Nepal is largely dominated by return based options such as endowment and whole life policies. The general mindset about insurance is heavily return focussed rather than protection and coverage. Due to this mindset, term life policies are still not a preferred option despite having lower premiums on face values. On the other hand, there is no product diversification as in developed markets. The market is devoid of products like ULIPs (unit linked insurance plans). Such products provide the option of investment in various portfolios with the benefit of life coverage too.

FOREX: Forex solutions are largely provided by financial institutions only and are heavily regulated. There are no proper tools in this front and whatever is available is quite limited in both availability and usage such as hedging, forward contracts, options and swaps. Forex in developed markets is a strong wealth management tool and here also there are avenues to explore. Forex is comparatively a riskier option as the movement of forex rates is influenced by multiple factors and hence requires thorough planning and risk benefit analysis.

Commodities and Derivatives Market: These tools are in a nascent stage in Nepal. Even regulatory policies and the mode of operation are still very vague and proper guidelines are lacking. Hence, this option has not been able to attract a substantial number of investors. The prices of these tools are less affected by the     stock market thus can be used as a better tool for portfolio diversification.

Although it may take time for the wealth market in Nepal to grow in scale, the first step would be to streamline the available wealth management options. To start with, there is a severe lack of wealth advisory professionals in Nepal, which is a major challenge in creating one-window wealth management solutions. Individuals need to self-assess, analyse and decide on how they want to create a portfolio out of the above available options. And in the course of creating a portfolio, they need to individually liaise with respective brokers, banks, fund managers or exchanges for each of these options. Thus, we can see that there is a huge scope for wealth management advisory services in Nepal. To add to this setback, listed below are a few major challenges that must be faced in order for the wealth management market in Nepal to grow:

Regulatory Hurdles: In developed markets, with product diversification and client centric approach, the products, providers and regulations continue to evolve for the better. In our case, there are limited products and even for these options robust regulations are still lacking. If we expect to have streamlined wealth advisory services in the country, the regulations surrounding the available wealth management avenues should be addressed first. That will not only help in establishing wealth advisory services, but will also open opportunities to introduce new products in wealth management.

Low Financial Literacy: Low financial literacy level is a key challenge in any developing market. This not only hinders the growth of wealth management but also has a severe impact on the overall growth of financial solutions in the country.

This to some extent can be addressed by including financial literacy in educational curriculums. This will be of help in imbibing the concept of wealth management in students and will also contribute towards generating a more informed and competitive workforce.

Sector Reach: As wealth management is focussed on catering to the financial needs of high net worth individuals and since a majority of these entities offering wealth solutions are concentrated in metro cities only, there is the challenge of including prospective clients from all over the country. Also, financial literacy as discussed above in places outside the metropolitan area is a standing challenge.

Limited Product Diversification: Unlike in developed markets, the product and service offerings for wealth management are very limited in Nepal. At current levels where wealth management even as a concept is in its infancy, innovation and new product development as per customer needs is still a far cry.

Traditional Approaches in Financial Institutions: There is lack of intent among financial institutions and insurance companies to adopt disruptive approaches in the wealth management field. Adopting disruptive ideas can only boost wealth management solutions as financial institutions are in the forefront in creating wealth solutions in Nepal where wealth management advisory services is still non-existent.

There is promising scope for wealth management in Nepal. The number of high net worth and affluent individuals is on the rise. Due to lack of wealth management advisory services, such individuals have to consider the investment options on their own.

Portfolios thus created may not be apt to cater to the individual’s financial goals. In the present context, the availability of wealth management advisory services might not be enough, they need to invest in brand building to gain trust from investors too. Quality advisory, transparency and compliance are the key attributes of a professional advisor.

Respective regulators, financial institutions, insurance companies, brokers, fund managers and capital markets must come together to build a robust platform for wealth business in Nepal. There is a need to replicate the best practices from the developed markets and analyse the operating models in these markets such that a prudent foundation for wealth business in Nepal can be established.

Developing a wealth management market will not only help the nation’s economy but will also prove to be a promising profession for the upcoming generations too.

The author is Head of Bancassurance at Standard Chartered Bank Nepal Limited. The views presented in the article are of the writer himself and do not represent the organisation that he is associated with.