Thursday, May 6, 2010

In search of a Financial Advisor..


The actions of SEBI with reference to the mutual fund industry and its battle with IRDA over regulation of ULIP’s has far reaching implications on the way the distribution of financial products is being done. So far, the customer was being chased and the distributor was getting paid by the producer (the amc or the insurance company) who in turn used to dip in to the investors’ pocket. The fact was that the consumer got a feeling that the distributor provided him with a ‘free’ service. Given the Indian mentality of not wanting to pay for professional advice, when it comes to mundane things like finance, this system was convenient for the distributor. The entry load, the NFO charges were all seemingly charged by the producer. In reality, the distributor took away every last penny of these kinds of ‘extras’ that the producer was levying on the investor. Of course, the insurance industry took it to the highest level with ULIP’s.
Now, hopefully, the spat between the regulators (though I believe that IRDA is only an insurance club, headed by retired people from government service) will reduce the opacity in the ULIP. It is too utopian to wish away ULIP’s in toto.
Now, the distributor has to do a big rethink. The trail commission that will get from mutual funds, will not be sufficient to cover his costs. Most IFA’s will have to seek alternate careers. If the ULIP commissions come down to mutual fund levels (which it could) we can see a lull in the industry. Mutual funds and insurance are products that have to be ‘sold’. The only way out is for distributors to levy a charge on the investor. Most investors would be loath to pay one, but unless they reconcile themselves to paying, they stand to suffer. What is a ‘fair’ tariff, will be decided by market forces.
The distributor also has to mend his ways. For instance, a mutual fund distributor never shows you all the funds. He is today an ‘authorised’ stockist for a select few fund houses, based on the money he gets from them. No distributor or IFA will show you all the products available in the industry. In insurance, it is worse. You get to see only one company product. This means that you have to do all the hardwork or fall in to the trap of the distributor.
Paying for advice is going to be the way ahead. There is no option for the distributor. In this fall out, there will be the unfortunate ‘small’ investor who will be left out. No one will want a thousand rupees investor. In fact, I think that the threshold will shift to investors who can put in at least a few lakh rupees. If I am a distributor, I would have a minimum ‘revenue’ ticket of at least a few thousand rupees for spending time with an investor. So, the ‘small investor’ will be left to the mercies of self education and small time hustlers. . For the ‘small investor’ there is no hope but to do the hard work himself. Economically, he does not make sense as a business proposition. Today, when the AMC gives ‘per application’ incentives, the small investor is sought out. Once these incentives are not there with the distributor, he will ignore them.

The sad fall out is that penetration will surely drop and there is no incentive to reach out to underserviced centres. I think that the number of investors will not increase. Perhaps, it could decrease further. This is the real damage that the regulators have done by micro managing. If LIC had not paid the kind of commissions it did, it would not have penetrated the smallest town in India. Now, the regulator is making an attempt to make mutual funds and insurance as a ‘white collar’ ‘anglicised’ industry. This, to me, is the biggest backward step which is an outcome of mindless regulatory action. The recent moves by the regulators have adversely impacted distributors as well as the producers. An SMS floating around is very apt. “SAVE THE MUTUAL FUND INDUSTRY. ONLY 38 LEFT”.
The distribution industry has to make deep changes. Once they start charging a fee, they become accountable to an investor. They have to stop employing kids in their diapers to render advice. As an investor I would expect someone with experience to handle my affairs. It is debatable whether there is quality of people available in numbers in our markets. I would make the following a kind of laundry list of ‘minimum expectations’ from a distributor who wants a fee from me:

i) Qualified and experienced person to talk to;
ii) Show me the complete range of products;
iii) Talk to me when the going gets bad;
iv) Give me periodic MIS as well as updates on my portfolio;
v) Tell me when to sell;
vi) Tell me what he gets from the producer as a selling commission;
vii) Provide me a periodic assessment of the investments;
viii) Assist me with all documentation, pre and post investing; and
ix) Give me his advice and assumptions in writing.
As an investor, a good thing that has happened is that you can change your distributor at any time, without disturbing the investment. This is a powerful tool and use it well to ensure that the distributor provides advice and service.
Expect to pay a fee that is typically a percentage of the investments that you make. Soon, we should also see the emergence of pure financial advisors, who do not sell any products. They will only discuss strategies and financial goals with customers and charge on hourly basis. That would perhaps ensure truly unbiased advice. I would like to see the advisor being divorced from a seller. However, to render this kind of advice, I would expect very high quality and at least ten to twenty years of experience. I would hate to go seek advice with a young kid who has not seen any complete business cycle at a professional level. It would become very much like going to a doctor for advise and a chemist for the medicine. Here also, I would urge the distributor to outline his strategy and assumptions in writing so that the client can check back with him. This will also curb the general tendency of the sales people from making exaggerated claims which often fall in the realm of dishonesty.
Till the advisory services evolve, the investor is going to be on a roller coaster and perhaps a guinea pig in a financial lab, providing experience to financial advisors.
Of course, you will have your banker chasing business from you. It is surprising that your bank abuses the relationship to target you for marketing of their other businesses. Many banks will try and sneak in charges without being explicit about it. In the papers you sign, the banks will hide away a clause whereby it would appear that you are giving them permission to debit them for services such as helping you in mutual fund investments. Do not give in. Most banks try and sell you products where they get high fees and do not show you the full suite of available products in the market. It is none of the distributors’ business to adopt arbitrary bases to ‘short list’ products. Also, I dislike banks in financial service, because there is generally no continuity and most of the persons who come to you seem quite inexperienced. And, every year, the person keeps changing and the new person will change your portfolio simply in order to meet his revenue target.
It is going to be difficult to choose advisors. It will take time for the industry to evolve. However, I think that Indians have to learn to pay for advice and the advisor has to become accountable. We will see the evolution of standards on advice. Mis selling will be legally punishable with penalties and more. Once there is a written advice, the onus would be on the advisor to ensure that the advice he renders is in line with the risk profile and financial standing of the investor. Distribution game has to change significantly. Investors have to also change their mind set. A new order is under way.