Think Tank

Financial products are investment avenues and if matched properly with investor needs and risk profile, can serve the primary need to beat inflation and generate adequate returns after adjusting for risk. In recent years, post liberalization of financial services industry, diverse financial products have been introduced such as variety of open-ended and close-ended equity and debt mutual fund schemes, life and non-life insurance schemes - ULIPs, Pension plans, PMS schemes focusing on customized investment in stocks and corporate bonds/debentures.

Distribution of financial products in India has also undergone sea-change over the last ten years; however there are only few products that penetrate beyond tier two cities.

The key drivers which continue to shape the future of the financial products distribution in India are:

1. Regulation is one of the major factors shaping the financial products distribution industry in India:

• Regulatory control on distribution commissions:Till recently, before regulators banned entry loads in mutual funds and capped charges in ULIPs, high upfront commissions for selling Mutual Fund NFOs and ULIPs induced the short term transaction income. This has motivated the distributors to look at a longer term relationship with the clients.
• Regulatory framework for products: While most products are rightfully regulated that help the mass investors, there should be separate regulations for sophisticated investors seeking specific products.

2. Change in investor mindset Having experienced both bull and bear markets, investors today are:

• Looking for 'portfolio' level asset allocation based approach for wealth management.
• Getting very choosy about distributors they want to deal with and are seeking incentive alignment in advice and fees and want high quality post investment review and service .
• Looking to anchor primarily in simpler open ended products with transparent fee structure.
• Investors are increasingly shy of a transaction oriented approach to private placement of equity and debt. They are now insisting on an entry / exit alignment with the arrangers, thus promoting a longer term relationship.

Thanks to the above forces the market dynamics are undergoing a change with the competitive forces realigning.

1. Distribution Dynamics – as is in any maturing industry, the relative performance of the entrenched players have seen competition coming in from Indian and multinational players. We see that the industry as a whole will see large institutions garnering larger chunks of AUM thanks to their reach and aggressive marketing. While volumes would clearly be consolidated, the Independent Financial Advisors (IFA) would seek and thrive within their well defined and focused clientele. The IFA’s ability to provide personalized service with a highly customized offering will see him compete with the majors on a different plane.

2. Shift from transaction oriented approach for distribution towards longer term advisory approach: The smarter set of institutional distributors are either putting in place or are already executing business plans with emphasis on long term portfolio advisory approach for client engagement supported by quality service and research.

3. Increasing use of technology in product distribution: Today distributors are increasingly using technology to serve clients better by facilitating buying/selling investments, reviewing and monitoring the portfolios, accessing research through internet and mobiles. Also, CRM systems are enabling distributors to map client habits, patterns and helping them understand and serve clients better.

Therefore given the changes in the regulatory framework and the market forces we are seeing an evolution of the relationship between the distributors and the clients. I believe that all in all, this is a turn for the better and will only deepen the relationship that is based on the bedrock of mutual trust and respect. Hence going forward the three nodal points of market place will be
(a) Transparency – a complete transparency on both sides - in terms of viewing the complete financial status of the client and in turn a complete transparency on the fees earned by the distributor.
(b) Open Architecture – no stone unturned by the distributor to get the best in class products across asset classes.
(c) Alignment of Interest – the fees earned by the distributor will be aligned to the clients interests ensuring that the client knows that what is recommended is in his interest and not based on distribution margins.

Disclaimer: The views expressed in the articles are personal of the authors and do not reflect the views of Kotak Mahindra Bank Ltd.