The Future of Investment Advisers

Mint 10/2/11

Investment advisers channelize household savings into a productive pool of capital for nation building

The last 18 months have been an eventful period for the investment advisory business in India. Various investor-centric changes created anxiety among investment advisers, financial product providers and distributors.

While interacting with various investment advisers, individual or corporate, one can observe feelings ranging from despondency to guarded optimism. A handful of them are able to visualize the actual potential of these changes. For them, it is essential to harness these changes and use them to drive profits and attain sustainable growth. Ignoring these changes and not adapting them may cost dearly in terms of lost opportunity.

This series of articles is an attempt to act as a catalyst and provide inputs that might help investment advisers position their business better for the future.

The big picture

The investment advisory business is a critical part of any economy that has adopted a capitalist system or has a reasonably free capital market. Investment advisers play two crucial roles required for a nation’s growth. The first is to channelize household savings into a productive pool of capital for nation building. The other function is to ensure that individuals have enough money to take care of themselves during their working life and after retirement. The second role is critical assuming the changes in the nature of jobs. Earlier, most of the government employees used to get pension along with inflation adjustment. Such pension schemes were called defined benefit type schemes. This has been discontinued in the past few years for new employees as it creates a huge burden on the exchequer. The new pension system follows the defined contribution system, where a fixed amount is invested and the participants bear risks such as investment returns, inflation and longevity, entirely by themselves. Such transitions are taking place all over the world. Also, governments in the developed world, which promises social security and pension to their citizens, are under severe financial stress and compelled to announce various austerity measures. It is likely to result in increased social unrest. We have already seen a nationwide strike in France against increase in the retirement age and demonstrations against hike in tuition fees in the UK.

In India we do not have such an elaborate social security system, and so we may not face many fiscal issues due to these changes. But if the government fails to create a regulatory, institutional and industrial framework that 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 individuals might generate adequate savings during their lifetime, if not advised properly they might run into financial risk. And if this happens on a large scale, it will create social issues and stunt economic growth.

In this context the investment advisory business has an extremely crucial role to play in the coming years for India. The reforms initiated by the Securities and Exchange Board of India are a good beginning but the journey has just begun.

I suspect many investment advisers 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 practised in the right manner, this profession offers not only a rewarding career but also the satisfaction of helping clients meet financial goals and preventing them from becoming a burden on others, including the exchequer.

Fundamental drivers for this profession are compelling. The following macro trends are likely to create unprecedented growth for the Indian financial services industry in general and the investment advisory profession in particular.

Demographic dividend: This is a very well known and most quoted argument. India is a country of young people. There will be a big surge in the number of people who will start earning and saving. Most of them will be potential clients for investment advisers.

Economic growth: Due to the current demographic situation and other factors, India is expected to witness one of the fastest growth in the world in the coming decade. This will also result in handsome growth in per capita income, and so there will be more money available to save.

Higher savings rate: India remains one of the countries with high savings rate. Due to lack of social security, old age pension and free medical care, people will be required to save more and more for expected and unexpected events. This will push people to have a higher savings rate.

Higher inclusion due to structural changes: The introduction of the unique identification project will allow more people to have bank accounts and investment accounts. Also, introduction of goods and services tax and the liberal direct taxes code will improve tax compliance, which will leave more money with official channels.

These factors together will have a multiplier effect, which will provide a once-in-a-lifetime opportunity for unprecedented growth. Investment advisers may be required to position themselves well by providing simple, consistent, cost-effective investor-centric solutions. The surge in the 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 expected surge.

Rajan Mehta is executive director, Benchmark Asset Management Co. Pvt. Ltd.


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