1. Low penetration of financial products
There are around 475 million people (36 percent of our 1.3-billion-strong population), who are between 18 and 45 years of age, the prime working years in our lives. Interestingly, there were over 400 million users of the Internet in 2017, which is expected to grow to over 650 million by 2020, according to industry experts. However, less than 5 percent of the population is investing in or buying financial assets. We attribute this primarily to the lack of awareness and low transparency in the selling and distribution of financial products.
2. Retail customers wary of financial products
Despite industry-wide investment in customer education over the past two decades, the penetration of financial products remains low. That is because the information about investment products are still laden with jargon, lacking clarity, and unable to connect with the end customer. The lack of transparency about commissions of the distributors from whom the retail investor buys a product makes the latter even more wary.
The loss in income owing to payment of commissions (both to the distributor and for the asset manager's fee) has resulted in huge value-erosion for retail clients during their investment tenures.
As a result, we see the average Indian household savings getting channelled into gold and real estate, even though there may be investments with better returns and tenure for their needs. The lack of prudent financial advice implies the lack of planning, which in turn results in a debt trap for customers.
Here are two pie graphs, one on the overall distribution of the average household savings, and the other a finer look at the spread of preferred financial products, to show financial awareness is the need of the hour.
3. How can the penetration of financial products increase?
One of the ways to increase the penetration is to increase the use of Exchange Traded Funds (ETFs), which are easy to understand and don't entail any trailing commissions. The use of ETFs is prudent financial advice for the core investment portfolio of a wide range of investors, as is evident from the global ascendancy of ETFs, and the industry’s skyrocketing AUMs (assets under management).
We observe that passive funds have grown from less than 5 percent of total managed funds assets to 25 percent over the last 10 years. Most of the market share has been gained in the past five years, as the ability of the active manager to generate alpha has diminished over time, as markets mature. The retail customer, as a result, shifts towards ETFs and other passive funds as saving on commissions remains the only silver lining.
4. Distribution problem still persists, though
ETFs aren't new. One of the first ETFs was launched in Canada in 1990, closely followed by one in the US in 1993. In fact, the first closed-end fund (similar to the present ETF structure of pooled investing) was launched way back in 1893.
In India, ETFs have been around since 2002, when Benchmark was the first mutual funds to launch in India.
However, the popularity of ETFs is still low in India. The market is dominated by institutional players such as EPFO (Employee Provident Fund Organisation) and the Government of India (with CPSE & Bharat 22).
5. Can technology help solve this problem?
Tavaga believes that new-generation robo-advisers can solve the core problem of financial inclusion, by leveraging technology and delivering quality advice, irrespective of economic status or location of the customer. Technology solutions imply that a viable business model can be created while providing quality services at mass-level pricing.
The global robo-advisory landscape suggests that such a shift is already embraced by institutions. Be it wealth managers, or mutual funds, many are embracing technology to increase financial inclusion.
The way forward
Tavaga believes that all the industry forces need to work together to increase awareness about ETFs.
What is holding back the players from their full potential is not peer competition but under-penetration of financial products and lack of awareness.
The regulatory push towards RIA implies that the interests of the advisers and the clients are aligned.
What remains to be seen is whether this wave of technology development would see a structural shift of consumers towards financial products.
If the trends in shopping behaviour can change (i.e. offline to online) over a short period of time, Tavaga believes the same can happen as fast for investment products as well.
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CEO Tavaga Advisory Services
Nitin Mathur is the CEO of Tavaga Advisory Services, a robo-advisory platform, which promotes financial inclusion with the help of Exchange Traded Funds.
With 20 years in the finance industry, Nitin is a thought-leader in the space with a deep understanding of the Indian consumer sector and has been featured regularly on TV and the print media. He has worked as a research analyst for marquee institutions such as Jefferies, Societe Generale and Lehman Brothers. His earliest stint, at ICICI Bank, saw him work on transaction banking, securitization and credit cards, and perhaps, sowed the seeds for the fintech venture that he is now heading, championing financial inclusion. Nitin is an avid traveler and lives in Mumbai with his wife and daughter.