Wealth managers in the spotlight as markets zoom
Indian stock markets have hit new peaks recently, causing a ripple effect across sectors. Investors' increased spending due to the wealth effect has indirectly benefitted various industries, including real estate. In fact, anticipating good days ahead, stocks of real estate companies have risen sharply over the past year.
So, who are the direct beneficiaries of the bullish markets? Enter, wealth managers. The wealth management industry has undergone a sea change over the years, especially in terms of revenue recognition. The predictability of future earnings has increased as annual recurring revenue from trail-based incomes has replaced the upfront commission model.
No wonder, most wealth managers trade at a premium to brokers, who charge transactional or broking fees that are prone to fluctuations in stock market trading volume. Data sourced from a Jefferies India report dated 8 April shows that brokers trade at an average one-year forward price-to-earnings multiple of 16x compared to 33x of wealth management companies. To an extent, the lower cyclicality in revenue and sticky client relationships justify this steep premium.
If a client sticks around, the increase in market value of the client’s assets automatically translates into higher fees as annual recurring revenue is generally calculated as a percentage of the assets under management (AUM) based on mark-to-market (MTM) value. Also, the operational leverage lowers the cost-to-income ratio, thus boosting profit. Jefferies has projected a 22-25% CAGR in active AUM (fee-bearing) of Indian wealth managers over the next three years.
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