Top of the Pyramid

This article is a gist of Kotak Wealth Management's annual report, “Top of the Pyramid” 2016 edition. It throws light on the spending, investment and lifestyle patterns of ultra HNIs in the context of the country's changing socio-economic conditions.

It includes insights for partners who deal with or wish to deal with the most sought after segment of clients – ultra HNIs

Market Size

India's robust GDP growth has led to an improved ultra HNI sentiment. The number ultra (high net worth Households) HNHs has grown to 146,400 in FY 16 from 137,100 in FY 15, a growth rate of 7% and a compounded growth rate of 16% over the past 5 years. An ultra HNH is defined as a household with a minimum net worth of INR250 million, mapped over 10 years. It is estimated that the number of ultra HNHs will increase to 294,000 by FY 21 with a combined net worth of INR 319 million. While 55% ultra HNH concentration is in metro cities, the remaining 45% is with emerging cities and smaller towns, especially in inheritor and entrepreneur categories.

The average age of Indian ultra HNIs is falling, and nearly half of them are less than 40 years old. Increasing number of start ups has led to a fall in the average age.

Classification of Ultra HNIs

The report classifies ultra HNIs into three categories - as an entrepreneur, inheritor or a professional.

1. An entrepreneur strives for self recognition and achievement and believes that his wealth should strictly go to his immediate family. He spends to attain a luxurious lifestyle and has an opportunistic approach to investing.

2. The inheritor works for wealth preservation and growth, he too persists that wealth should remain within the family. He spends to maintain a luxurious lifestyle and has an organised and planned approach to investing.

3. The Professional works for self actualization and believes that his family must strive to earn for his wealth. He looks for value for money and has a disciplined and planned investment approach with systematic goals.

Spending Behaviour:

Falling inflation has resulted in rate cuts leading to a fall in lending rates. Hence, the ultra HNIs are substituting savings for investments in primary business or in wealth generation avenues. Out of the total, ultra HNIs have allocated 14% to savings and 16% to investment for personal wealth and 23% for investment into primary business.

Jewelery, holidays, apparel, automobiles and home décor account for 68% of total spends. Designer wear and expensive accessories are holding their places tight within the Indian ultra HNIs.

Art and paintings form an integral part of ultra HNIs' portfolio. These purchases are not backed by thorough research but by impulsive buyer behaviour. The ultra HNIs buy art to pursue their passion and also for status, making it an alternate investment avenue.

The inclination towards 'wearables' has recently increased among ultra HNIs. Wearables include wearable electronic devices like smart watches, fitness bands, smart glasses, virtual reality headsets and sleep headphones. 61% of ultra HNIs between the ages of 36 and 50 years were eager to adopt wearable devices against 55% adoption among the below 35 age group.

Th quest for collectibles has descended from the Maharajas to the ultra HNIs. About 65% of ultra HNIs collect electronic gadgets, luxury cars account for 63% of ultra HNIs' collections, followed by art & paintings and sports bikes.

Succession Planning: Almost 98% of Ultra HNIs believe in succession planning and 81% of them give it high importance.

• Ultra HNIs understand that succession planning is a proactive and a continuous process and not a reactive one

• Their plan is to identify potential leaders, groom them and encourage them to look beyond their immediate responsibilities

• With changing education system, successors are being inducted in business at an early age as management trainees, so that they can understand the fundamentals of the business and get to know the key people in the organisation

• 43% of ultra HNIs prepare for at least five years to put succession in place, while 35% take between two to five years

• Successors also pursue family business management programs offered by various colleges, along with the hands on training

• Daughters are also becoming an integral part of succession planning. Ultra HNIs are looking for suitable successors who are capable to take the business to another level

• Kids of Ultra HNIs take the first place in the list of successors, followed by other high potential family members or external candidates

• People are gradually relying on professional estate planners, trustees and wealth advisors for succession planning

• Ultra HNIs prefer to pass on their assets though a simple Will

• Ultra HNIs are working on succession and retirement plans simultaneously. They are opting for various post retirement funds and insurance schemes to secure the future for themselves and their families.

Investment Pattern:

The main source of wealth of ultra HNIs is succession. There is a decrease in the number of Ultra HNIs from sale of business or from real estate sector. 'Impact investing' segment i.e. investing in social entrepreneurship businesses that focus on sustenance is on the increase.

Indian Ultra HNIs invest across equity, real estate, fixed income and alternative assets.

• Equity investments saw a decline as a result of 20% fall in Indian equities

• In the debt market, tax free bonds of PSUs has drawn a positive response from ultra HNIs

• Real estate investments saw an increase, with commercial properties being the center of attraction.

• Ultra HNIs invest in commodities, gold is the favourite. The Gold Monetisation scheme launched by the government has also appealed the Ultra HNIs. 49% of ultra HNIs invest more than 10% of their assets in commodities and 59% of these invest in Gold. With the merger of Forward Markets Commission and SEBI, the future of Indian commodity markets seems bright.

Ultra HNIs are enthusiastic about adopting and promoting renewable energy. They undertake various initiatives, such as water and energy conservation, recycling and reusing plastic bags and waste segregation. The Ultra rich have always been generous towards charity. The approach has slightly changed, they want to build enterprises that not only create a positive difference in society, but ones which are self sufficient, economically viable, and lasting. This is called Impact investing.

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