'Robo-advisory could be run with significantly less costs'

In an email interview, Kunal Bajaj, founder of Clearfunds, a robo-advisory platform offering direct plans, shares his thoughts on the future of advisory landscape in India.
By Ravi Samalad |  16-02-17 | 
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About the Author
Ravi Samalad is Assistant Manager - Editoral for Morningstar.in.

What was the genesis of Clearfunds? Why did you decide to focus on selling direct plans?

Clearfunds was born from an idea and a principle: the idea that a technology-driven investment adviser could be run with significantly less costs; and the principle that we will only sell things that we really believe are good for our customers. Our focus on direct plans flows from this core principle - we will not sell or recommend regular mutual funds because they end up costing our customers a recurring, hidden commission, year after year, forever.

Most advisers will probably tell their customers that it does not matter which plan they invest in. After all, the adviser only earns a small annual commission of 1% for his services.

It doesn’t sound like a lot, but in real terms, it is. For instance, if a 35-year-old investor were to put Rs. 10 lakh in a 1% annual commission bearing regular plan of a mutual fund, which grows at 8% a year, his investment would be worth Rs. 76 lakh when he retires at 65. On the other hand, if he switched to a direct plan of the same mutual fund and cut out the 1% annual commission, his investment would grow to Rs. 1 crore over the same period. What would he end up losing as 1% commission each year to his adviser? A whopping Rs. 24 lakhs!

How has been your journey so far?

It has been exactly a year since we first started work on the Clearfunds idea. The journey of taking an idea and converting it into an actual, live product that customers use (and love) has been the most incredibly satisfying experience both on a professional and personal basis for all our founders (despite too many late nights and too much black coffee). I finally understand what Steve Jobs meant when he said Everything around you that you call life was made up by people that were no smarter than you, and you can change it, you can influence it, you can build your own things that other people can use.  Once you learn that, you will never be the same again.”

How are you reaching out to your target audience?

We use a combination of direct marketing via email and SMS and digital marketing via targeted advertising. And it helps that we have a phone number that customers can call into the understand the product.

Technology has its pros and cons. DIY investors can have a tendency to redeem at impulse, especially if there is market crash. Do you foresee investors redeeming in large numbers in the absence of a human adviser who could guide them? How do you plan to tackle such situation?

Of course, there is a risk. But just like a human adviser, we can build in processes where we guide and hand-hold customers through the user experience about the risk to their retirement pot from redeeming their investments during a market correction.

But the risk of a customer doing transactions on impulse is no different from the problem an offline adviser faces. After all, once the purchase is made, an investor is free to redeem his holdings by contacting the AMC directly and completely blind-siding the adviser.

Retail investors continue to invest through distributors. Only 8% of retail investors invest directly. How do you plan to popularize direct plans?

We think this change is coming about much sooner than people expect. Most investors don’t even know they’re paying recurring, hidden fees of up to 1% a year to their distributor. And when they do, they react angrily because they know they’ve been kept in the dark. No wonder horror stories abound of how investors are forced into expensive products by financial advisers who operate like used-car salesmen. We find that it is easy for us to convince these customers to switch to Clearfunds – where there’s more for them and less for their adviser.

Investing is no one-size-fits all approach. Would you explore tying up with traditional advisors or have your in-house advisors to deal with more complex goals like retirement, succession planning, cross border financial planning, etc. 

Traditional advisers will always argue that it’s only natural for human investors to rely on human advisers. After all, human advisers can hand-hold investors with many aspects of personal finance beyond their savings, such as tax-planning, insurance and personal wills.

But a glimpse at the near future – at self-driving cars in California; at automatic food courts in Singapore;  Alexa, Siri, and Messenger bots – shows us that people worldwide are embracing automated services at an unimaginable pace. So if we do decide to build any in-house expertise, it will be with the philosophy of embracing automation and bringing down costs for the customer – whether in retirement and succession planning or will writing or cross border investments. In fact, we are already exploring a partnership with a California-based fintech company to offer US market investing to Indian customers at the same price of Rs. 199 a transaction.

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