The retail investor has a plethora of options, from bank fixed deposits (FDs), government-administered interest rate products, equities, company FDs, debentures and bonds, to insurance policies, pension schemes and mutual funds. However, there is always a reluctance to choose anything other than a bank FD and financial literacy continues to be a challenge.
When India became Independent, the total bank deposits aggregated less than Rs1,000 crore; 50 years after Independence, in 1997, the total bank deposits aggregated slightly above Rs5 trillion, 13 years later, the figure has grown to over Rs46 trillion. We need to look at the total corpus of about Rs6.50 trillion of the mutual funds, about Rs12 trillion of the insurance industry and about Rs6 trillion of savings accounts in post offices against this backdrop.
Typically, there are two types of distribution set-ups—corporate, such as a bank or a corporate distributor, and independent financial advisers (IFAs). A typical bank, about a decade back, had a simple distribution model under which the distribution outlets focused on gathering assets and liabilities, leading to income comprising mainly of interest income and fee income on banking products. With the advent of mutual funds and insurance and the overall improvement of the Indian economy, we saw banks focusing more on investment advisory/distribution business. Large-fee incomes accrued from marketing mutual fund and insurance products. On the other hand, IFAs, who in the past focused on administered interest rate products such as Public Provident Fund and National Savings Certificate, graduated into marketing mutual fund schemes and insurance products. The strength of the total distributors of financial products increased multi-fold—to 2.5-3 million by my estimation. The distributors include IFAs, agents, employees at corporate distribution centres and, of course, insurance agents.
The withdrawal of entry loads on mutual funds by the Securities and Exchange Board of India last year was indeed a game changer. Past data shows that upfront loads led to large-scale churning and did not bring fresh money into the industry. Banning of entry loads was followed by a large drop in charges on unit-linked insurance policies by the Insurance Regulatory and Development Authority. This would have a long-term effect and will affect the cost structure of both the manufacturers (asset management companies or life insurance companies) and distributors. To begin with, both mutual funds and insurance products have become cheaper for the investor.
In the future, the distribution would either be focused on transaction or on advisory. While small investors would get services from distributors by paying a small transaction fee, a high networth individual would, perhaps, get services by paying an advisory fee across the investment period.
While the advisory fee would become a norm, collecting a transaction fee from small investors would remain a challenge. On a three-year mutual fund scheme, a distributor used to make about 70% of his income by way of trail commissions (considering the net asset value growth that happens due to marked-to-market) and about 30% of his income from upfront commissions. Since the upfront commissions now need to be recovered directly from the investor, there should be a process to facilitate such recovery.
With mutual fund units also available on the stock exchange, I think the distribution would also look at providing the secondary market access to the investors. Similarly, secondary market brokers would be able to sell mutual funds.
As the advisory moves up the value chain, I think the advisers would focus on both sides of the balance sheet of the customer/investor. In case the customer wants a home loan, it can be provided for by the adviser who can have a tie-up with a home loan provider. The same can be done if the customer wants an auto loan or a credit card. The investment advice is a function of the investment horizon and should take into consideration the liabilities due. In that sense, the financial adviser would do a complete life cycle financial planning for the investor. In the future, I see a financial adviser providing all investment products—mutual funds, insurance, pension products, direct equity, administered interest rate products, debentures, tax-free bonds, fixed deposits and loan products. The distribution business would become customer-centric from being product-centric. The customer would be able to view all his investments from a single window.
Sandesh Kirkire is chief executive officer, Kotak Mahindra Asset Management Co. Ltd. These are his personal views.
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