How RIAs and MFDs can enable financial inclusion

George Mitra, CEO and Co-founder, Fintso, on why advisers and mutual fund distributors need to adopt technology.
By Morningstar |  17-12-20 | 

While all of us get momentarily inspired by stories on making money from the markets – a la “The Wolf of Wall Street”, the truth is that the majority of us lack the knowledge to make a fortune out of the markets. Yet, all of us have financial goals, which we work hard towards. The art of financial planning – which makes our savings work just as hard as we do, is something that eludes us.

Over the last few years, a collective push from the government, financial institutions, and regulators have improved the state of financial literacy in India to a great extent. This was focused on two aspects – the first being in creating an awareness of the need to plan. The second is the importance of making the right investment – not getting carried away with the promise of high returns from ponzi schemes. The second, unfortunately, most often affects the segment which can least afford to.

Traditionally, these retail investors (who are much more in numbers as compared to HNIs and UNIs) may still not be equipped to prepare their financial strategy by themselves. They do not have enough understanding about the available financial products, how to pick or reject one, and in what proportion.

Therefore, their financial investment would often fail to meet the goals (if there was one). In fact, just the last month, at an NSE event to commence the World Investor Week, G.P. Garg, Executive Director, Securities and Exchange Board of India, said, “In a country like India we have close to 80% literacy, but when it comes to financial literacy we are not that lucky. Last year, National Centre for Financial Education did a survey which says that only 27% of Indians are financially literate. It means that we have a long distance to travel and that puts a lot of responsibility on all the institutions including exchanges and Sebi that how best we take the message of financial literacy across the country.”

As per the data as on September 2020 from RBI, fixed deposits and savings accounts, metros and urban locations account for 70% of the $ 1.7 trillion. Compare this to the fact that 90% of the population is in Tier 2 and beyond. Even in mutual funds, as per The Association of Mutual Funds in India, or AMFI, data, B30 (after T30 cities), account for only 25% of the total assets of individuals, let alone beyond that.

According to a joint report by Boston Consulting Group, or BCG, and  AMFI, the Indian asset management industry has the potential to cross Rs 100 trillion in AUM in the twenties. Crossing this milestone will help the industry become the 11-13th largest asset management industry in the world from its current standing of 17th largest asset management industry. The report estimates that achieving this growth will require a 5x increase in the investor base from 2 crore to 10 crore investors.

To achieve this vision, independent financial advisers (MFDs and IFAs would play a very important role. They are in essence the “bridge of trust” that exists that need to be leveraged to bring about financial inclusion and the change into productive savings.

These MFD/IFAs have a better presence and connect with potential investors residing in tier 2 and 3 towns. They understand the local culture, saving and investment habits and speak vernacular languages, as opposed to the English-speaking institutional advisors. Using their local reach and personal connect, IFAs can bring about new investors to the financial mainstream and make the financial markets more inclusive to the very category of people who need it the most.

Technology can enable MFDs to offer financial insights, and customized portfolio management capability for retail investors at a very affordable price. This liberates financial planning for retail investors, who, so far, did not have means to create and deploy a sound financial strategy. Moreover, financial planning and investing is a lot about being able to manage client’s emotions too. Having an IFA who has a strong understanding about an individual client’s psyche can imbibe the required trust and help the client make better decisions.

An experienced adviser who is personally invested in your success is a great asset to have especially when there is ambiguity and turbulence in the markets. Managing emotions and making wiser decisions are often the key to long term and sustainable success.

Over the next few years, India’s financial landscape is expected to go through several evolutions, all at once. The rise of digital-savvy millennial, the growing influence of working women and the rising elderly population are all examples of ‘newer’ emerging investor segments. These investors could be living anywhere in the country. As all of them look for making structured financial investments, IFAs, powered by artificial intelligence and machine learning driven tech platforms, will be instrumental in bridging the gap between them and the market. These IFAs will have to devise and deploy new methods to reach out to potential clients and provide them the right services.

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