This post has been written by Ajit Dayal, founder of Quantum Advisors - sponsor of Quantum AMC.
Advisers, who wish to be true to their profession and do what is best for their clients, are in a bind.
At one end of the spectrum advisers have to compete with bendable brokerage houses who sell and package anything to make money (proof: some recently appeared on national television to give a mediocre Budget an “8/10”). On the other end is the truly professional adviser who has to deal with a customer base that is not accustomed to paying an open, transparent fee for the impartial and solid advice that an adviser may give a client.
In addition to these very real challenges on the remuneration side, the adviser has to deal with his or her views of what is happening in different asset classes - and the perceptions that investors carry about the outlook for these asset classes. Take the case of debt funds. The market consensus is that the RBI will reduce interest rates by 0.5% during the year. When interest rates decrease, the NAV of your client’s bond fund will increase generating a potential capital gain in addition to the interest received by virtue of the fund owning a security which pays a fixed rate of interest every year. That is a good outcome.
However, what if an adviser believes that “Demonetization was a Dud” and is a potential disrupter to India’s rural economy which could result in a shortage of agricultural output, higher food prices, higher inflation, and higher interest rates (as opposed to the consensus of lower interest rate for the next 12 months)? If the dud scenario pans out, this will cause a decline in the NAV of the bond fund – something which no one is expecting. And, since the CEOs of the distribution giants are on TV rating a dull budget as an “8/10”, the gullible client has it “from reliable people” that everything is hunky-dory and there is no cause for panic! The customer’s focus and behavior has been shaped by a series of lies, half-truths, or hidden facts!
In this scenario, what does a lonely, independent advisor do?
The easy way out is for the adviser to follow the herd and to use the bogus endorsements on TV channels as a crutch for the “consensus” view and let your client believe the Alternative Fact, recently legitimized by the media team of President Trump.
If the Alternative Fact of “Demonetization is Good” and the budget is an “8/ 10”turns out to be a falsehood, the client – it is argued – will not blame the adviser since the client “heard it on TV”.
The more difficult alternative for the adviser at this moment is to spend time convincing the client that the TV sound bytes were falsehoods and the customer’s focus is wrong. The adviser has to then to make a sensible case for the view that the adviser has, followed by a particular recommended course of action – no matter how different it is from the market consensus. In the above example, it would be “dump your bond funds and move money to the liquid fund till there is clarity on the impact of demonetization on the economy”.
This will never be an easy task.
Investors are conditioned into believing myths which become their focus and then influence their behavior:
(i) when the market is surging, it will always rise, and
(ii) when the market is declining, it will always fall.
They are also conditioned to believing that advice can be had for free: there are enough hollow-sounding experts donning the cloaks of gurus on sagacious TV channels generating ponderous statements on what will happen “today”.
Human psychology is also compromised by the fact that when a Great Leader has said something, we believe it must be true and needs no confirmation of data points. As Mark Twain said, “It is easy to fool people - it is more difficult to let them know they have been fooled”.
As the founder of Quantum Mutual Fund, we know how difficult it is to be devoured by the customer’s misguided focus on the fashionable statements of the day and be squeezed into near oblivion by a mercenary army of financial executives armed with MBAs and incentivized by near-term greed. But, 11 years later, Quantum Mutual Fund stands tall and remains focused on what is best for the customer.
As Indian regulations and disclosure norms evolve and the mafia-like behavior of the large distribution channels and their willing accomplices in the mutual fund houses stands exposed, we hope that the birth of a professional advisory channel will help nurture the evolution of a class of long term investors who are guided not by a focus on sound bytes but by the solid advice given to the customers by professional advisors: advisers who know that they must work with the customer’s interests in mind and earn the respect of the customers so that the advisers can earn their fee.
This post initially appeared in the India Markets Observer 2017 where you can read the perspectives and views of other experts too. It is available to all for FREE. All you need is a minute to register.
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The views are personal and not necessary those of the organization the author represents.