10 points every financial adviser must note

By Morningstar |  21-12-16 | 

Kunal Kapoor, President, Morningstar, throws light on what the financial adviser of the future must contend with and adapt to.

These excerpts are taken from a presentation made by Kunal during the 2016 Morningstar Investment Conference in Mumbai.

1) If you find the right types of investments, the macro environment should not matter over time.

My father started to invest in the late 70s-early 80s. He was not a particularly sophisticated investor. He essentially bought 100 shares in a number of companies that had gone through privatization and became public again. So he invested in firms like ITC, Cadbury India, and so on and so forth.

My father never sold those shares. He just held on to them. This has a lot to do with my own formation as an investor and how I think about investing.

If you step back to think about investing, there is so much noise around everything we do. Everyday there's some macro event that's going to blow up the world - Brexit, interest rates, elections in the U.S., elections in India. These things catch everyone's attention.

But at the end of the day, if you find the right types of investments, the macro environment should not matter over time. And really, what it comes down to is your personal discipline as an investor.

2) You earn your keep when things are the worst.

If you go to buy something, say vegetables or fruit, you're always going to bargain to get the price down.

What we find in investing though is that when the prices of things go down, people want to buy less of them. They only want to buy more of that thing when it costs more. This is a fundamental problem that exists today when it comes to investor behaviour. And it is sort of the opposite of what you see in everybody's normal day life. Consequently, most investors have a really horrible experience. They buy when the price has gone up and sell after it has come down.

Think about your own behaviour so that you're better prepared to help a client. You earn your keep when things are the worst, not when they are the best. It's usually the opposite of what you would think.

3) Put the client first.

Early in my career at Morningstar I was a part of the fund analyst team. One year, we said something very critical about a U.S. asset manager. We wrote a report that called them out on the fact that they were not doing the right thing. That very day, that asset manager pulled out $800,000 of business that they had with Morningstar. They told us that if we don't change our view, that business is not coming back. We did not capitulate to pressure like that. We stuck to what we had to say. We lost that business.

I like to tell this story because one of the challenges in financial services is that you have conflicted parties. You have sources of people who are trying to sell you things and they are not always independent.

4) Look for wider opportunities.

In October 2016, Morningstar announced the acquisition of Seattle-based firm PitchBook. This is a firm that provides information on private equities.

I think this is a theme that you're going to start hearing in the investing world because private markets and public capital markets are more and more starting to come together.

And the ways that financial advisers in the future may think about helping their clients is not only through the ways you've known, such as public markets, but I see a future where it's possible that some of the differentiation you will have to bring to the table will include opportunity to access harder-to-get investments.

5) Pursuit of sustainable income.

For most of their lives, people work and receive a paycheck. As they start to age what will replace that in retirement? How can you help your clients get a paycheck based on their assets without feeling that they are constantly having to draw it down?

6) Advice delivery will change.

The current version - where you just charge a fee for assets under management, is going to be challenged in the future.  It's likely that you're going to be thinking about things such as episodic advice a lot more than you had.

So, just like a lawyer might get paid for doing a certain activity, it's very possible that as an adviser you might be facing a future where you have to do that. The positive is, your ability to scale that with technology is likely to be a lot more than it is today.

7) Regulations will change the environment.

Looking at the regulatory landscape in India, it's likely that as an adviser you are more likely in the future to be paid on a recurring basis as opposed to a transactional basis. Today the model for the way advisers get paid is it's very transactional in nature. You sell something, you get paid for it. The future globally is starting to evolve to what it's called a fee-based model. This is going to become fairly prominent in India as well, particularly as you start thinking about how to serve different individuals by using different types of technology.

8) In a world where technology starts to commoditize a lot of things, differentiation becomes incredibly important.

As an adviser, one of things you will have to start thinking about is how you are differentiating what you have to offer. And you really need to think about how you segment the different kinds of clients you are looking to serve.

One of the interesting things in India, relative to many other markets, is the reality that a lot of people went directly to the mobile phone. They skipped desktops and laptops and landlines. And so, the opportunity for you as advisers, in terms of thinking about how you can scale your business in the future, is to start thinking about how technology, particularly on mobile, is going to make sense in that regard.

9) Embrace technology to grow your business.

The word Fintech has become pretty popular. Most people would not even know what Fintech was 5 years ago. Neither would they have heard of the term robo-adviser.

Technology is disrupting financial services as we know it. You can have two reactions to that: Be scared and just keep doing what you're doing or start playing around with a lot of that technology yourself.

When robo-advisers first came out, the feeling was that they would never be used by advisers anywhere in the world, because robo-advisers were a threat to them. Across the world, we now find that robo-advisers are starting to be an integral part of what advisers do.

Why is that? Because chances are when you look at your own book of business, you have clients with different net worth, who are in different stages of their lives. Robo-advice is pretty good and a scalable way to manage those clients at the lower end of the spectrum today in terms of the assets that they bring you. In the future you can start shifting more of what you do on the personalized side to your higher-net-worth clients.

You should not be scared of technology. It can be disruptive, but it can also be really helpful. Because of the way technology is evolving, you will be able to do things at scale in a way that you have not been able to do in the past. You will be able to serve more clients than you have and you can do it in a fashion that makes sense for their individual case.

That means you will have to differentiate your book a little bit more between those clients who maybe are higher-net-worth versus mass affluent. It's an effective way for you to start thinking about how you might grow your business.

10) Show your clients that you are adding value.

In the future you're going to have a situation where more and more asset managers offer portfolios to their clients through advisers versus offering single individual investments. The future is going to be around managing for outcomes versus trying to manage purely for an investment result. And that means you as adviser won’t be doing investment planning but actual true financial planning.

Besides embracing technology, one of the ways you can add value in the future is not just help people pick their investments but also help them with some of the other complexity in their financial lives. Because as people tend to have more money, the complexity around their financial lives tends to grow.

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