Sweeping changes have taken place across the international financial services space ever since the Bear Sterns debacle. Much has been written and talked about the entry load ban, the distribution issues, the large and continuing redemptions in mutual funds, the recast of insurance products and trimming of intermediary commissions. My endeavour here is to bring in a different perspective.
While addressing a gathering of financial service practitioners in Kolkata, and more recently in Hyderabad, I had shared a study conducted by renowned researcher, Sheena Iyengar, and her team. Iyengar has been teaching at the Columbia Business School and is a PhD in social psychology from Stanford. She is considered an expert on the subject of “choice”. In her book, The Art of Choosing, she shares this study done in a Communist land (I am sure you are wondering what this has got to do with India or investments). Haven’t you heard this: “We are but the choices we make?” To know more, read on.
The research team set out to explore the ways in which people make choices; the relationship between how we choose and who we are; how we choose when our options are practically unlimited; and whether we should ever let others choose for us, and if so, whom and why. In this study, the participants were offered multiple choices of soft drinks. The researchers were expecting some choices to emerge—maybe an orange drink, or the drink that had a bright label or one in a bottle with a nice shape. To the surprise of the researchers, the participants’ feedback was that they were not offered a choice at all! But there were multiple bottles, argued the researchers. It seems that since the country (Communist in this case) had only one fizzy drink in the market, the participants, after seeing multiple choices of soft drinks (seven of them), assumed that all of these were just coloured soda and that the choice in effect was not there. To further their findings, when the researchers added milk and water: instead of nine, the participants saw three choices—soda, milk and water.
Let me draw a parallel between this story with our scenario. Our financial advisers understand cash, debt, monthly income plans, balanced, diversified, sectoral, thematic and international mutual funds. They are also trained to evaluate whether a fund fits the investor’s risk appetite and needs. But if you don’t know about these funds, they are just coloured soda to your mind. Pause for a minute to read your own mind: “This adviser’s service is all about offering me sodas of different colours and brands. He isn’t even giving me a choice. Why should I even think of paying him a fee?” But the adviser is actually offering you soda, milk, water, juice and other liquids to quench your thirst (read multiple investment choices within the mutual fund space).
I am trying to bring out two fundamental issues here—first, low or negligible investor education and second, lack of understanding or refusal to bring about an institutional process to tackle the first issue.
The analogy of a doctor is probably a part of many daily discussions in the mutual fund and insurance industries. While the analogy is true on the ground, what doesn’t work so quickly is that the investor isn’t forthcoming to pay a consultation/advisory fee to the adviser. The fact is when it comes to personal financial planning, the characteristics of the underlying financial products play a large role in defining the outcome of the adviser’s service. A financial product that you buy is invisible and time has to pass before you understand its impact (a distant moment of truth—words borrowed from the financial well being report). Today, we are all happy if things happen (or are given to us) quickly—fast food, two-minute noodles or instant messaging. Any ailment we have if treated quickly makes us happy too and, therefore, we can see the growing number of allopathic medical practitioners and a very small number of ayurvedic doctors. This is again because a majority of people generally tend to like solutions that offer instant gratification. I have seen many people popping headache pills when they are fully aware that the root cause is their dental problem. The pain radiates from their teeth to their upper eyebrows and the two-minute solution for this problem is popping a pill. The long-term solution—and they are aware about it—is to meet a dentist and do a root canal.
Until the investor is educated about the products offered by an adviser and why the adviser’s skill of choosing the right products is important for achieving the desired objective, the industry is headed for continuing turbulence.
Why pay fees? What is the adviser’s value-add? These are the two most common questions that I get to hear from customers (and the highest ranking objection statements that advisers share with me when quizzed about their business). For advisers, they know that they are in a business where they always have a distant moment of truth. There couldn’t be a bigger priority than to educate—self and investors.
Rajesh Krishnamoorthy is managing director, iFAST Financial India Pvt. Ltd.
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