In the first in this series of articles on distribution, Mr. Rajan Mehta, Executive Director, Benchmark AMC points to the long-term potential of the investment advisory business in India
The last 20 months has been an eventful period for the investment advisory business in India. Various investor centric changes have created lots of anxiety amongst investment advisors, financial product manufacturers and distributors.
During interaction with investment advisors, one observes a range of feelings - from despondency to guarded optimism. Very few of them are able to visualize the opportunities these changes bring to their business. It is essential for them to harness these changes and use them to drive profitable and sustainable growth. Ignoring the changes and refusal to change with changing times may cost them dearly in terms of lost opportunity.
This series of articles is an attempt to act as catalyst and provide the inputs which might help investment advisors to position their business for the future.
The Big Picture
Investment advisory business is an extremely critical part of any economy which has adopted a capitalist system or has a reasonably free capital market. Investment advisors fulfil two major requirements which help the growth of any nation. The first role is to channelize household savings into productive pools of capital which can help nation building. The other function is to ensure that the individuals have enough money to take care of themselves during their working life and retirement. This is an extremely critical function.
The world is moving from certainty to uncertainty. For example, in India most of the Government employees used to get pension along with inflation adjustment. Such pension schemes are also called defined benefit schemes. This has been discontinued now for new employees as it creates a huge burden on exchequer in future. The new pension system is called defined contribution system where fixed amount is invested and the participant bears all the risks like of investment returns, inflations and longevity.
But if the government fails to create regulatory, institutional and industrial framework which allows individual savers to mitigate the risks assumed by them, the fiscal prudence could become a social blunder in times to come.
Even though many of the individuals might generate adequate savings during their lifetime, if not advised properly, they might run into financial risk and if this happens on larger scale, it will create bigger social issues and stunt economic growth.
In this context the investment advisory business has an extremely crucial role to play in coming years in India. The reforms initiated by SEBI are a good beginning but the journey has just begun.
I suspect that many of the investment advisors themselves may not realize how onerous their responsibilities are. It is very critical to attract large pool of talent with right attitude and skill sets to the profession. If practiced in right manner, this profession offers not only rewarding career but also satisfaction in helping clients meet their financial goals and preventing them to be social burden on others including exchequer.
Fundamental drivers for this profession are compelling. Following macro trends are likely to create unprecedented growth for the Indian financial services industry in general and investment advisory profession in particular in the years to come.
Demographic dividend: India is a country of young people. There will be a big surge in the coming years in the number of people who will start earning and saving. Most of them will be potential clients for investment advisors.
Economic growth: Due to the current demographic situation and other factors, India is expected to witness one of the fastest growths in the world in the coming decade. This will also result in handsome growth in per capita income and higher per capita income and thus higher savings.
Higher savings rate: India remains one of the countries with a high savings rate. Due to the lack of social security, old age pension and free medical care, people will be required to save more and more for the rainy day. This will push people to save more.
Higher inclusion due to structural changes: Introduction of UID will facilitate more people to have bank accounts and investment accounts. Also introduction of GST and liberal DTC will improve tax compliance which will lead to more money in official channels.
These factors together have multiplier effect, which will provide a once-in-lifetime opportunity for unprecedented growth. Investment Advisors just may be required to position themselves well by providing simple, consistent, cost effective investor centric solutions and the tailwind of the surge of number of investors and asset per investor will do the rest. Product centric, upfront profit oriented convoluted models may not last the life cycle of this surge.
