Atul is 50 years old and independently wealthy. He’s a first generation entrepreneur who left a cushy job at 30 to found his own enterprise. Many years of toil later, he struck gold when his business took off. Today, he has a net worth in excess of Rs 50 crore, spread across various financial and physical assets. Atul is decisive, stays up to date about the financial markets and has been investing his money for over fifteen years. He’s clued on to various available investment instruments, and the risks involved with each of them. He takes pride in the fact that he’s ridden out three bear markets and come out of relatively unscathed.
Sunil is 30 years old, and six years into his fledgling career in Information Technology. He’s currently employed as a Senior Software Developer at a mid-sized IT firm in Gurgaon. He tied the knot two years ago, and his first kid was born earlier this year. Sunil and his wife plan to expand their family in another year. Although Sunil earns a fair wage, his income and expenses invariably seem to cross each other out every month. He’s got a car loan and a home loan, and sometimes ends up overspending on his credit card. Sunil is clueless about financial markets and investment avenues, relying on his family’s LIC agent for financial advice. He’s been putting away some money at the end of every fiscal for tax-saving, but it doesn’t seem to be growing too well.
In your opinion, who requires the support of a financial advisor more? Atul or Sunil? Sunil, of course. Atul, being a seasoned investor, will derive limited value from the “advice” of a wealth manager, most of which he’ll already be well accustomed to. In fact, he may well be able to teach a thing or two about investments to some of those rookie, freshly minted MBA Wealth Managers with only textbook knowledge about financial instruments! Atul will primarily require only transactional support from an advisor, to make his investing experience more convenient.
Sunil, on the other hand, will have a million questions. He’ll likely need to start bucketing and channelizing his savings properly, managing his expenses more smartly, restructuring his debt, planning for his child’s education, building an emergency corpus for his family, transferring risks adequately and sidestepping dangerous investing traps that could potentially hamper his wealth creation in the years to come. And while doing all of this, he’ll need to “budget for fun”, too!
And yet, most financial advisors will be on the hunt to “crack” Atul’s prized account and not Sunil’s meagre one. This unfortunate phenomenon is something I like to call the “Advisory Paradox”- the counterintuitive situation where folks who don’t require intensive advice have advisors lining up at their doorstep, while the hapless middle Indians flail their arms wildly, drowning in a veritable ocean of investment jargon. The unadvised millions in India are floundering with their personal finances, clueless about the nuts and bolts of building out a solid financial future for their families.
Where lie the roots of this rather unfortunate situation, and how can it be resolved – if at all? Unfortunately, there's no “silver bullet solution” even remotely in sight. First, the nature of the Advisory business itself is volume centric, and not fee-centric. In other words, an advisor stands to earn much more by cracking Atul’s account than by advising Sunil on his small monthly savings. Simply put, the payoffs associated with advising smaller clients are just not seen as commensurate with the costs and effort involved. As a result, we have clients like Atul enjoying the (mainly transactional) services of multiple advisors, sometimes pitting one against the other to minimize transaction costs through unethical practices like commission rebates. Clients like Sunil are left to the mercy of small-time LIC agents, who frequently sell them high front-load products such as traditional insurance plans, in the guise of long term investments. And then, they disappear – only to resurface when the next policy needs to be sold.
Is doing away with commissions altogether, and moving to a fiduciary, fee-based model the solution? Unfortunately, no. The vast majority of Indian investors would rather cut off their right arm than write a fee cheque to their advisors! The same clients are not averse to bearing upfront commission costs of 30-50 per cent on their life insurance policies, though. This needs to change.
As you’ve probably gauged by now, the problem is complex. Advisors have no real financial incentive to advise those who need it the most, and clients who need advice the most are averse to paying for it!
A paradigm shift is the need of the hour. Advisors need to migrate away from unwieldy, traditional brick and mortal businesses where the cost of acquiring and serving a retail customer far exceeds the customer’s life time value. They need to innovate, leverage on technology and re-engineer their business models to make them more cost effective while widening their breadth. Regulators need to do more to incentivize intermediaries who are bravely striving to take low cost, high return potential investment products such as Mutual Fund SIP’s to B-15 cities. Clients need to embrace the paradigm shift and loosen their purse strings when it comes to paying for Financial Planning. More CFP’s (Certified Financial Planners) need to come into the fray and work closely with Asset Management Companies to facilitate conflict-free, goal based investments. Mis-selling needs to be cracked down upon harder, to purge product-pushing insurance agents from the business. A concerted effort from all players in the ecosystem is the need of the hour; without this, the unadvised millions will continue to flounder.
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