Innovation inequality

In a big push to move India closer to a cashless economy, National Payment Corporation of India’s Unified Payment Interface is now a reality and customers of 21 banks can now send and receive money via a smartphone just as they exchange messages. This initiative has an enormous significance. Real-time sending and receiving money through a mobile application at such a scale had not been attempted anywhere else in the world. This fintech innovation will bring a remarkable shift in the money and payment space throughout India commoditizing peer to peer payments scaling up the sharing economy drastically. Imagine Aadhar based digital identity over Internet of Things(IoT) powered by such a large scale peer to peer payment infrastructure can make the Internet of Values(IoV) i.e., exchanging values on the Internet just like exchanging information a reality in distant future. Sounds exciting !?! This is why Fintech disruption is the zeitgeist of current times. But is this innovation across the board in India?

In this age of Customer Capitalism, companies are compelled to increasingly favor value for customers over profit. And fintech innovations are based on the fundamental tenet of Customer capitalism. Customer engagement is a key area where fintech innovations have been most disruptive. But when it comes to Investment and Wealth management Industry in India, it seems like a lost story. At one hand RBI is a doing a commendable job as a central banking regulator to embrace an ecosystem for fintech innovation, Indian Capital markets are not that lucky. There has hardly been any innovation especially for the retail Investors for long-term wealth creation.

Still struggling with the past

Discount brokerages, Internet-based trading for direct Equities investment, Mutual/Debt Funds investments through digital channels, are just one aspect of long-term wealth creation. Investment vehicles such as ETFs are in very early stages and REITs are still going through regulatory corridors. Retail Investors participation in Equities though has picked up through SIPs in MFs and savings money going into Equities over Gold and Fixed Deposits is a good sign but the participation is still very low when compared to the huge population with savings. Also, MFs should not be the only way out there for investment and it seems there is a huge disconnect in terms of democratic access to a more diversified set of Investment vehicles for retail Investors.

The other side

In contrast, HNIs and Institutional Investors have a plethora of Investment opportunities for wealth creation across different asset classes through paid Investment advisers who not only invest in MFs but also build custom Equity portfolio or alternative investment vehicles for clients meeting their risk-return objectives and providing superior returns. But those services are regulated and structured in a way that requires huge fee and big ticket size investment and is beyond the reach of retail investors.

The only choice

So when it comes to Equities as an asset class, MFs are perceived to offer everything that a retail investor seeks: low charges, ease, and flexibility of investment and withdrawals, diversification, lower taxes, transparency and tight regulation. But in reality, this is not completely true.

Is it really a right choice?

Investors not only pay commissions to MF distributors but also pay for fund management fee and as a matter of fact, Total Expense Ratio in MFs is one of the highest in India. Also, Investors are sold inappropriate MFs, ULIPs by distributors to earn more commissions. But Investors generally don’t care about these charges as they are implicitly included in the entry and exit of MFs. In such a model, fund houses have made Investors believe identifying the right asset classes for their Investments are free but tacitly earn through commissions and management fee on selling those investment products. Consequently, any explicit fee-based Investment advisory services are not widely accepted and retail Investors believe getting right investment choices should be free.

Moreover, MF investing is complex in India because of the number of funds. SEBI has realized that the number of listed MFs are higher than the number of actively traded listed stocks on stock exchanges and is asking fund houses to reduce the number of funds and come clean on themes of each fund. Recently SEBI has also introduced policies to bring transparency in this implicit cost model so that investors know how much they are paying in terms of commissions to their MFs distributor and how much Mutual fund managers are earning through management fee. Also, they are tightening launching of new MFs by fund houses to break fund house distributor car telling in earning commissions.

The future looks bright

Some good signs in MF investment space from FinTech perspective is that some new age advisers are providing MFs investments through unbiased digital channels using scientific methods for MF selection or providing direct investment in MFs by completely making Investors avoid commission charges. In lieu of such services, these advisers are looking for an advisory fee from the Investors. This brings the question how investors look at fee and commissions when it comes to Investments.

Fee and Commissions what is that?

Firstly, fee and Commissions need to be treated differently by Investors and they need to be made aware of the benefits of going through a fee-based advisory in comparison to a commission aligned distributor/advisor as in the first case, fee-based advisor earnings are aligned to Investor’s earnings. Another major challenge is that Investment Advisory and Portfolio Management Services providers are technologically outdated and at the same time have to follow SEBI regulatory guidelines to provide advisory services and scaling up becomes a major challenge for providing low-cost advisory to small ticket size retail Investors.  So they either generally stick to wealthy clients or follow grey practices which are not in accordance with SEBI Investment advisory/Portfolio Management services guidelines.

The future

Robo-advisory through MFs is a low-cost solution for small ticket size retail Investors but unless different classes of Investment choices are not available to diversify different investors risk-return profiles, the model is not comprehensive to honor varied risk-return objectives for long-term wealth creation. In such a case, machine-assisted human intelligence with a technologically scalable low -cost distribution model to manage all sorts of risk-return objectives which is highly regulated and transparent from an Investor perspective is the need of the hour.

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