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What are some of the unique challenges when it comes to wealth management in India, given its demographics and the popularity of physical assets?

It’s not necessarily well-priced yet for people to access advice. Most people who are accessing wealth management services generally start to think what they are looking for. You also have to have sufficient wealth to do that. India is an emerging wealth country, so the number of people who probably require wealth management services in a way that works for providers is a little lower. But it will definitely grow. Things like technology and robo advisory can do a good job for lower levels of assets, which can be really important as India starts to save and invest. I think the prospects are good, but there are some challenges between clients and providers.

When you say that wealth management is mis-priced, do you include the fact that financial services are commission-driven?

The CFA Institute’s charter is about acting in the best interests of clients. Commission-based services can sometimes be in conflict with that. We are pretty comfortable in the space of making sure that everything is transparent and clients know what they are paying for. I do think it is important that we as providers of services are able to articulate our values. In the institutional space, it’s well understood how CFAs operate and the quality they bring. I think that’s less appreciated and understood by individual investors.

What is your take on the National Pension System (NPS), particularly with respect to the mandatory purchase of annuities?

The annuities market in India is not very efficient—both from the point of view of annuity providers and underlying capital markets. It’s hard for providers to execute good annuities. You need good underlying assets which needs good bond markets.

There is also an actuarial issue on the pricing of annuities. We think that people should have flexibility. In principle, you are trying to translate a defined contribution system to a defined benefit system. As an individual, what I want is to take care of my longevity risk. I need to make sure that I get enough pension in my old age and enough cushion when I fall sick, which I will when I get older. That is the reason for NPS to insist on buying annuities.

However, the case may be different for different individuals. Forcing a set percentage of annuities may not be appropriate. As long as pension authorities understand that they can keep tinkering with the rules to improve the outcomes, that’s fine. What’s going to happen is, larger and larger sums are going to come out for the underlying annuities market. If you look at developed markets like the UK, a very significant portion of people’s assets are coming from these types of products. In India, that is going to force a change in the way markets work.

Has environment, social, governance (ESG) caught the fancy of investors? What are their return implications?

There are several aspects of ESG that have caught the attention of investors. Governance is reasonably well understood and there is a lot of best practice out there. Of all the letters in ESG, it is the most advanced. The environment, of course, has also caught investors’ attention as many people are feeling, seeing and experiencing the impact of climate change. We are now understanding that there are actual areas that do have a material impact on portfolios. For instance, if you think of environmental conditions that can change the valuation that we ascribe to certain securities. We have, historically, looked at it in terms of risk and returns and now we are looking at it in terms of impact. What’s interesting is that Europe is much further along. Most of the rest of the world is still catching up. It hasn’t caught much attention in the US, but in the last four-six months, that has changed and is accelerating. There are discussions around things like the concept of a Minsky moment—when you have immediate repricing of a security understanding new risks. You can imagine someone managing a portfolio, who hasn’t taken ESG into account—should there be immediate repricing on certain assets? If you hadn’t done your due diligence and your research hadn’t taken this consideration, that would not pass the prudent professional fiduciary standard.

How do you see the active versus passive debate in the Indian context?

There is a role for both. Passive investment has achieved a real momentum for a couple of reasons. First, it’s really cost-effective relative to a benchmark. Second, for wealth managers in particular who are taking the asset allocation route rather than security or manager strategy selection, passive funds become an easier way to do that. Our view is that there is a role for both. Inefficient asset classes tend to provide much greater opportunity for active managers to provide value even after the fees. There are definitely parts of the Indian asset class spectrum where active management becomes very attractive. For example, credit funds are not normally suitable for passive management. So I think there is tremendous opportunity in the Indian market for active management and security analysis/selection to pay off.

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