The fund industry has witnessed spectacular growth over the last few years, growing by 83% from Rs 12.62 lakh crore in February 2016 to touch Rs 23.16 lakh crore in February 2019. Factors like financialization of savings, adoption of technology, entry of online investment platforms, a booming stock market and increased awareness, have catapulted the industry on to unprecedented growth. Now a road map is needed to sustain it. We present some key areas in distribution that should be focused upon to maintain the momentum.
Promote advisory practice
For a country with a population of 1.31 billion, and mutual fund penetration of 11% of GDP, the distribution force of 40,000 active advisers is woefully inadequate. Even if we add Employee Unique Identification Number (EUINs) which stands at 1.07 lakh, there is a huge scope for adding further feet-on-street advisers. In comparison, the life insurance industry has 21.62 lakh agents (according to Life Insurance Council Data as on February 2019).
Traditionally, Indians have maintained a reasonably very high net savings rate (about 20% of GDP). However, the net savings rate as a percentage of GDP has been steadily declining since 2011-12. Also, a major portion of these savings gets invested in unproductive assets like gold or low-yielding bank fixed deposits or traditional life insurance policies. To educate and move Indian household savings towards financial assets, we need a healthy distribution network. Of the total 1 lakh AMFI Registration Number (ARN) holders, industry estimates suggest that only one third ARNs are active. Currently, the industry has close to 2 crore unique investors. If the investor base was to increase to 5 crore in 10 years, do we have distribution strength to cater to the demand?
Sunil Subramaniam, Managing Director, Sundaram Mutual Fund, says that the distribution model needs to be profitable in order to attract new talent. “Given the low penetration, low awareness of the product category, the inherent risks of the capital markets and the need for advice on financial planning and asset allocation – the need for hand holding for new investors is very critical and the sales force of asset management companies is woefully inadequate to service such a larger underserved population. The distribution business must be rendered profitable with a certain subsidizing of client acquisition costs and a reasonable medium-term clarity to be provided on those regulations that impact the economics of the distribution model,” he explains.
Steps must be taken to strengthen the distribution force. The industry needs to match the supply with demand. With a swelling Investor Awareness programme (IAP) budget, AMFI and fund houses are going all out to promote mutual funds. If there is a sudden increase in enquiries for mutual funds, we would need more distributors to cater to these investors, many of whom would be first-time mutual fund investors.
With a sizeable IAP corpus, AMFI can perhaps look at investing a portion of this money in holding awareness programmes in colleges / other educational institutions to encourage the youth to take up mutual fund distribution as a career. There are plenty of examples of advisers who have made it big against all odds. The inspiring success stories of these advisers need to be heard by the youth.
AMFI has a big budget for investor education at this disposal. The industry could mull the setting aside a portion of this corpus to attract new distribution/advisory talent in the industry. Typically, new Independent Financial Advisers (IFAs) face the crucial challenge of meeting their operational expenses until they build a decent assets under management (AUM), especially in an era where upfronts are banned, except for Systematic Investment Plans (SIPs). Can AMFI come up with a plan to provide stipend/business loan with low interest and infrastructure for the initial years to encourage new talent?
This support can be provided with an agreement that the IFA will pay back the loan within a stipulated timeframe. The government offers stipends to students pursuing PhDs with defined criteria, to encourage research and curtail brain drain. Why can’t a similar scheme be set-up by AMFI/SEBI for new IFAs?
The LIC of India runs a campaign in media to encourage people to become LIC agents. AMFI can also advertise about the benefits of taking up mutual fund advisory as a career. While the market regulator has done a commendable job of protecting investors, we would like to see the same attention given to strengthening the distribution landscape.
To sum up, all stakeholders need to come together to prepare a roadmap as to where they wish to see the industry in the next 10 years. This will provide much-needed clarity to new players wanting to invest in this business.
Ethical Selling
The industry and distributors need to adopt the right selling skills and provide a superior investment experience to create happy customers. Mohanty pointed out that balanced funds were sold under the guise of Monthly Income Plans (MIPs) offering regular dividends, which created wrong expectations in the minds of investors. “When the tide turned, investors did not have a good experience. I believe fund houses need to act more responsibly while positioning their funds to distributors. Due to the seamless availability of data and information, investors today are lured by past returns. Fund houses need to adopt the right selling skills. We all need more investors but not at the cost of existing investors. We need to create a good investment experience for investors,” he explained.
Outsource research
A large number of advisers run a one-man show and are faced with numerous tasks. Given the competitive nature of the business, even those who have a team are hard pressed for time.
Financial planners need to provide investment advice with rigorous and up-to-date investment research and analysis. The costs of setting in-house research team for small advisory firms can be high. Currently, most advisers perform a number of tasks like investment research, managing staff, meeting clients, and marketing on their own. This takes up a lot of their time thereby diluting the value they could provide for each of these tasks. Financial advisers should focus on their strength areas such as growth and business development. Some research shows that technical aspects of the job, including research, providing analysis, and handling administrative work, are less likely to generate perceived value and client loyalty.
A recent Fidelity Investments survey which covered 383 advisers shows that outsourcing allows financial advisers to focus on deepening relationships and providing a seamless experience for clients. The top functions that firms outsource are IT/technology (48%), investment management and portfolio construction (40%), and legal and compliance (37%). Of the firms and advisers who hired specialists, 84% indicated they had a successful experience. The top reasons behind the success were:
- Helped save time – 77 %
- Vendor had qualified expertise – 70 %
- Helped increasing productivity – 66 %
- Helped optimize efficiency – 57 %
- Allowed firm to focus on deepening client relationships – 53%
Gamma1, a metric introduced by Morningstar’s David Blanchett and Paul Kaplan, measures the additional expected retirement income achieved through wise financial-planning decisions, and many of these decisions are made with an adviser’s assistance. Morningstar’s Gamma research demonstrates that making sound financial planning decisions in five areas—asset allocation, withdrawal strategy, guaranteed income products, tax-efficient allocation, and portfolio optimization—can generate 29% more income on average for a retiree.
Therefore, outsourcing research and managing portfolios is ideal for advisers so that they can focus on client facing activities. More importantly, they would be able to spend more time with their high value clients, improve investment outcomes for clients, get higher wallet share and more referrals.
1 Blanchett, David, and Kaplan, Paul. “Alpha, Beta, and Now…Gamma.” The Journal of Retirement 1, no. 2 (Oct. 31, 2013): 29–45.
Behavioral Coaching
The industry consensus on why financial advice is valuable has changed. No longer is an adviser’s worth solely linked to his ability to beat a benchmark, it’s also measured by the impact that their services can have on financial outcomes and ability to hand-hold an investor during turbulent phases, when panic hits. In a bull market, clients tend to become return-oriented by ignoring asset allocation and their risk appetite. Advisers need to continually reinforce the long-term benefits of an actively managed approach that will mitigate risk when the market turns topsy-turvy.
New metrics and research findings show that the interpersonal aspect of advice may have more impact on a person’s finances than anything else.
This outlook favours services like behavioural coaching—helping clients mitigate their biases and stay the course, and personalized advice versus traditional selling points like maximizing returns and asset allocation.
Investors are known to face biases like confirmation bias, herding behavior, loss aversion and anchoring. In recent years, there has been a slew of research concerning the biases that advisers exhibit as well. Although advisers and other professionals are highly experienced and skilled in their trade, they are not immune to the everyday behavioural biases we all face.
They can make mistakes in investment judgment, process, or implementation, and can fall prey to herd mentality, prompted by the behaviour of clients or their peers. Overconfidence is one such cognitive bias that often affects advisers.
Although it’s not possible for someone to avoid all behavioral biases, planners need to understand these instincts better to help them in advising clients who are facing the same issues.
Morningstar’s research shows that the interpersonal side of advice, which includes personalization and behavioural coaching, can be the most valuable aspect of professional advice, and the industry needs to better articulate that. Contemporary advice is more coaching than stock-picking, and returns are only part of the picture.
Adoption of Technology
With the proliferation of smart phones and online technology, it is far easier for new investors to complete Know Your Customer (KYC) formalities today. Industry experts believe that doing away with the need for separate KYC for mutual funds will go a long way in removing operational barriers. “We need more convenient technologies for investors to invest in mutual funds. Today, the investing experience in mutual funds is still unnatural for investors. They have to fill out forms, give documents and understand jargon. The day it is made simple, one barrier for investors will be removed,” says Sapre.
New distributors joining the industry today have the option of collaborating with platforms such as MF Utility, BSE StAR MF, NSE MF II, and other B2B platforms started by private players. Most established distributors today are executing their client transactions through mutual fund exchange platforms.
These platforms have made it easier for distributors to grow their business by cutting down on paper work and expand geographically. Despite the shrinking margins, the mutual fund industry has continued to see emergence of new distribution channels. Payment apps, web based robo-advisers and other platforms have mushroomed. Together, these platforms are helping expand the industry’s penetration. This is evident by the rise in SIP folios and the overall growth in industry assets. To meet client changing expectations and attract more millennials, the industry has to keep evolving its technology. Distributors and advisers would do well to complement their services with digital capabilities to provide a seamless experience to clients.
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