Wealth Beyond Tier-1 Cities: Deciphering the fundamentals that make Bharat's billionaires tick

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In a significant shift, India's economic vigour is increasingly evident in its Tier 2 - Tier 4 cities. Ten years ago, the Indian HNI list was concentrated in 10-15 cities. Today, more than 60 cities contribute to the rapidly growing number. This geographical trend offers potential for a never-realised-before holistic economic growth of the country.

There are two distinct facets to this trend

Legacy wealth: India's Tier-2 and Tier-3 cities have always had wealthy families. This wealth has been created by specialised sector focus and preserved for generations. In terms of investments, traditionally, legacy business owners are inclined towards real estate and gold. However, this wealth is now being diversified across more sophisticated financial instruments. Take the example of mutual funds, whose AUM share of smaller cities has grown from a mere 2.55 percent in 2014 to 17.44 percent in 2023, as per AMFI. Post–pandemic, this transition has been fueled by better access and growing financial awareness and further accelerated by the inter-generational wealth transfer, with the new generation showing more interest in exploring newer asset classes.

New wealth: Improved infrastructure, enhanced connectivity, and increased awareness have made India's smaller cities more business-friendly. Not far behind Maharashtra and Delhi, Uttar Pradesh, Rajasthan, and Tamil Nadu form the top three states from which India's unicorn startup founders hail. These wealth creators, who have built venture-backed enterprises, are financially aware and aspire to build a strategically diversified investment portfolio.

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What makes this trend truly special are the distinct financial, cultural, and social perspectives of this demographic, which suitably positions them to not only adopt the best global investment practices but also integrate their own principles to secure a thoughtful wealth creation and preservation strategy.

3 Distinct Small City Characteristics that Enable Better Investing Fundamentals

Financial - Long-term investing habits  

"Long-term returns belong to long-term investors. Those who wait."

Delayed gratification and Custodians of wealth—India's small-city wealthy are well acquainted with these two core financial principles. Traditionally, these families have invested in real estate, where the typical holding period is over ten years. They also view themselves as custodians of their wealth rather than just consumers.

This may seem like a small shift in perspective, but it is a giant leap to keep portfolios in good stead when navigating through tumultuous times. Applying the same lens to equity markets helps one understand that volatility is only a temporary loss of value, as long as one is invested in good businesses with earning growth potential.

Cultural - Inherent family office foundations

The concept of 'family office' is still new to India. Even though the number of family offices being set up has increased exponentially over the past 2-3 years, India is still deciphering the formal functions and processes entailing the family office entity. While most information about family offices references successful structures found in the West, the wealthy families in tier 2/3/4/5 cities of India have a unique characteristic - informally existing family office foundations developed over generations.

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A family office is a privately owned entity dedicated to managing the substantial wealth of affluent families. Beyond investments, family offices support such families in establishing governance frameworks, formulating succession plans, linking their wealth with their purpose, and more. Legacy wealthy families in small cities of India have successfully implemented internal processes to navigate such matters.

1) Traditionally, these families are associated with a trusted advisor who assists in every crucial financial decision and manages the wealth of the family.

2) There is a strong focus on family values, shared with the next generation from an early age.

3) The family patriarchs are aware of the importance of starting early and clearly communicating when it comes to succession planning.

4) Most families have well-defined processes and established roles & responsibilities, which are integral to good governance.

5) The joint family culture also establishes better conflict resolution among the family members, another crucial aspect of a family office.

Social - A less noisy lifestyle 

Driven by a starkly different lifestyle, a wealthy individual from a small city approaches every spectrum of wealth - investments, legacy, purpose, and aspirations - quite uniquely compared to a wealthy individual from a tier-1 city.

Typically, life for an eminent business owner in a city like Delhi or Mumbai moves from traffic signal to traffic signal and shuffles between meetings. The breaks, already few and far between, are filled up by various influential voices trying to spread awareness/ suggest solutions/ sell products. The ecosystem around this individual is formally established, offering access to plenty of solutions to known as well as unknown problems. There are plenty of alternatives, but time is short; thus, decision-making processes are complex.

On the other hand, a similarly successful business owner in a smaller city like Jaipur, Chandigarh and so on lives a relatively clutter-free lifestyle. The day doesn't always pass at a breakneck pace, allowing for a better work-life balance. Though the infrastructure is not fully developed, the overall lower noise levels (lesser populated neighbourhoods, fewer vehicles on the roads, better AQI, and fewer voices to get influenced from), when combined with the luxury of time, lead to a simpler and clearer decision-making process, which, is a crucial factor for financial planning.

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To build on these definitive foundations, an ecosystem of formal wealth advisory needs to be developed in India's inner cities. Having enough skin in the game, wealth advisors are suitably positioned to guide this wealth trend towards its optimal state. However, a straightforward replication of wealth management services for a tier-1 HNI investor is not an ideal method to follow as each family's values, purpose of their wealth, and perception of risk are unique. While identifying the right partner for their wealth management journey, investors should consider the following –

1) Bespoke Advisory: How well does the wealth advisor understand and align with the family's values and risk appetite without compromising challenging investment perspectives when necessary?

2) Strategic Solutions: Does the wealth advisor offer holistic offerings beyond listed investments, such as succession planning, philanthropy, alternative investments, family governance, impact investing, and so on?

3) Alignment of interest: Does the wealth advisor operate on a commission-led distribution or a fee-based advisory model?

The writer is the managing director of Waterfield Advisors.

The thoughts and opinions shared here are of the author.