Mutual funds are one of the best ways to accumulate, preserve and park wealth. Investors can save on taxes and let their money work for them by generating better risk-adjusted returns over other asset classes.
Currently, the MF industry has over one lakh distributors (20,000 active though), hundreds of online distributors and banks that sell mutual funds through their large networks.
Clearly, the product per se, its past performance, target market, sales and distribution channels - all are in favour. However, still penetration of mutual funds is abysmally low. Even with the AUM of Rs.20 lakh crore, the penetration of mutual funds is hardly 2%.
To understand the reason for low penetration, firstly, we should admit that the MF industry is neither facing a problem of sales and distribution strength nor unattractive commission structure, as both these factors are quite conducive.
The industry first needs to understand that distribution strength plays an important role in only making the product available; however, beyond a point, the industry can achieve mass penetration once people start investing in mutual funds on their own.
The industry believes that they can increase penetration by leveraging its distribution strength. So far, we are yet to see the results.
In my view, the industry needs to change the perception of mutual funds to make it a mass financial product. And, this is where the gap is. Investors expect to get unbiased advisory services while dealing with their so called advisors. But when commissions drive business, it creates a gap between expectation and delivery. Thus, from consumer’s perspective, industry lacks the creation of a perceived value at a mass level. This perceived value gap is an ‘Advisory Gap’.
Filling this gap is utmost important, and for this, advisor needs to be segregated from agent. This way, financial advisor gets recognition as a professional whose advice is neither free nor driven by product commissions. When investor understands that his advisor does not represent any company and works for his best interest with the fiduciary responsibility, he starts perceiving the same advice with more involvement and seriousness.
Another reason that the industry claims for low penetration is the lack of financial knowledge. However, the original issue is not the knowledge, but the perception. There is famous quote in this regard by Leonardo Da Vinci, ‘All our knowledge has its origins in our perceptions’. Advisory, if segregated from distribution would fill this perception gap and this would lead to flow of knowledge simultaneously.
Hence, if penetration is what industry wants, it must welcome SEBI's investment advisory consultation paper where the regulator has given professional stature to investment advisors.
Instead of running away from the proposed change, the industry must understand the power of a perception for the product that an advisory approach can bring in.
If banks, large distributors take the initiative in this regards, it will create a huge ‘perceived value’ for the product and once this happens, there will be a shift in the flow of saving from traditional products to mutual funds.
Lastly, the fear that investors will not pay a fee for advice is just a myth. If investors will get value, they will pay fee. From buyers' perspective, paying a price for an offering is not just a cost related decision; it is more a value related decision. As Warren Buffett once said, ‘The price is what you pay and the value is what you get’. Therefore, the perceived value of a registered advisor is going to command its price.
With commission based distribution model, buyers will always be cautious and the perceived value gap will exist. This way, industry will grow only incrementally and penetration will continue to be a cause of concern.
If SEBI promotes investment advisory in a big way, there will be a competition in delivering the advisory and not just sales, and this will create a positive perception about the product at a mass level. And, in that scenario investors will be more confident and less cautious in their buying decisions, which is when the penetration will increase.
Kamal Manocha is the Chief Executive Officer of Bharosa Advisor, a SEBI registered investment advisory firm.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.