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If pure valuation play is your business, it will fail
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When you get a third call in a week from someone wanting to discuss their business plan in the same area of work, you know that this is an industry just waiting to take off. Advisory in financial services in the online space is buzzing with new start-ups and business plans. The first wave of business ideas came some five years ago with comparison and execution platforms across the home loan, insurance and mutual fund industries. As it happens in start-ups, many of the ideas went under. But there are businesses in each of these verticals that have survived and look viable. Most of the ideas that centred on pure-play financial literacy died a natural death. People don’t log on to learn about finances just as we don’t go on to the Internet to learn to medicate ourselves and self-prescribe drugs for persistent problems.
The next rush looks to be in the financial advisory space. The ideas range from helping people take decisions about their important life events to actual execution of a financial plan online. Most of entrepreneurs are either young management graduates looking for the next valuation spin or refugees from the insurance industry who either left on their own or were fired once sales of unit-linked insurance policies (Ulips) dipped post 2011.
In 2010, Ulip regulations where overhauled to make the toxic product relatively safer to buy by taking away the killer commissions and removing trap-like features. The impact on the insurance industry was drastic with the first-year premium income of private companies dropping by 18.5% in 2011-12 over 2010-11, and that of single-premium policies going down by 14%. For an industry that was growing at over 15%, the drop in business meant lay-offs of even very senior people. (As an aside, these guys tell me that the pain is not over for insurance yet. Once the toxic sales of traditional plans are curbed, there will be another round of lay-offs.)
A third category of entrepreneurs is the hard core tech bunch that is smelling an opportunity in this space and writing business plans.
The biggest question in front of this nascent industry is this: how to convert all the gyan into money? Option one is to get people to pay. But when investors find it difficult to pay for face-to-face advice, why will they trust an online faceless entity to get financial advice? The value proposition of good advice is realized by clients only after two years of being with an adviser or planner; or, if they are hit by a life event in the interim. Option two is referrals, when registered users on the sites who finally make their choices are forwarded to the company selling the product and the website earns a referral fee. The third option is the most lucrative but also the most messy—to get into execution itself. But doing this takes away from the advice-only unbiased platform that some of the ideas want to ride.
While the decision to charge a fee for advice or earn through execution remains for the business to work out, what strikes me is the fact that after all the feel-good, do-good spiel is over, most of the ideas are still just looking at investment planning and, in that, just at asset allocation-linked solutions. They forget that though important, investment planning is just one of the parts of the individual’s money box. People need help in cash flow planning, de-risking their lives and assets by buying medical, life and asset covers and putting in place an emergency fund. They also need help in constructing the short- and medium-term part of their portfolios before getting to the big ones of long-term corpus building. Given that the bulk of the market is still a commission-driven sales push one, the entire focus sits on the long-term part of the money box that has the highest money allocated out of the savings pie of the individual. This neglects the equally, if not more, important shorter-term parts of the box.
A piece of advice to all such entrepreneurs in this space—if pure valuation play is your business, it will fail. The only ones to survive will be those that build confidence and give real value to the retail consumer of financial services. But that is a long process since trust builds over time. Move beyond asset allocation solutions—most investors can’t be bothered with achieving the exact ratio between debt and equity—and focus on solving the real problems that consumers have.
End note: It is a part of the regulatory evolution of the market that there is so much action in getting the advisory piece right. Financial products are impossible for a retail investor to decode and India is slowly moving to a seller-beware model from the current hit-and-run sales push one. The new finance minister, Arun Jaitley, will do great harm with any knee-jerk steps to kick-start the retail market for financial products. There is a process of regulatory change that has spanned across past three governments. Please don’t disrupt that!
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com
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