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Entrepreneurs and the traditional wealthy differ in their understanding of risks. Photo: iStockphoto
Entrepreneurs and the traditional wealthy differ in their understanding of risks. Photo: iStockphoto

Excerpt: The Wealth Wallahs

First-generation entrepreneurs have a can-do attitudethey are more opportunity-driven and look for product ideas that can deliver high returns

At the heart of The Wealth Wallahs by Shreyasi Singh are the country’s new wealthy.

What do their first millions mean to them? How do they manage their fortunes? These are among the many questions that Singh, a business journalist and Mint columnist, explores in this book, which is based on extensive interviews. “More and more, as new-age Internet and consumer technology companies scale up, the nature of the first-generation super-rich has changed too. For one, the average age has come down. Nearly half of the ultra high net worth individuals are below forty years," she writes.

In the chapter “Great Expectations", Singh talks about how the freshly forged millionaires think about their wealth, and how they differ from the traditional wealthy when it comes to the appetite for risk.

The Wealth Wallahs: By Shreyasi Singh, Bloomsbury, 210 pages, Rs499.
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The Wealth Wallahs: By Shreyasi Singh, Bloomsbury, 210 pages, Rs499.

Edited excerpts:

Zooming on the risk highway

First-generation entrepreneurs’ can-do attitude has evolved from the fact that they have seen their lives change within a decade or so, if not years. Their focus on wealth creation comes from the greater ambition and aspiration levels consolidating across India as well as a belief that dreams can come true. Lives can change.

“These people have a strong belief that yes, you can create a fortune, even a large fortune, and that there are various sources through which you can do it," says Shiv Gupta, founder and CEO (chief executive officer) of Sanctum Wealth Management, a start-up that acquired the private banking business of the Royal Bank of Scotland (RBS) in September 2015 for a reported 200 crore, in a unique management buyout. Gupta used to lead the RBS private banking business.

In contrast, inheritors understood that creating family wealth was a generational game that came from patience and prudence. They knew growth eventually followed protection....

In old, affluent families and business houses where wealth continues to get distributed between different family members across generations, lies an overriding anxiety around the fragmentation of wealth. This also leads to a greater focus on wealth protection and preservation and, consequently, a conservative approach to managing the same.

The traditional wealthy are also more resistant to outsourcing their portfolio. They usually have a trusted accountant who looks after their company’s treasury and an informal family-office setup that may offer a contrarian view of what external wealth managers recommend, creating a layer of friction that makes getting customers such as these onboard difficult.

In contrast, the first-generation wealthy are more inclined to give professional firms a chance and listen to their ideas.

The flipside of this open-mindedness, some believe, is their inherent confidence, especially because they’re usually successful business builders. This confidence leads to a higher propensity for risk, most evident in entrepreneurs whose pace of wealth creation has been accelerated.

The dangers of ambition

So, if the wealth has been amassed by the time they’re forty, not only do its creators have greater confidence in their own decisions, they also know they have a huge chance to replicate and multiply their corpus because their age gives them a longer runway to create more wealth.

Thus, they are more opportunity-driven and will look for product ideas that can deliver the expected returns. Having built successful companies, they have witnessed an exciting phase where their equity holdings in their companies have multiplied substantially. They’re, therefore, unlikely to be happy with sustained returns of 10-12 per cent. Also, because they believe they are plugged into the global information flow, they are confident of making smart decisions that are both adjusted for risks and offer high returns. However, it’s a confidence that isn’t always justified.

“People want high returns because the cost of capital is high in India. The good thing is—the economy supports taking high risks. Risk is rewarded right now," says one of India’s most successful stock market investors who, because he is notoriously media-shy, refused to be quoted in the book. In his experience, an understanding of risks differentiates old and new wealthy. “The new wealthy sometimes take risks without really knowing what the possible risks are. The old wealthy take risks too but they have a better sense of what could go wrong...."

The confidence that many ambitious first-generation entrepreneurial clients across Asia have is that they think they can achieve higher investment returns than the market average, says Hubbis’ Michael Stanhope. “But this is usually not possible. There is too much proof that it is very difficult to consistently outperform the market," he told me.

There are others who believe that wealth managers and financial advisors are partly to blame for this because they initially promised unrealistic, market-defying results to clients. Today’s wealth managers must re-educate the client on the new reality, and get them used to tempered expectations and realistic returns....

A senior private banker in Mumbai, who advises several new wealthy clients, laments that it’s often an uphill battle to convince his clients to be satisfied with sustained 15 per cent returns, and that the bull run of the 2003-2007 phase was an aberration that is not going to come back. Clients are more focused on knowing the returns they are likely to get than in understanding the risks they are taking, he adds. Their impatience for unreasonable returns and firm optimism, that has convinced them that opportunities for massive returns exist, is striking.

Unlike the math and logic people might believe are involved, managing one’s wealth is a behavioural, attitudinal game. The notion that economic rationale always dictates behaviour is foolhardy to believe. Inherent personal characteristics play a critical role in how individuals approach this. It’s why decoding entrepreneurs’ attitudes and traits gives us a clearer picture of why they exhibit them.

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