No amount of regulatory changes and rule tightening seems to be providing any succour to beleaguered investors. Barely had investors recovered from the rude shock of the global financial crisis in October/November 2008, then came the Irish and Greek crises. Add to that, frequent regulatory changes such as abolition of entry loads on mutual funds (MFs) and insurance reforms. This has seen many intermediaries deserting investors, who have now been left to fend for themselves. Poor inflows into equity schemes, despite a strong rally in the equity markets, and dwindling MF folio numbers is an ominous sign that the retail investor is not in a hurry to return.
What is even more disturbing is the recent industry data and the subsequent media coverage, showing that the malaise of churning continues unabated, especially from the banking and institutional segment. This defeats the very purpose of doing away with entry loads. It seems the lure of upfront charges has been replaced with transaction charge.
Mis-selling, too, continues, albeit in a different form. This should include underselling risk products such as equity funds to the investor, when his/her risk tolerance permits that, and pushing monthly income plans (MIPs) instead. Recent bias towards pushing MIPs for the reasons of higher upfront is gross injustice. Many investors’ portfolios have underperformed, missing large parts of the ongoing rally. Otherwise, how does one explain growth in the assets of MIPs over the last 15 months, vis-à-vis equity funds? Some of these MIPs have seen five-six times growth in assets, when the same asset management company’s (AMCs) top performing equity schemes have seen marginal growth, considering rise in the value of the underlying stocks in the same period. Here, too, banks and institutional channels have been more aggressive in pushing MIPs.
What I find redeeming is that independent financial advisers (IFAs) and boutique firms have seen the least churn and outflows even during turbulent times. This and previous industry data reveals that assets garnered by this segment are considered more stable and stay longer with the AMCs. This is in the investors’ interest. In spite of substantial evidence to the contrary, what is baffling is the average investor’s undue reliance on banks and institutional channels for seeking financial advice and investment products.
Adviser evaluation should be done on the basis of their experience, expertise and integrity, and not based on the activities of the organization they represent. Successful placement of $100 million (Rs460 crore) worth foreign currency convertible bonds by an institution is of no relevance to an average investor, when an adviser assigned to his relationship can’t comprehend the risk associated with sector/theme fund.
There is a compelling case for investors to consider IFAs.
Continuity: There is continuity in their services and consistency in dealing. This is critical even for a high networth client, who may not be well-versed with financial products and may need hand holding at times. It also provides personal attention.
Strong bonding: Over time many advisers and boutique firms develop a deep relationship with investors. Indeed, many handle relationships that span across generations. Financial matters are very personal; the same cannot be shared and disclosed to everyone and privacy is of utmost importance.
Third-party products: Most investment products have third-party originators. The manufacturer of these products is keen to see his actual customer, irrespective of the distribution medium. An average investor can be adequately served with simple products such as MFs, insurance, and fixed income instruments and, in some cases, portfolio management services. Alternative products and structured notes are opaque and serve limited purpose and may not be suitable to all investors.
Client centric: In the absence of the sales targets for the period, an IFA/boutique firm is more likely to be client centric than product centric. Deeper understanding of the client’s needs also brings in some degree of accountability.
Requisite expertise: Many IFAs and boutique firms are owned and managed by qualified professionals, who have worked in the financial services industry and are experienced to handle large clients. With a focus on selected products, there is a sound knowledge base of products and process.
Acquisition through referrals: Since client acquisition is only through referrals, this brings in a dimension of seriousness and accountability. Client acquisition is the key growth driver; referrals can’t be expected from a bunch of disillusioned clients. Thus, there will be efforts to retain and cultivate clients.
Availability of quality research from independent agencies and technology that can be bought off the shelf has further dented the advantage that institutions enjoy.
After the collapse of Lehman Brothers, the belief that large banks and institutions are self-serving has gained momentum in evolved markets such as the US. Many wealthy investors have moved their portfolios to IFAs, who they have found to be more sincere and reliable.
It may be fine for a client who has a certain degree of financial sophistication to engage any adviser, but a normal investor should lay sufficient emphasis on adviser selection. In the absence of this, the investment venture may turn out to be a mug’s game.
Deepak Chhabria is chief executive officer and director, Axiom Financial Services Pvt. Ltd.
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