Change not an option anymore for Investment Advisory Industry in India

The ecosystem surrounding the Distribution of Investment Advice in Indian Markets is going through a major structural change.

• On one hand, the regulatory landscape is expected to get tougher for Investment Advisers, Mutual Fund Distributors, Stock brokers and Chartered Accountants who as part of their business activities explicitly or incidentally provide Investment advice to clients and distribute Investment products as well on a non - fiduciary basis. A recent SEBI consultation expresses its intent to follow a global trend of delineating those individual and organizations acting as distributors versus advisers who will be required to act as ‘fiduciary on behalf of clients’.
• SEBI wants to shift all Distribution led Advisory which is based on earning commissions on the Investment products at the tail end and not charging anything from Investors upfront to fee-based advisory where the source of income is by charging a fee to Investor directly. Distributors function would be limited to distribution & execution only & distributor without an Investment Advisory license cannot offer advice which is deemed incidental to sales process currently. This challenges their model significantly as they need to become Registered Investment Adviser within three years.
• Even in the current Distribution led advisory scenario, Marginal revenue on the tail end(Commissions) are shrinking in the Mutual Funds as well as stock broking Industry. But the transition from distribution-led advisory to pure fee-based Investment advisory is not easy and will first need to be supported, as Indian clients learn to pay for advice. Amid such challenges, scale, size, and efficiency will matter even more to the industry than before 
• Additionally, Advisory and Distribution market is going through a major technological shift. On one hand, there are new age advisers launching robo-advisory platforms and there are others including Mutual Funds Asset Management Companies and Brokers enhancing their digital distribution capabilities to reach larger customers in the consumer internet space. Mobile Investing is the way forward in the future.
• The services provided by incumbent advisors and distributors currently is non-client centric and unscalable in nature due to the existing operational barriers to scaling and regulatory under-compliance that is rampant in the industry.
• Future is not just about building digital interfaces to initiate transactions on behalf of Investors, but providing consumer-focused mechanisms to raise awareness about Investing and disseminating advisory/distribution services (risk profiling, portfolio-based approach, strategic asset allocation, transparent performance calculation) based on which Investor can buy the right Investment products.
• The product landscape in Indian Capital Markets is currently hampered by a limited offering. Investment specialists depend on just a few assets at the moment – including mutual funds and direct equities. Even the bond market is India is not developed enough to be accessed by retail investors, so remains dominated by institutions such as Insurance companies, Banks, and pension funds. Passive Investment choices such as Equity ETFs are still in nascent stage and needs a regulatory overhaul. REITs are still stuck in regulatory corridors. Derivatives markets and Alternative Investment strategies as an asset class for Investors with appropriate risk appetite is highly restricted and cannot be distributed easily because of operational and regulatory challenges. Global Equities and Debt instruments are conspicuously absent in asset allocation for most of the domestic Investors.
• There is a strong need for systematic capabilities to innovate on building new Investment products and categories which can be composed of asset classes such as Equities, Mutual Funds, Derivatives, Debt Instruments based on different risk-return requirements. And to add further, the ability to actively manage these funds as Active Investing handsomely outperform passively managed assets in Indian capital markets.
• Robust and unbiased performance tracking for funds managed by Investment Advisers is critical to building the trust among the Investors.
• Another important aspect is investor education and ability for the Investor to transparently engage in the Wealth creation process. Currently, many investors even do not understand simplest product offerings, for instance, mutual funds. Understanding historical performances of investment products, whether a particular investment opportunity fit an Investor risk profile and future goals require transparency on the Investment adviser part so that Investor can invest objectively in the advised products.
• There is a huge opportunity to create capabilities so that Investment Advisers/Distributors can partner to offer clients a variety of offerings, rather than create everything in-house. These partnerships can lead to product innovations which can significantly add value to clients. Although which products are offered to clients need to be dependent on a client’s risk and reward profile that needs to be examined quantitatively and qualitatively. This can also give Investment Advisers access to new products which they cannot manage on their own.

So what is the conclusion? To be relevant and future ready in the Investment Advisory Industry in India, Technology is a necessity. If we do not stay ahead of it, it is essentially the same as ignoring it altogether. Technology innovation in this Industry is not just about the robo-advisory, but even the smartest human Investment Advisers need to adapt to technology. This will enable them to innovate and create diversified Investment opportunities for their clients and provide a much needed digital experience in wealth creation that competes with the best in the Industry.

The technological solutions to address such massive challenges are costly. At the same time, it is challenging to integrate these technologies when a majority of the Investment advisory and distribution business is process driven, non-innovative and managed by human-driven operational model.

In this scenario, if one is concerned about staying current, competitive and future ready for the investors, but at the same time is concerned about the thoughts of affordability of these technological solutions. I have a solution for you.