An interesting twitter conversation ensued today between CIEL’s Uma Shashikant and Mint’s Hindustan Times’s Gautam Chikermane. It started with a conversation that Gautam had with Raghuram Rajan in which the latter made some interesting (and a bit unexpected) comments about financial products distribution. (You can read the full interview here).
During the twitter conversation, Gautam asked the oft-repeated question regarding financial service intermediaries – who do they represent? Do they represent the manufacturers (such as the AMCs) or the consumers (the investors)? Whose interest is of concern to them?
(Full conversation here )
I responded (using the @fundsindia twitter account) saying that this question presents a false choice. That is, the question presumes that it is an either-or situation without a third or a middle option possible.
The reason I said so was that at FundsIndia, we have been successfully doing both over our tenure. And I do know quite a few other advisors/distributors who can claim to do the same as well.
We represent AMCs to the investors – there are close to thousand investible schemes in the mutual fund market today, and I often hear representations from the AMCs who try to highlight good funds to me that go unnoticed. Whenever such claims have merit, we use that as input when we talk to investors then on. For example, a mid-level AMC with a very good balanced fund recently visited our offices and showed us how their fund has done better than more well-known names in the market. Another even smaller AMC showed us how their MIP product is as good or better than many other such products in the market. There are many such pitches every week, but with these two, we found that their arguments have merit and we have absorbed them into our recommendations.
And, we are always representing investor views back to the AMCs. Regardless of the fact we get our commissions from the AMCs, we know that all the money eventually comes out of the investor’s kitty. We service our customers by working every day with AMCs to make this or that accommodation or exception as much as possible. Apart from that, to all the sales and marketing folks from the AMCs who visit our offices, we make it a point to tell them what we are hearing from the investors in terms of performance of their funds or what kind of products they’d like to see (if I had a dime for every time an investor asked for a silver ETF, I’d have many, many dimes).
FundsIndia or any intermediary business will work only if we have a robust group of manufacturers make good, useful products and also if we have a investor population who are served well. It is not a choice, you need both. As an intermediary, it is not a choice for us either.
So, we do both – represent each side to the other and work for the benefit of the industry and the market place as a whole. It is possible to act with that sense of enlightened self-interest that calls for a healthy industry with a well-served market so that both (as well as us, the intermediary) thrive and prosper over the long-term.
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A balanced view, indeed. My take on this debate has been that advisory services need specialist ability to select from various product options. Simple distribution needs the ability to reach a large number. A sharp analyst of products, dislikes the sales job; the smart salesman is seldom patient with intense research. Business models that bring the two together, and earn distinct incomes from both streams will survive. We suffer today when distribution masquerades as advice; and advice is unable to earn enough to sustain the effort. The costs are high for both investors and AMCs. A model that sees distribution as subservient and dependent on advice, will restore incentives to good quality advice.
Uma,
I see the line that you are drawing between distribution and advisory (both here and in your blog/columns). At FundsIndia, we are LIVING on that line, in that we do both. We are a unique model in that sense in that I do not know any other entity that does both core distribution and core advisory services to different segments of an audience using a same platform/infrastructure. So, while your point is valid in general, I request you to accommodate the possibility of existence of legitimate, good hybrid models in your world view.
There is a good reason why we do this, and it has to do with one problem that you allude to in your comment above. The problem of scalability. Since the beginning of FundsIndia, we are constantly trying to answer the question of how to deliver advisory services in a scalable way to a LOT of people. And in a way that makes business sense (from unit economics perspective). Our on-demand advisory services (over phone), automated portfolio builders, pre-packaged portfolios, built-in value adds such as value-averaging, triggers etc. are our attempts to push the envelope in terms of how we can get quality advice and a high fidelity platform to even a guy who is doing Rs. 1000 a month SIP. We are going to do more such things – automate portfolio review, bring in an order-of-magnitude more pre-packaged portfolios to suit different life situations and investor profiles.
It is such efforts that get hurt when, with a stroke of a pen, the regulator brings in a disrupting effect such as the direct plan. Apart from being an affront to the precepts of free market enterprise, this will hurt companies like FundsIndia who have diligently created a business model around a low margin service and are trying to solve real problems with technology and innovation.
Thanks for your time, please stop by our offices when you are in Chennai next.
Regards,
Srikanth
Yes, there is no doubt that technology and standardisation can deliver quality solutions at a scale. I have emphasised rule-based advisory with institutional distributors interact with. My compliant is that regulators have discarded the embedded pricing model without much thought, leading to the distribution model being more profitable than advisory. The new advisor regulation will entrench this distortion further. I would be happy for the advisor to be able to take the expense now being reduced in the direct plan, but to expect investors to pay that variable fee is unrealistic. An embedded advisory fee in the form of trail would have enabled moving ahead and setting disclosure, performance and other standards for the advisory profession, enabling them to compete efficiently. I also believe thee is space for standardised strategic allocation (passive advice if you will) and tactical advice that would be a top-down active allocation model, both capable of being scaled and priced differently. The markets for useful products such as mutual funds will expand when players are able to build business models given a framework for compliance and conduct. To advocate one mode over other, using regulatory diktat, kills choice and enterprise. This is more so in India where we culturally are not conformists to a process, but innovators who find alternatives. I have heard a lot of good things about the FundsIndia model and am keen to visit you and learn more. Shall get in touch when I am there next.
Thanks, Uma, for the considered, reasoned response.
Look forward to seeing you here when we get a chance,
Srikanth
This is very well articulated comment. Of course, you already know that.
My question is about your comment “in India where we culturally are not conformists to a process, but innovators who find alternatives”
What I observed is, we indians still follow age old customs as given in ‘Puranas’ and perform all the rituals so diligently. Our innovation is limited to find loopholes in any process, rather than accepting it and then improving it.
What is your opinion?
Satyanarayana
Blending distribution and advisory is like walking the tightrope! It’s a thin line and the probability of tripping for lesser mortals like me is very high. 🙂
But though I personally have had little success in following your footsteps of representing the financial service providers as well as the investors/clients, I have not lost hope.
I am working on articulating the “cost of free advice” and it’s a chapter in my upcoming, self published book.
Even though it’s a hard climb reaching out to investors and explaining the nuances, more and more people understand the implications.
(On a lighter vein, you talk about using technology to scale up but talk of “one investor at a time” in your tag line 🙂
Ranjan,
Thanks for chipping in with a response.
I think blending distribution and advisory is key to having scalable personal investment solutions in India. Apart from institutional (or individual) discipline in this regard, a critical element for the industry to be able to achieve this is the availability of diverse good products from different companies. That is, good investment products across different asset classes being available from more than a handful of companies is key. This is true today, I believe. In the MF world, we can cite many schemes from different AMCs across asset types that we can blend and recommend to our investors without bias or an appearance thereof. As long as this holds (and smaller AMCs are not forced out of the game by regulations or other machinations), running an honest distribution plus advisory business is do-able, I believe.
Regarding “One investor at a time”, honestly, it is an adaptation of a similar tag from the historic US brokerage Dean Witter, who said “We measure success one investor at a time”. They served 3.2 million clients at one point in time 🙂
Regards,
Srikanth