When I was in middle school in the mid eighties, I remember that, for many months the headline dominating the newspaper front pages, related to the subject of bank computerization. The banking industry was crippled by a series of strikes by the trade unions opposed to computerization in the mid eighties. The unions feared that, the computerization / automation will make people redundant and cause unemployment. Though I was quite young and did not understand business matters, I was a news junkie even in my early teens, and so I asked my father what his opinion was on this topic. My father said that, fear is a natural instinct, coded in our genes through millennia of evolution and therefore, one should not be ashamed of their fears. At the same time, he said, progress is also an intrinsic element of human evolution. Technological progress has been the most important progress in our evolution and therefore it is inevitable, no matter how we think about it.
My father told me back in the eighties that, one should never try to fight technology; instead, one should try to learn technology, invest in it and use it for their own benefit. My father’s words to me in my teenage years regarding technology seemed almost prophetic, 15 – 20 years later since I saw that, companies which embraced technology and made use of it raced ahead of their competitors who did not. The success stories of private sector banks in India were great examples of the benefits of technology adoption, while the public sector banks fell behind. My father was also a big believer in Darwinian evolutionary theories, especially in the theory of “Survival of the Fittest”. This theory has found its best expression in this age of capitalism, especially technology driven capitalism. The success of Google and failure of other engines / applications / platforms further reinforces our belief in the Survival of the Fittest theory.
It is not just the banking industry where technology adoption has been subject of debate and concern. Further, it is not just automation related technology that has been a cause of concern; the advent of e-commerce and online distribution channels has been a cause of concern for many stakeholders in various sub-sectors of the financial services industry, e.g. mutual funds, life insurance etc.
In this blog post, we will restrict ourselves to the mutual fund industry only. Over the last few years, a number of developments have caused concerns amongst the intermediaries of this industry, the mutual funds distributors, especially Independent Financial Advisors (IFA).
- The introduction of direct investing in mutual funds has been a cause of concern for IFAs, even though the percentage of direct to overall mutual fund mobilization is still quite low
- The advent of online mutual fund distribution platforms has been another cause of concern to the IFAs, who relied on the personal (human) touch with the customer
- Robo-advisory, or automated advisory based on technological tools, is raising doubts in minds of many advisors, if they are, at all relevant in these times
- Reduction in upfront commission and some other regulatory developments, already in force and others rumoured to be in the pipeline, are causing incremental concerns amongst IFAs
- Fee based advisory has not yet picked up in India, as much as the fee based financial advisors would have liked
Having spent a considerable amount of my career in the United States, I can foresee these developments and the associated concerns, intensifying even further here in India in the future, especially in terms of proliferation of online distribution channels, if we were to follow the US in terms of development of the mutual fund market. Further, the Exchange Traded Funds (ETF) market, relative to the mutual fund market, is underdeveloped to a vast extent, here in India. As the ETF market develops further and ETFs become more popular, the concerns of the IFA’s will rise even more, since customers will expect lower costs. Moreover, an investor with a demat account can do online ETF transactions, through his or her trading account. Robo-advisory is still at a very nascent stage here in India, compared to the United States. But we will see an incremental shift towards online, once Robo-advisory becomes more popular in India. Like it or not like it, technology is here to stay and grow even further. Therefore, you should either adopt technology or you run the risk of getting obsolete.
Let me give you two contrasting views. One view is from a financial advisor perspective and another view is that from an investor perspective. Firstly, let me share with you the view of the financial advisor. I have known this advisor for some time. In fact, I do some of my own mutual fund investments through this person. He is a very good advisor, but one thing that I noticed over the past many years was that, he spent 60 – 70% of his time in his office, mostly doing paperwork, like filling out applications, checking forms, resolving customer service issues with Fund Houses / Asset Management Companies, downloading account statement for his customers, preparing monthly account statements and capital gains statements for his customers etc. In other words, he spent most of his time in back-office and customer service issues. Is this how the financial advisor should be spending most of his or her time? In fact, I asked him if he is happy what he is doing. He told me that, mutual fund investment is still mostly a manual process. Therefore, he has no other option but to do what he is doing right now. He further said that, his customers are happy with him and therefore, he is quite satisfied doing what he is doing currently. He might be satisfied with his work, but the question in my mind is, if this advisor spent 60 – 70% of his time on back-office and customer service related work then, how much is the time that he can devote to new customer acquisition? In other words, is he resigned to remaining small forever? I asked him, cannot he automate some of the work, he is doing manually? After all, there are a quite a few online transaction platforms, where his customers can transact online, and yet he can get commissions, because the customers can mention his AMFI Registration Number (ARN) during their online transaction (sometimes the ARN of the investor’s financial advisor is the default option for online transactions). He told me that, the customers can also choose direct in the online transaction and therefore, why would he lose revenues by recommending such an option to customers. My view on this matter is that, if a customer chooses to go direct, he or she will go direct. Information and access is free in today’s information age. Many investors, especially younger ones, are very technology savvy. Customer behaviour is also changing as far as financial services transactions are concerned. Many customers prefer self service or do it yourself (DIY) in financial services transactions. Self service can not only improve customer satisfaction, but it also improves the advisor’s productivity. Through online self service, the advisor can save a lot of time, otherwise spent on filling out application forms, checking it and submitting it to the registrars or AMCs. Many financial advisors are themselves already using online tools provided by the registrars and AMCs to improve their productivity, but if advisors can get their customer to do their own online transactions, then they can improve their productivity even further.
Let me come to the second view now, the customer view. A cousin of mine in New Delhi has had large balances in his savings bank account for a long time now. I asked him why he didn’t invest a portion of his savings bank balances in a liquid fund, since liquid funds give much higher returns than savings bank interest. He told me that, he knew all about liquid funds, but he said the process of deploying his surplus cash balances in liquid fund and withdrawing it when necessary is cumbersome because, he has to fill in forms for each deposit and then again fill out forms when he wants to withdraw. Since, my cousin is always quite busy with his work most of the time he relies on the services of a financial advisor to execute his mutual fund transactions. Since his short term funds availability and requirements are quite dynamic, he cannot rely on a financial advisor’s availability to deploy or withdraw his short term surplus funds, on an as and when basis. As a result, he kept a larger than required balance in his savings bank account and in turn was losing out on returns. I told him that, there were multiple options whereby he could invest and redeem from liquid funds with a few keystrokes on his computer through online mutual fund transactions. Now he has been regularly using the online facility for the last two to three years, and is quite happy with both the returns and the convenience. However, he wondered to me, why his financial advisor never told him about the online facility. He told me that, he was ready to lose a few basis points of returns by investing in regular plan, instead of a direct plan, if his financial advisor gave him an online platform to transact, since at the end of the day, he is expected to get higher returns by investing in liquid funds in comparison to savings bank account. The fear of online or direct, is in my opinion, preventing financial advisors from getting a bigger share of the wallet of the average household savings. This fear is unwarranted.
Online is the way of the future. Look at the growth of online shopping in India. It is simply phenomenal. 38 million people shopped online in 2015. Online shopping is projected to grow at CAGR of 63% to reach over
र 50,000 crores in 2016. As per a recent newspaper report, the CEO of Amazon India has been inducted into the global senior-most leadership team of Amazon, the biggest online shopping and e-commerce company in the world. The Amazon organizational development, speaks about the potential of India as an E-commerce market. A recent survey by American Express and AC Nielson revealed some startling statistics. 98% of households with internet connection in India shop online. 95% of households with internet connections use online banking. Retail financial service is one sector where online penetration has been the maximum. It is not just limited to online banking. Online share trading, online life insurance, online automobile insurance and online health insurance are all growing very rapidly. The demographics of our country suggest that, we can expect even faster growth of online commerce in the future. Though internet penetration in our country is growing rapidly making India the third largest country in the world in terms of internet users after China and the United States (India may have already overtaken US at this point of time) the overall internet penetration in terms of our population is still only about 35%. The favourable demographics of our country and the proliferation of 4G enabled smart-phones imply that the future online potential is enormous. These trends suggest that, online mutual fund transactions will also grow at a rapid pace in the future. The online trend undoubtedly poses threats to the traditional IFA model, but also provides opportunities to IFAs who are willing to adopt technology and turn it into a business advantage for themselves.
Conclusion (of this part)
The benefit of technology adoption by IFAs is five-fold:-
- Response to the shift in customer behaviour paradigm and access to web based information resources.
- Improve advisor productivity, through use of technological tools, both for transactions and customer service
- Improve customer relationship management, both through changing customer behaviour and use of technology for customer service.
- Provide business development bandwidth, by moving from service to an advice based paradigm
- Provide new channels of new customer acquisition, through the use of social media and variety of other technology channels.
We will discuss how Financial Advisors can leverage technology to improve productivity and scale up their businesses, in our next blog post. Stay tuned for more.....