It’s the Quarter End – a barrage of requests from bankers, investment advisors, distributors about new investments or topping up old ones. Deepak Shenoy and Shray Chandra speak about how financial advice has evolved.
Here’s the podcast: (See more episodes at The Capitalmind Podcast.)
1) How did we get here? What’s been the evolution of financial advice in India and where are we now?
From the world of bankers, to brokers to independent financial advisors to now, robo advisors: India’s seen a large move in this space.
We have growth from Product Pushers (where even the 65 year old was sold insurance) to Asset Allocators & Planners.
2) Who actually needs financial advice?
Basic Level of Advice:
- Anyone who either spends less than they earn (invest in say fixed deposits or mutual funds)
- Anyone who is way too deep in debt (advice on how to escape their debt situation)
Intermediate Level of Advice:
- You have saved some money and you have dependents say kids and parents
- My spouse and I will retire and we’d like funds to last during retirement
- You have reasonably well understood near term or long term liquidity needs (kids education)
- Need to plan because inflation (and overall salary growth) won’t negate the need for financial planning
- Deepak started his career at Rs 6,000 per month which is an irrelevant sum today because of inflation and India becoming richer. However, people in the initial years of their career earning Rs 30-50k per month today – they may not see 50x to 100x growth in incomes over their lifetime like say the previous generation did. Planning matters more.
Advanced Level of Planning
- You have excess money beyond needs but you don’t really know what the money can do
- You may be able to retire at 55 vs 60, you can stop saving for your kids when they are 14 instead of 18, can try different holidays or events
- If you’ve got this money from a sudden liquidity event like an exit from a startup, inheritance – you may not know your risk profile as yet and a financial advisor can help there.
- If you want to change careers, switch to a different paying job etc. – advice gives you another way to think about this
- Special requirements: Will, charity, ongoing charity, trust, angel investing and so on
3) What is an advisor’s role, what should the customer expect and what should the advisor be doing?
An advisor shouldn’t start with telling you what you should buy. We now have customized products for everything – minimizing taxes, paying more taxes, low liquidity, low or high risk. This doesn’t make for the best starting point.
An advisor should go one step higher and figure out what you need – basic needs, emergency needs, life goals, insurance levels. It may not be what you say you need. People often say they are high risk investors but they are only comfortable with the high returns part and they exit at the first sign of a loss.
Advisors can do an ongoing analysis to check if all the assumptions are still valid – does the customer still needs money for goal X, can we reduce the retirement age, save less and enjoy the money more today.
For wealthier customers, a single advisor may not be suitable either. There are several asset classes (stocks, bonds, real estate, commodities, art, private businesses) and they are structurally different. A family office (probably available to people with 50crore+) make sense for them. Maybe shared family offices in the future will be a solution for wealthier customers.
4) What’s wrong with the current state of financial advice?
Information Arbitrage: What’s obvious for people in finance isn’t obvious to people who don’t invest all the time.
Opaque about Fees: The more complex a product, the more likely the fees are too high.
People outright lie about returns and avoid talking about liquidity.
No Alignment of Incentives:
No retribution for false, incorrect or wrong advice.
5) From the Customer’s POV: how do you identify bad advice?
Words lie: Sure-shot/guaranteed – Too good to be true and start becoming wary
Do they disclose the costs of getting in and staying in the product/investment?
Fees, both implicit and explicit: What’s in it for the advisor and the product manufacturer?
How easily can you access the money, is there liquidity? How much does it cost to exit the investment? (selling gold for example often has a friction while selling)
The minute the product is too complicated, let it go.
6) What do you see changing with regard to financial advice?
Customers are fed up of aggressive sales practices and looking for simpler and more transparent options, these Simpler solutions will also find popularity among the wealthy too.
Someone will figure out a better fee way for customers to pay fees.
Reference: Invest like the Best with Patrick O’Shaughnessy interviewing Michael Kitces on the past, present and future of financial advice.
Inactivity will be a respected/acceptable option – your second meeting with the advisor shouldn’t always require you to change things.
Solutions need to be married with technology. Technology could tell you the actual risk profile vs. the stated risk profile, technology helps adapt your financial plan to new realities like say universities no longer costing as much.
Q7) What should our customers or listeners do with regard to financial advice or advisors?
Identify who you are in the ecosystem – do you want to be on top of this or do you want someone to do it for you.
Find a partner/financial advisors with what you need and who can give you a bill of financial health say once in 6 months or once a year. Calling someone once a year to ask how the market is looking isn’t really financial planning/advice.
Wealthy? Understand you will need multiple sources and not a single advisor.
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