In this second part of the interview, Rajiv Bajaj, Vice Chairman and Managing Director, Bajaj Capital talks to Cafemutual about the challenges in fee-based model, his advice to budding financial advisors and more.
You have been in the investment advisory
business for more than 25 years now. How have you seen the industry evolve?
The most significant change that I have witnessed is that this market has transformed itself from a pull to a push market. Earlier, on times such closing dates of any popular bond issue or IPO, there used to be queues outside our office. I recall, on a few occasions, we even had to make police arrangements to control the crowd on the closing dates of IDBI Flexi bonds. We have almost come a full circle since that time, where only a handful of clients walk into our branches now because almost the entire business is done either at their home or office. The biggest reason for this transition is that the risk of investments was systematically transferred from the issuers to investors after the US 64 fiasco.
One of our prime objectives has always been to help people get “more than bank returns”. Initially, our target was to help people get 2% more than what a bank offers without compromising on the safety. However, with the changed scenario now and with an entirely different set of aspirations of the young Indians who want 3-4% more returns than a bank and are willing to take slightly more risk, we look for creating structures having 80-85 per cent debt component and 10-15% equity component in their portfolio. We even use products like capital protection funds which are designed for investors seeking protection of their capital invested. We are market leaders in this segment.
Also, earlier, people used to get drawn by slogans like 'Invest Rs. 2,500, and convert it into Rs. 1 lakh', or they used to get 10% assured pension by investing in LIC Jeevan Suraksha Pension Plan. These schemes were replaced by the current generation of open-ended mutual funds (both equity and debt) and ULIPs which come without any assured return. Also, an investor does not go hunting to buy these products, except for the short periods of time when perhaps the stock markets or interest rates are booming.
As a result of this, the financial planning approach actually became a necessity from a business model of choice. Unless we interact with clients to make them realize about their unaccomplished financial goals, they will not be convinced about investing for long term. This change in the business model also necessitated that investment advisors and distributors be remunerated higher to justify their efforts, which brought with it the ills of mis-selling - the most talked about topic in media with regard to our business.
No one has really cared to trace down the need for a higher remuneration to justify higher effort (return on time invested). The policy makers also took a knee-jerk action and started cutting down on the remuneration without adequately working on other important areas like raising professional standards. It was only in 2013 that there was a serious push for self-regulation of the industry. This is a good development, better late than never.
We urge the policymakers to understand the value proposition being offered by financial intermediaries in the country. We strongly believe that unless there is a proper hand-holding of investors, meaningful financial inclusion will not happen. It’s important for the members of financial intermediary community to have interactions and discussions in not only making investors aware about matters related to investments but also in understanding their goals, aspirations and risk-profile. Building up trust and relationship takes time and is the first-step towards financial inclusion. Policymakers should take steps to grow this community which is on the declining path.
How have the regulatory changes, especially the entry load ban affect your business?
In 2009, when the regulator announced the removal of entry load from mutual funds, we had to immediately re-structure our business model. We started concentrating on building up the AUM to increase our trail income. We also integrated other products into our portfolio, in order to make it economically viable for us. As a result, our business did not suffer a major setback.
Talking about paying fees for the advisory services, I would say that it is still a challenge in the Indian context. Nobody really wants to separately write a cheque, unless there is a dire need. Though people pay their doctors or lawyers for their services in times of need, but the proposition has not really been established for financial advisors yet.
As a distributor, one has to view the commission income (especially the trail income) as an annual fee and accordingly make efforts on continuous basis to justify it. We have to be impeccable in finding out what the client actually wants and what his goals are. And this is not a one-time but a tedious continuous long-drawn process. As a wealth manager, our primary aim is to follow the “do no harm” principle in all our discussions and therefore our advice is directed towards protecting the capital of the client. If we are able to deliver higher relative returns the clients sees value in it.
We ensure that the client is made aware of the risks involved. We do not solely talk about 'flavour of the season' products with our clients. Rather, we suggest investments based on the time-horizon of their goals. The idea is to help clients create, manage and review investment portfolios, based on the asset-allocation approach. If equity markets goes up, we never suggest putting all of their investment into equities, instead we help them shift and allocate between equity and debt as per their goals. Our recommendations are strictly on individual client's asset-allocation requirements.
There is a perception that ours is a hard-sell industry. The negative impression could be due to those who merely 'chase bank balance' thus bringing down the reputation of the industry. Unless client interest is kept uppermost, the question of trust doesn’t arise.
I am happy to share that our relationship with clients is time-tested and long-standing even running into third-generation family members. We are fully aware that establishing trust marks the beginning of any relationship. Therefore, we have also helped several families in transferring wealth to their legal heirs. At times, there are investment papers, documents of the deceased that go unnoticed by surviving members of families and such investments are brought to their notice by us. This permanently cements our relationship with the family.
I feel that purely fee-based services will be slow to take off in India. Since it is a very tedious task to connect with each investor, it may not be possible to offer fee-based services at a mass level to begin with. In my view, fee-based services will first get established in the high net-worth and mass affluent markets and then gradually move to the retail investors. Probably, platforms wherein the fee gets embedded in the offering, could work. However, writing a separate cheque is un-viable and is not a very scalable business proposition in the present environment.
What is your advice to budding financial advisors?
The financial services sector will see about 20-25% annualized growth from now on. That’s the organic growth, after factoring in mark-to-market gains, you may add another 15%. So, I believe, one can witness a growth of 30-35% in this industry.
The opportunities are there for the taking. It’s your creativity, hard work and perseverance that would determine your success. There cannot be a better time than now to ride on the growth curve of the economy and reap benefits in the long term. This is the time for the next generation to come and be a part of the industry movement in creating a positive image for our community. The efforts, dedication and the perseverance that you show in the initial three years of joining this industry, can positively shape your career for later part of your life.
Unleash your entrepreneurial spirit and see the positive impact that you bring, not only to your client’s wealth but also to your own well-being. Unless you take ownership for your job of creating wealth for your client, you will not succeed.
While the previous decade belonged to non-banking financial companies and other financial institutions, this decade is looking promising for the wealth management companies. I see a few wealth management firms getting themselves listed in this phase and creating wealth for themselves and their employees. Make sure you are a part of the success story, either growing your own platform or partnering with an existing fast growing platform.
This is the final and concluding part of the interview.
