In the second article in this series on distribution, Mr. Rajan Mehta, Executive Director, Benchmark AMC argues that distributors are better off in the long run with a customer-centric ‘farming’ than a transactional ‘hunter’ approach
Humans began their journey on this planet as nomadic hunter gatherers and they continued to exist in this state for more than a millennia. At the dawn of civilization, this nomadic activity metamorphosised to agriculture as more people settled down and turned to farming.
The Hunter v/s Farmers classification is also frequently used to describe other professions such as sales and selling.
If we use the ‘hunter’ analogy to depict the sales function, a hunter typically sells his products and then quickly moves on the next transaction. He has little interest in customer need or requirement and is only interested in closing sales. The Hunter has to locate a new prey frequently. Even the repeat customer is akin to a fresh prey. As the customer relationship is transactional, it cannot be long-term. On the other hand, the farmer type sales person is necessarily more customer centric by offering suitable products. Hunting cannot be stable as each day is a new day while farming offers security and stability as the same land is tilled year after year.
Investment advisory in India, so far, has resembled hunting. Front ended compensation especially for product like ULIPs has created many hunters. They spread their net very wide (the respectable word used is market penetration). They change their strategies quickly as they are market savvy. They quickly move to a new hunting instrument if the old one gets blunted. They will thrive as long as investors (prey) are greedy and keep demanding new products.
The hunting model is conflict ridden and hence not conducive for investors. It is unhealthy for an economy as it turns investors to gamblers-losers in a casino like activity and keeps a large universe of serious investors out of capital markets. Trading prevents investors from capturing market rate of returns and bad experiences results in apathy towards equities as an asset class.
Hunting model is not desirable for investment advisors either, as it increases cost of client acquisition. The hunting environment faces challenges in terms of growth in yearly revenues - the direct fall out is mis-selling, disgruntled clients and possible law suits.
To product providers, hunting environment gives false notion of growth due to higher gross sales, but in reality, there is negative or marginally positive net sales. As a corollary, a year of NIL entry load has seen mutual fund houses increasing their profits on more or less flat growth in AUMs.
There is a strong case for investment advisory industry to progress from hunting to farming - as the latter business model will be more growth oriented due to alignment of interests with the client.
How may it happen?
To begin with, large organized players like banks or large brokers need to seriously rethink their strategy as they are overtly revenue focused. For wealth management business, entire reward system is skewed towards immediate revenues. Shareholders of such entities should ensure that wealth management activities of their companies do not end with killing the golden goose. Hunting could boost short-term revenues / share price but will damage long term interest. Additionally the reward system of senior executives is also a culprit, as it makes them focused on yearly bonuses rather than sustainable growth of the business. Banking by nature resembles farming business as it nurtures depositors and borrowers. Surprisingly, this DNA does not work when it comes to investment advice as banks turn into hunters.
Independent Financial Advisors are more likely to convert to farming as it aligns with their long term economic interest. The sooner they accept this reality, the faster will be their transformation.
Investment advice too shall witness a paradigm shift from stock / manager selection to asset class investing in line with global trends. The product teams of large advisory houses will eventually have to change their roles and instead of sourcing products, negotiating commissions and creating flavor of the month lists, it will become obligatory to generate investment solutions. This could either be for specified groups of clients or customized solutions for larger clients.
Wrap accounts also need to be introduced. They can hold financial assets and charges are predominantly in form of AUM based fees. Since there are no transaction based charges, there is no motivation for an advisor to unnecessarily transact. Wrap accounts have seen rapid growth in various markets and have proven themselves as backbone for investment advisory business.
It is necessary that our investment advisory profession goes through this transition just like humans did for their survival and prosperity thousands of years ago. Accepting change is the best hedge from turning into dinosaurs and getting fossilized.
