Do Indians need investment advisory service?

Wealth in India is growing and Indian Investors are realizing that there is no such thing as a free lunch. However, the need for an advisor is not for all.

Investment Advisor

During the 1980s, India was under a severe grip of borrowings from the World Bank and IMF. They agreed to grant $500 million with the condition that India comes out with more liberalized economic policies. Finally, these changes were made in 1991 and India started with its economic liberalization. These changes have brought in a major change, India is no longer an agrarian economy but rather a services-oriented economy.

India’s opening up has widened the gap between haves and have-nots and this gap is expected to grow further. You may feel that only Ambani’s and Tata’s are categorized as wealthy but that’s not completely true. People like you and me are also under ‘haves’ category. Reflect on the income levels that have risen way beyond inflation in the last two decades. Don’t agree, read this report by MasterCard India. Average annual income of Rich India is Rs 394,271 with a surplus income as high as 32%.

Urban inflation in India is between 8-10% (and not 4% as claimed by RBI or CPI index). Traditional investment products are no longer suitable to meet the needs of Rich India. Most of the traditional investment products including fixed deposit don’t meet the rising cost of living.

Let’s break-up this Rich India bucket further into three categories:

1. Retail – These investors are at the lowest spectrum of savers, usually first-time investors.

Thanks to a lot of fintech companies that have mushroomed over the last few years to cater to this segment. These companies provide a do-it-yourself kind of model and few self-help tools.

2. Mass-Affluent – These are investors who have annual income levels between 50 lakhs – 7 crore.

Investment advisory service including investment management is most suitable. Mass-affluent are prominent clients for boutique investment advisory firm. A large financial services firm is not suitable for these investors since the mass-affluent client is not large enough for them.

3. High Net Worth (HNI) – These are the real rich people. Usually a net worth more than 50 crores and often a large part of it in real estate. Over the last few years, these investors have started exiting real estate and a substantial portion of that is invested in financial assets.

This segment is spoiled with choices since everyone wants to work with them. They are suitable for large financial services firms. Now, these clients have investment advisors who give them unbiased view and the transactions are placed with large firms. This way these investors enjoy unbiased advisory with benefits of dealing with large financial services firms.

Until a few years back, investors became prey to agents providing investment product advice. This advisory was primarily a product push strategy than investment advisory in true sense. During 2008-2010, SEBI relooked at the entire spectrum of mis-selling and rationalized brokerages on various investment products.

Other than regulatory changes, investors are also getting educated and they realize that there are no free lunches in this world. Any good investment advice comes at a price. The “free advice”, may not be free at all. It is just that you may not be paying directly — that’s all. Although investors even today fall prey to ‘high-return’ products or ‘quick’ rich strategies but those experiences are getting reduced.

A sub-segment of ‘Rich India’ is looking for ethical and professional advisors who are well qualified to understand the nuances of investment products and have a deep understanding of asset allocation. Mass affluent prefers a fee-based advisor whereas HNIs prefer having a fee-only advisor. In a fee-based structure, the advisor makes money off the investment management whereas fee-only structure, the advisor makes money only through the fees paid by the client.

Sub-segment of Rich India is realizing the benefit of investment advisory. The compensation paid to an advisor varies based on the services bouquet that is offered. You need to pay attention to what services you are being offered and the quality, knowledge, experience & expertise of advisors offering it.