Client’s Well Wisher OR Client’s Wealth Wisher

I had promised to do a post on how to find out the right advisor (the most challenging part) and here I am doing it at a lightning fast speed. I need more of such 4 day holidays. Please Stars! Do align accordingly more often. The previous post on Mutual Fund Distribution was about me being a free messiah. Here I decided to do some role reversal and act like the devil’s advocate.

Warning: Many in the distribution fraternity who liked my earlier post may find themselves befuddled with this one. The good news is, that was also true and this is also true. The bad news is, earlier truth was easy on the palate and this one is going to be tad difficult to digest.

The asset breakup of Indian Mutual Funds shows a very interesting trend as per broad categories:

Category	Equity Assets	Fixed Income Assets
Retail	42%	3%
HNI	42%	26%
Institutions	16%	71%

In a 13 lac crore industry, the retail investor stands at a meagre 15% at 2 lac crores. Retail investors hold 170000 crores of equity assets but only 24000 crores of fixed income assets of the mutual funds. These are rough estimates. There must be something egregiously erroneous in our approach from the very beginning as to why the numbers look so despondent. With us, I mean AMCs and Distributors. Since the beginning, when regulations were also not stringent, not much has anyways been done to reach out to the real retail investor. To put it plainly, no one has ever bothered about them.

More than 90% of financial savings of an average Indian household are in Fixed Income Instruments like Bank FDs, NSC Certificates, PPF, Kisan Vikas Patra, Post Office Saving Schemes, etc. His investment into direct equities has only come down. But, when it comes to mutual funds, it is evidently clear that an average retail investor has only been sold more and more of equities with great disregard to asset allocation or his personal needs and preferences. Though it is also true, that such investors should only hold equities through mutual funds for several reasons (please google). Clearly, if he later has a bad experience in the funds, it leads to an investor lost eternally for the industry to other assets like Gold, Real Estate, Bank FDs and blah.

The elusive retail investor is like a star which shines bright, they are in abundance and everyone wants to reach them, but they are too far (read scattered everywhere). Also, they are so tiny that it is not worth the effort to approach (read not remunerative). We rather focus on the easy money. And continue to serve the well served.

In the race to gather AUM and climb the ranking charts, few AMCs in collaboration with select few in the distribution fraternity are guilty of indulging into unhealthy practices. Why bother with a slow tortoise race when there are many a hares eager to run fast and reach the finishing point using shortcuts.  

The Collective Distorted Motto: 

Show the rich, the well informed and the well served investors; even better

ways  of getting rich and extra informed to serve them the best

Like they say a few rotten apples, spoil the barrel. Similarly, few participants (be it the distributors or the AMC) give the entire Mutual Fund Industry a bad name. This post is not supposed to be a rant, but in a commercial/luxurious trips/five star meets driven distribution network, even those distributors who try to do genuine good work by wanting to learn, enhance their skill set and get trained while simultaneously educating their clients, will go unnoticed and remain discredited.

It has always mesmerized me as to why; Not always but most of the times, a new skeptical investor into mutual funds is not introduced through the fixed income route? Why don’t we let him have a positive experience of positive returns through fixed income funds and later graduate him to equity funds?

Clearly relatively poor revenue in those funds is the culprit. So much for investor protection (or brokerage protection)!

The average working class Indian does not know much. I say this out of experience. Doesn’t know the products, doesn’t know the markets, has faint idea of his / her goals. Most don’t know the importance of saving right though we definitely know how to save. We Indians are expert at it.

So then how can a true blue retail investor be sure whether the trusted distributor he is dealing with has his welfare in his heart and not the brokerage warfare in his mind, when he himself is clueless many a times about his own financial goals?

Instead of telling investors what to look for, I think they should know what to watch out for as signals that you need to RUN. Run really far and wide from cronies who will portray the role of an advisor in the garb of pushing the maximum revenue products.  Also, the ones in this profession should do a serious reflection and contemplate whether they are guilty of the same and are they willing to alter their client approach in the future. As a client, RUN when you see these:

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•  He promises you that he can deliver a magical CAGR of 18% to 20% on all your investments year after year. If he does, he is serious competition to Warren Buffett.
•  He mindlessly loves NFOs / IPOs / New launches. All of them. These actually give him a professional orgasm and he loves to sell you at par value, saying how cheap it is.
•  He easily recommends funds without spending time with you, trying to understand your investment horizons, investment psyche, risk appetite and risk profile. 
• He has never bothered to know your insecurities, goals, long term plans, desires and aspirations. He is just interested in knowing how much money you can spare at the end of the month, what salary hike you received this year and how can you top up that SIP.  In short, what you have with this person is a transactional relationship, while what you need to have is a transformational relationship. Starkly different. 
• He never bothers encouraging you to save or discouraging you from needless spending. He never counsels you on EMIs, credit card spends, etc. 
• Meeting often?? Hell, Who does that as long as the investments roll in and the brokerages are trailing. 
• He recommends only Equity fund, Direct Stocks (typically multi baggers) or ‘safe high accrual’ funds in Debt.  
• Psychometric test for the client!!! Ehhhh….what is that??? I am a psycho and also a metric pass. 
• Action, action and more action. Re-balancing, churning, booking profits, booking losses is always recommended. It then becomes quite easy to justify his ‘value’ to the gullible retail investor. 
• Every investment recommended is the best investment advice of the year. Also it cannot be postponed. It cannot wait. It has to be done NOW. Else, you will be too late as the golden goose of an investment which has to lay golden eggs will run away to some other planet.
• Shows you excel sheets of great past performance. Trust me this is the easiest and the dumbest way to recommend. Continuously chasing five star rated funds only make third grade distributors and investors. 
• Always agrees with you whenever you wish to invest, especially in equities. He always thinks it is the right time. As no time is wrong time to make higher commissions, right?
• Tax planning, Insurance, a holistic financial plan is something he only dreams of for you.

     In short, what I just mentioned is what financial advisors / planners are made of. But, in my opinion the consumer in our country is not yet prepared to dish out fees for such financial planning and thus it is the inherent duty of a distributor to double up as a financial advisor.

    

     Word of mouth really helps in identifying a good advisor. Also, if the correct thing to do is to not do anything at the moment, a good advisor will tell you the same. He is supposed to address your worries, concerns, calm your nerves when you see volatile markets. Mom! He / She is your Financial Mom. What clients need is a Saarthi, the Krishna – a Mentor who can guide them towards attaining financial independence.

How many in the distribution community can live up to such expectations? It is going to be a survival of the fittest.