It might surprise you that I am a personal financial advisor, a species which is getting extinct fast. I was doing reasonably well in my BPO career, till I decided to move into personal finance, which has always been close to my heart.

It was not forced on me by circumstances. Like so many other souls, I too have been inspired by the wit and wisdom of Warren Buffett. I believe in his view that doing what one loves is the ultimate luxury and a person’s standard of living is not equal to his cost of living.

In other professions, to survive, you need to sell your services. While in personal finance, you need to sell both your services and products.

Swinging between mis-selling & no-selling

Some years ago, mis-selling was rampant. People who sold certain products like ULIPs (unit-linked insurance plans) or close-ended NFOs (new fund offers) made more money in a month than what some one else of the same calibre would take atleast a year to earn through a salary.

The mis-selling was unethical although not illegal, because all these products were cleared by the regulatory authorities! Then, suddenly, a lot of action was taken to curb mis-selling. At best I can say that the intention was good, but the implementation was lousy.

Again, I wonder, why create a product structure, or environment, that creates mis-selling, and then go to the other extreme of making a livelihood through selling itself difficult. I think we like to swing between two extremes-mis-selling and no selling. Not only that, selling itself has suddenly become a bad word.

Selling is not a bad word. Mis-selling is

Selling is not a bad word. Mis-selling is. The whole world revolves around buying and selling. In the regulatory zeal to eliminate mis-selling, selling itself is being eliminated. This, however, is valid logic! There cannot be any mis-selling if we abolish selling altogether.

I come across many advisors who are ethical but are pushed to the point where they are now feeling guilty about the word ‘sales’. The repeated emphasis we keep hearing from sections of the media is that selling financial products is bad. I’m curious. Like everyone else, the media too sell themselves, right? Then why this advisor-bashing, that advisors should not sell?

Without monetary incentives, why should someone take the pain to take the product to the customer and service him? If the expectation from regulators or sections of the media is that advisors should not look at financial incentives, then this profession can be left only to enlightened souls, if there are any, and if they are keen to take up this job.

Let’s  speak statistics

Next to banks, in financial services, only Life Insurance Corporation of India (LIC) is able to penetrate across different geographies and income groups. Ignoring the fact for the moment, whether combining insurance and investment is wiser, this reach is made possible only because of LIC’s sales force.

The irony is that despite this success, the life insurance penetration in India is barely 4%. It is reported that only 1% of Indians have medical insurance coverage. Around 1% of the population invests in capital markets, both through mutual funds and the direct equity route. The abysmal 1% again!

I read that equity as a percentage of household savings has actually come down in the last 15 years. If you remove the mark-to-market effect, I don’t think the equity corpus of mutual funds have grown at all during the past decade.

Technology cannot substitute the human factor

This contradicts the claim that the National Stock Exchange (NSE) and National Securities Depository Ltd (NSDL) have made big inroads and achieved penetration. They are not able to reach with technological power what LIC has done with its human power.

Though I have a vested interest in saying this, human interface and long term relationship gives more comfort to people while dealing with their money. Technology can complement, but cannot substitute the human factor.

Now NSDL is campaigning that ‘demat’ing the mutual fund units which are already in demat form is the next best thing that can happen to investors. I’m amused by this concept of demating a mere account statement. Extending the same logic, the demat statement issued by DPs (depository participants) also needs to be demated. Does this sound illogical? There is no difference between an account statement and a demat statement. Both merely indicate your holdings and are not the certificate of your holdings. NSDL can try doing something meaningful.

Focus on market development

Our focus should now be to increase the reach of financial services and products. How to bring 350 million people into the system? The rest of the 850 million are simply forgotten ones and cease to exist except at the time of elections. I’ve to write a separate piece about them.

We should be giving as much focus to development as we give to regulation. Otherwise there would not be anything much left to regulate. Continuously trying to regulate without any efforts to develop would amuse even Mohammed Bin Thuglak.

Since so much is spoken about lack of employment opportunities in this country, why cannot we create around 1 million advisors who would take products and services across India to all income groups?

A proper incentive structure is a must. Incentive includes reward for good behaviour and a penalty for bad shows. An advisor should have confidence that he can make a living out of selling products and services. Otherwise no one would want to take up this profession.

Do a reality check of noble intentions

There is a line of argument-“why not make advisory a fee-only profession?” A noble thought indeed. If practical, this is a better way to service customers so that there is no suspicion of conflict of interest. However noble intentions ought to be checked with ground reality.

People who read personal finance portals, informed investors, NRIs, HNIs-who are willing to pay for the value received, are an insignificant portion of the current investible population, which itself, as seen above, is next to nothing.

The huge segment of population which needs to be brought inside, does not belong to the above category and is not confined to the financial hub like Mumbai or other metros and Tier I cities. They are spread across innumerable cities and towns.

In-build pricing a better option for India

My opinion is that the general Indian mindset is to prefer inbuilt pricing rather than paying separately. Even in the case of mutual funds, inbuilt transparent pricing which encourages long-term investments is far better than re-introduction of entry load or variable load. Relationship managers at institutions, by the very nature of their job profile which focuses on short-term targets and performances, may be tempted to misuse this.

Insurance products and small savings have always had inbuilt pricing models. There is no such thing as a separate load or advisor charges. Of course, insurance companies need to work a lot more on bringing in transparency related to pricing.

People who talk about replicating a US model in India should compare the financial awareness and product penetration levels between both the countries. Simply aping the west without considering local realities would ensure that the growth remains stunted.

Comparing with other professions

Someone may argue, aren’t people paying doctors? People consider the medical profession as essential or critical. Do people consider personal financial advisory as essential as medical advice? I leave it to readers to decide.

Another profession which is cited as an example is that of an auditor. Speaking about chartered accountants, it has been made legally mandatory on various fronts to avail their services. It is not so for a personal financial advisor. So the comparison is not appropriate.

Like any other profession, grey areas exist even in medical practice and the auditing profession. Not that every one there may be making money purely through professional advice.

Conclusion

I’m not against regulations. Only an ignorant man would expect people to act perfectly without any checks and balances in place. As I said earlier, let us also give at least equal importance to development.

The motto for every advisor should be, in the words of Warren Buffett: ‘I don’t want to be on the other side of the table from the customer. I never was selling anything I didn’t believe in myself or own myself’.

 

Authored by,

Muthukrishnan Dhandapani

Chief Financial Planner

Wise Wealth Advisors

Chennai

The article was earlier published in Moneylife

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