Category Archives: Intermediaries Corner

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.


Good Financial Sales Person

Mint, 16/11/2010

What makes a good financial services salesperson?

I have identified some qualities that go into making of good salespersons–actually, these qualities distinguish the good ones regardless of what product they are selling

Good sales personnel are difficult to find generally and more specifically in the area of financial products. Salespersons are, typically, a much-maligned lot. We are told that all that they care for is their next sale and the resulting incentives and bonuses. As with all generalizations, this is definitely not true. One always hears that all Indians are experts in elections and cricket. After having sold financial products for a long time, I can safely add a third, investing and stock markets. If an an investor buys a well-performing product, he attributes it to having done his homework, else it smacks of mis-selling that the glib salesperson palmed off on the unsuspecting customer.

I have identified some qualities that go into making of good salespersons—actually, these qualities distinguish the good ones regardless of what product they are selling, wholesale or retail, big-ticket or small-ticket.

Product/market knowledge: Some are good on micro aspects, while others at giving the overall macro picture on the economy and markets. Either way, they make the customer feel comfortable so that he makes the decision.

Speaking the client’s language: You may have the best sales pitch, but it would matter little if the customer is used to receiving and processing information in a particular way. Good sales personnel understand this and use it so that the client does not feel that he is being talked up or down.

Understanding the client’s pulse: Good sales personnel know when a client is not going to make a decision and instinctively stop pushing.

Holistic view of the client’s portfolio: Whether they get the deal or not, they know the decisions that clients are making at that point of time. Thus, they are able to pitch in a product according to its position in the overall portfolio. Sometimes this could also mean that a salesperson does not push his product, but gives a view on something that the client is considering.

Knowing the difference between perseverance and pestering: Knowing when to step on the accelerator and when to stop.

Market intelligence: Having information about what is happening in the market and sharing it with the customer makes a salesperson seem more intelligent that he actually is. Plus, market information helps a salesperson ferret out leads and keep creating new pipelines.

Networking and the ability to remain connected: Networking in India sometimes has a negative perception, but we all know its importance and benefits. Whether it is remembering birthdays or anniversaries of clients or remaining connected with other market participants, this is an important ability.

Following a process: There are the methodical ones who maintain detailed records, some others do it involuntarily. Leaders of sales teams should have the ability to recognize what makes their different team members tick and allow for individual styles—whether you score like Sehwag or Dravid, what finally matters is the total runs.

Sense of humour: It is essential to see the lighter side of things and even laugh at oneself when the situation demands so. This also helps sales personnel to handle failure.

Desire to win: If I had to pick up one quality over all others, it would be this. Good salespersons want to bag deals and meet more customers because ultimately they want to win. Monetary incentives are incidental. This is beautifully captured in the movie Rocket Singh–Salesman of the Year. I once had a salesperson who despite all the training sessions and coaching struggled to explain technical product details. Yet, whenever I had any trouble in achieving targets, I would turn to him and he would always deliver. He simply had an overpowering desire to win.

David Mayer and Herbert Greenberg, in their 1964 Harvard Business Review, talk about a positive ego drive and need to conquer that good salespersons tend to have. They stress on the need to have a robust selection process of good sales personnel, which must eliminate obvious biases such as equating interest with aptitude and emphasizing on conformity rather than creativity. Further, they add that experience may also not be as important as it seems compared with the possession of two central characteristics—empathy and ego drive. Selling is a tough job and salespersons need all the support that they can get from their companies. One has to remember, that in a company nothing ever starts till someone sells something.

How banker tapped into investors greed

Times of India, Chennai


Gurgaon: Shiv Raj Puri, 32, the man who cleaned out nearly Rs 250 crore from the Gurgaon branch of Citibank, is not someone you’d associate with fraud or greed. He was soft spoken and the car he drove belonged to his father, Raghu Raj Puri.

According to his neighbours at the upscale Hamilton Court, Puri was a modest man, who pretty much kept to himself. Though Puri was married, he often stayed with his parents. Says M M Bhalla, former president of Hamilton Court Residents Welfare Association, “Shiv Raj’s parents have been staying here for the past several years. We know them as friendly residents. I’ve met Shiv Raj only once. He was modest and came across as a god-fearing guy.”

God-fearing perhaps, but not quite law abiding. And smart. Says an investor, who was charmed out of his pocket to the tune of Rs 20 crore, “This tall, suave banker met me several times, and I was impressed by his soft talk.”

What Puri was talking about was miracles, the essence of which was greed. Puri said he would give 18% return on the money he received. To support his promises, he flashed a forged document, purportedly by Sebi, that empowered the DLF-II branch where he worked to float special schemes. His wealthy clients saw in Puri a short cut to even more riches. According to the police, over 20 high net worth investors allowed themselves to be lured into his trap.

A major problem with greed is that it prevents people from using their intelligence fully. And Puri soft-talked and hard-tapped his way into that vice with a vengeance. In the last few years, Puri opened 78 accounts in his name and in the names of his grand parents, Premnath Puri and Sheela Premnath Puri, and in the name of his mother, Deeksha Puri. All the three are coaccused along with Puri.

The accounts are with different financial institutions, including banks and brokerage houses spread across Gurgaon, Delhi and Kolkata. Religare, Bonanza and India Infoline figure in the list. The banks include SBI, HDFC, Standard Chartered, PNB, Axis and ABN-Amro.

According to police commissioner S S Deswal, notices have been issued to the banks to seize all the accounts. “We have formed five special teams to investigate the case,” Deswal said.

Hero Group staff among clients?    
Corporate which have invested in Citibank’s Gurgaon branch through manager Shiv Raj Puri include the Hero Group, sources said. A police officer supervising the multi-crore rupee fraud said most of the corporates which invested the amount with Puri belonged to the Hero Group. Naveen Munjal of Hero Exports alone had given around 50 crore to Puri for further investment, the officer said. Neither Munjal nor the group spokesperson could be contacted. AGENCIES

Brokers to now pay more tax

Business Standard 16/11/10

Turnover charges, regulator fee and demat charges to come under the service tax net.

Stock brokers will now have to pay more service tax. The Central Board of Excise & Customs (CBEC) has clarified that turnover charges, exchange transaction charges, dematerialisation charges and regulator fees recovered by brokers from clients will be added to the brokerage amount while calculating the tax. The stamp duty and securities transaction tax would be kept out of the taxable amount, it said.

Most brokers collect service tax only on brokerage charges and not on many statutory levies like the Securities and Exchange Board of India (Sebi) fees or stock exchange transaction charges, considering that these are levies required to be paid to remain in business. Earlier this year, in Gujarat, the service tax department told brokers to pay service tax on the charges mentioned above. The CBEC circular is a clarification and, hence, silent on the effective date. Service tax departments can demand arrears for the past five years.

Shailesh Sheth, a service tax expert, said: “Inclusion of statutory charges for calculation of service tax is debatable and, in any case, should not be with retrospective effect.” He cited several tribunal judgements that transaction charges, handling charges, terminal charges, etc, could not be included in the taxable value for determining service tax.

New demand notices
After the circular, all state service tax departments are expected to issue demand notices to stock brokers. Last year, the National Stock Exchange and the Bombay Stock Exchange collected Rs 1,000 crore transaction charges from brokers, which means an additional Rs 100 crore service tax from this account alone. If added to other charges on which brokers are not collecting service tax, the figure could be much higher. Only a handful of large brokerage houses collect service tax on all other charges. If the department asks for the additional tax, brokers will have to pay, irrespective of whether the tax was collected from the clients or not.

Since the issue became controversial after differences of opinion within the department in the western zone, the matter was referred to CBEC for clarification. In September, CBEC issued an internal circular, which was made public a few days ago, saying only the stamp duty and securities transaction tax were the liability of the buyer/seller of securities and the broker pays these while acting purely as an agent (collecting such charges from clients on behalf of the revenue department). So, these are not included in the service tax amount.

The board has now ruled that the gross amount received as consideration for provision of service should be considered. It shall include expenditure or costs incurred by the service provider in the course of providing the service, even if the various costs are separately indicated in the invoice or bill issued by the service provider to his client.

Our Comment: The stance taken by Excise Dept. will not just affect the Brokers but in turn will hit the Customers also as the brokerage charged might move up due to the extra burden put on the brokers. VRIDHI

New Ulip norms may throw 1.2 million agents out of work

Mint 3/9/10 Anirudh Laskar & N. Sundaresha Subramanian

Reduction in charges to benefit policyholders, but will bring down agent commissions from 15-17% to 7-9%

Nearly three-fourths of the 1.6 million agents working for private life insurers are set to go out of business, as insurers are taking steps to cut costs in the wake of a dramatic reduction in charges of unit-linked insurance policies, or Ulips, by the insurance regulator. The new norms, which may push 1.2 million agents out of work, took effect from 1 September.

Ulips, a hybrid product that combines insurance and equity investment, account for at least 80% of new business premiums for life insurers.

The size of the agency channel, which sells policies of 23 life insurers, has grown from 900,000 to about three million in a decade. Until recently, agents were aggressively pushing sales of Ulips, earning commissions of up to 40%.

Life Insurance Corp. of India, or LIC, the state-run insurance behemoth, alone manages at least 1.3 million agents. There are about 310 million policies in force, including traditional life insurance policies.

The insurance regulator has capped various charges including surrender charges. Till 31 August, companies were able to levy up to 100% as surrender charges from a customer if a policy was discontinued.

The regulator has also ordered insurers to offer a minimum guaranteed return of 4.5% on the fund value in linked pension plans. Earlier, there was no such norm and the value of the funds invested entirely depended on the yield of the instruments where the premium was allocated.

The new norms will benefit policyholders but will bring down average agent commissions in Ulips from 15-17% to 7-9%.

Though the new rules will benefit policyholders, reduce first-year agent commissions and help curb rampant mis-selling, insurance firms will be required to underwrite more losses, infuse more capital and cut costs to sustain Ulip sales.

“With the change in distribution norms, 75% of the agents will earn less than Rs10,000 a month. They will hardly bring any meaningful business to us. They are most likely to either quit on their own or we will ask them to leave,” said the chief executive of a large private sector life insurer who did not want to be identified. Currently, such agents earn nearly Rs20,000 a month.

S.B. Mathur, secretary general, Life Insurance Council, the representative body of Indian life insurers, went one step ahead: “About 75% of the agents are not productive. They just sell one or two policies and go away. What is the use of having them?”

LIC may not need to resort to cost-cutting measures due to its highly profitable business, but private sector insurers are planning drastic cost-cutting measures to sustain their businesses in the new regime. Cutting the agency channel is only one of several cost-cutting measures. The firms also plan to cross-sell products through branches of associate companies instead of opening new branches, cut commission of agents retained, and redesign new products with variable premium.

The companies are also focusing on alternative distribution channels such as subancassurance, where the expenses are lower. According to industry estimates, the cost of sales through bank branches or bancassurance can be as low as 20% of the value of the policies sold.

Though a bulk of the sales for some private players comes from bancassurance, overall, nearly 80% of policy sales in the life industry comes from agency channels.

LIC recorded a surplus of Rs23,500 crore in fiscal 2009-10 but most private life insurers continue to be in the red.

According to a recent study of consultancy firm McKinsey, existing distribution channels are almost entirely focused on Ulips. Nearly 85% of new business premium comes from sales of Ulips but the cost of sales through agency channels is very high—between 50% and 100%.

The study said the cost should be brought down to 25-30%. It also revealed that nearly 60% of the agents work part-time.

To save costs, private players are also focusing on training facilities to improve agents’ productivity. Some bank-owned life insurers are planning to sell insurance policies through the branches of their mutual fund subsidiaries.

LIC is setting up a separate wing for training agents. “Once this happens, agents can be trained on focused marketing strategies, where they will work on a select seven-eight products at a given time rather than going to the customer with 50 different products,” said Nilesh Sathe, executive director-marketing, at LIC.

N.C. Upase, a member of the chairman’s club of agents, LIC, said private sector agents are the worst affected. “Earlier, they used to be earning 25-40% commission. Now they won’t get more than 7-8%. This means their monthly income would come down by 60-70%.”

The chairman’s club of LIC is an exclusive group of agents who sell policies worth more than Rs1 crore in a year and have at least 550 life insurance policies in force for three consecutive years.

Upase said LIC agents may not face much trouble since they were earning much less, about 7.5%. “There are no major changes in LIC policies, except that the allocation charges are now distributed over five years. Agents would continue to get same commission,” he added.

Consultants are convinced agency sizes have to be trimmed. “The insurance industry cannot continue with the current costs. It needs to build a focused agency force. Companies must bring down the number by 30-50% at least, depending on their individual cost structures,” said Joydeep Sengupta, managing partner, McKinsey and Co. Singapore Ltd. Though the life insurance industry has grown to its current levels on the back of agency channels, this distribution channel is the most expensive of all other channels.

“Due to higher-than-expected expenses the companies have failed to attain a breakeven so far. The persistency ratio too is as low as 10% in some cases. This has to be improved,” J. Hari Narayan, chairman, Insurance Regulatory and Development Authority, or Irda, said at a conference in Mumbai on Wednesday.

The regulator has so far cleared 51 of 68 new Ulips filed by insurers. There were 230 Ulips in the market till August.

India’s life insurance industry has grown some eightfold in the past decade, collecting a total premium income of Rs2.61 trillion in 2009-10, or which nearly Rs1.1 trillion came from Ulips. At least 310 million life policies are in force now.