"Investor Centred Behaviour Is Critical For The Industry As A Whole"

It's an unfortunate truth that the Financial Services business has historically been associated with significant conflicts of interest between clients and investors. The pushing of high revenue products, indiscriminate and unjustified churn, and not explaining product features properly to clients are just some examples of advisor actions that may not have been 100 per cent conflict free in nature.

The MF distribution business is no exception to the above; SEBI has been taking a series of steps over the years to cut down on this potential conflict of interest and more closely align investor and client objectives, with the objective of creating a more sustainable ecosystem.

Killol Pandya of Peerless Mutual Fund, LovaiiNavlakhi of International Money Matters, Ranjeet Mudholkar of FPSB and Suresh Soni of DHFL Pramerica Mutual Fund got together to discuss the subject of 'Conflict Free Advice' during the 1st BW Businessworld Mutual Fund Summit at Mumbai held earlier this month.

Soni of DHFL Pramerica made the opening remarks, stating that the first tenet of any Advisory business is 'looking after the client'. He stated his belief that the manner of remuneration is unlikely to affect an Advisor's orientation towards the client.

Mudholkar of FPSB stated that in his opinion, the topic of 'conflict' is given too much focus at multiple forums and conferences. According to him, the IFA fraternity should understand that their business essentially consists of 'Thee C's' - Competence, Commitment and Conflict. Conflict can be managed by establishing systems and checkpoints, but the onus of building competence and commitment fall squarely on the Advisor. As long as Advisors work on the first two, the third will automatically fall into place.

Mudholkar also offered that the capping of commissions and increased transparency can go a long way in curbing mis-selling. However, the overall growth of the industry (in terms of new folios and new investors) also needs to be taken into account. The regulator needs to be able to strike a balance in this regard, as the latter is a key priority as well.

"The one thing that needs to remain with you in order for your business to survive, is your client", advised LovaiiNavlakhi. According to Navlakhi, the key priority for IFA's must be building long term relationships with their clients - preferably from a 'lifetime' point of view. This subtle shift in thinking itself can go a long way in ensuring conflict free advice. On the RIA model, Navlakhi stated that given India's width and depth, it is essential that different models be allowed to run freely for extended periods of time, in order to see what works best in the long run. He mentioned that the RIA model has been beneficial for his clients and his business.

"Investor centred behaviour is critical for the industry as a whole", said Killol Pandya of Peerless Mutual Fund. Pandya believes that conflict is a harsh word, best replaced with the word 'dissonance'. According to him, the key 'dissonance' that exists today is that fact that performance and profitability metrics for asset managers and distributors are markedly different from the time frame that investors would judge portfolio performance. This, according to Pandya, needs to change over time.

According to Soni of DHFL Pramerica, 85 per cent of investors in the U.S take the help of an Advisor to invest. Soni reiterated his belief in the long term sustainability of the Advisory function across geographies, and stated his belief that 'only around 20 per cent of individuals, primarily the DIY kinds' are inclined to invest directly without the support of an Advisor. According to him, it is a misperception that fees and charges embedded in the Advisory function in India are high. "In a country like India, you will need multiple models to run simultaneously", he said.

Mudholkar of FPSB believes that the ability to adapt will be the key differentiator in the future. "There is no regulatory environment into which you cannot adapt yourself, and there is no political environment in which you cannot survive", he said. Advisors need to invest in their own long term businesses and create infrastructures that will create value for their clients. Navlakhi seconded Mudholkar by saying, "If you are not going to put in an investment, you will not get a return".

According to Navlakhi, it is the approach of 'taking short term views' on any aspect of an Advisory business that create conflicts of interest. "We now only look at 3 year numbers", he said in conclusion.