The Reserve Bank of India’s (RBI) data on the Liberalised Remittance Scheme (LRS) outflows shows a clear trend: Indians are taking an increasingly global view of their wealth. In financial year (FY) 2018-19, Indians remitted over $878.8 million for deposits and investments abroad, up 355% from $246.9 million in FY15. As more Indians grow wealthy and look for smarter ways to protect and grow their wealth, global investment advisory could offer a great business opportunity for Indian advisers.
The challenges in entering this business are not regulatory. The Securities and Exchange Board of India’s (Sebi) registered investment adviser (RIA) regulation does not place any restriction on Indian advisers facilitating investments abroad. However, as with any other new offering, advising on global investment products will require advisers to scale up on capabilities, systems and compliance. Let’s look at the potential opportunity in global investments and how advisers can prepare to jump into the fray.
There are a few basic parameters that can help investors identify the right time to invest outside their domestic market. In India, these parameters are trending upwards right now, making global investments an opportunity that advisers should not miss.
Global opportunities: With more retail investors entering the capital markets, there’s a lot more money now chasing the same number of opportunities. As a result, we’re seeing very high valuations of Indian stocks, making it difficult to generate returns like before. Smarter investors will be looking at diversifying into global markets to access diverse businesses with better valuations or growth prospects.
Diversification: Indians invest almost 100% of their corpus within India; the corresponding number for a country like the UK is 56 %. So Indian portfolios have high concentration risk. In the last five years, the volatility of the Indian market, as measured by the MSCI India index, was 13.7%, with a return of 7.7%. In the same period, the volatility of the MSCI World Index was 10.7%, with 12% returns. Thus, a globally diversified portfolio tends to be less volatile and often more rewarding than a country-specific one.
Rise in foreign currency spend: Indians’ total remittance abroad in the first four months of 2019-20 was $ 5.8 billion, with the highest-ever monthly outflow of $1.69 billion in July 2019. For investors intending to spend in dollars or euros, currency diversification can be an effective hedge against unpredictable foreign exchange movements. For instance, the dollar has appreciated over 38% against the Indian rupee over the past 10 years, even though the Indian economy has grown faster.
Preparing to Stand Out
To offer global investment advisory, advisers will need to strengthen their global research capability. To build the necessary credibility and trust among clients, they need to be able to speak knowledgeably about the performance of various global asset classes, products and managers.
Systemic and administrative changes will be the next big consideration. Remittances through LRS require stringent paperwork and compliance with associated regulations like the Foreign Exchange Management Act, anti-money laundering regulations and KYC regulations. While most of these are to be taken care of by the banks effecting the remittance, advisers will need to ensure that their own on-boarding and execution processes are in sync with regulations. They should also be prepared to assist investors through these procedures, offer guidance on forex conversion, tax implications of investing in different countries and reporting norms.
As with many other areas in investment advisory, registered investment advisers can expect the emergence of various online platforms in global advisory too. The foremost tool to ride out competition here will be a consistent and seamless client experience, be it in terms of fee invoicing, portfolio reporting, advisory or transactions.
All of these together may present a challenge for most advisers, which is why we expect to see them choosing to execute global advice through an international investment platform in a tax-friendly jurisdiction, offering low-cost and transparent global products, research support and seamless fee recovery.
Global investment advisory can help advisers deepen their client relationships while becoming a significant differentiator in this market. Adopting it now, before it becomes mainstream, will mean they will have established credibility and pedigree by the time the market inflects.
Erik Hon is managing director of iFast India Pvt. Ltd