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Premature redemptions are directly linked to how funds are sold

Harsh Gahlaut, FinEdge Advisory, Delhi

In a nutshell

FinEdge serves over 30,000 clients spread over 200 cities across India, through a phone and web based financial planning proposition. How can such a proposition "hold a client's hand" in volatile times like these, to help them stay on track?

Harsh says it all comes down to the proposition and how it is offered. There are 4 aspects that you need to get right up front in the relationship: get the risk profiling right, adopt a goal based approach, communicate the advantages of SIPs clearly and set realistic expectations. If you get this right, clients will be willing to ride market volatility.

Premature redemptions are most often linked to how funds are sold. Get the sales process right, and you have long term investors with you.

Volatile markets are occasions where good advisors differentiate themselves from others.

To know more about FinEdge, read This business model is an eye opener for financial planners

WF: You run a highly scalable retail advisory model based on phone and web based advice and support. We live in a country where equity is considered risky, mutual funds are not a familiar terrain and financial planning is still nascent. How do you get investors comfortable with financial planning and with equity oriented investments, through a primarily phone based operation?

Harsh: We at FinEdge firmly believe that it is not the mode of communication but the content which makes a difference. We are a tech heavy, process oriented company with great emphasis on human touchpoints. Our business model in itself gives us some advantages in how we address our prospective clients. We believe that a good financial road map and goal based investments which lead to wealth creation for the client, are a chain of multiple activities. If any of the links in the chain are weak, it leads to clients reacting to market movements and pulling out their investments at the wrong time.

Today there is a huge buzz globally about Fin Tech companies which are transaction focussed through their investing platforms rather than building relationships with clients. We now have e-commerce players showing interest in the distribution space and these models don't even have relationship managers or any kind of customised "relationship" based communication with clients.

Compared to these models, our level of relationship building and management with each client like having a relationship manager, service manager and operations manager mapped to them is very "old school" even though we are also a part of this "Fin Tech" ecosystem!

WF: You now have experience with advising thousands of retail investors across the country. What is your assessment of the level of awareness, familiarity and confidence with equity investing among prospects your team has interacted with - prior to them understanding your proposition?

Harsh: While, for the country as a whole, the level of awareness is still low, the last few years have seen awareness levels go up considerably. India has fantastic demographics which is just waking up to the options available to them. Communication and dissemination of information has drastically changed in the last few years and we expect more and more people to quickly gain a lot more awareness in the investing options available to them. Going forward, they will be far more discerning in the choices they make and will be quick to see what value is being added to them.

WF: What are some of the biggest inhibitors that come in the way of investors allocating sufficiently to equity?

Harsh: Besides the standard issue of greed and fear in the stock markets, we think the biggest deterrent is the fact that we, as a country, have traditionally considered FDs, PPF, gold and to some extent insurance policies as the right long term investment. This is completely contrary to trends worldwide with what people do to achieve their long term financial goals.

Key ingredients like inflation, taxation and compounding are not taken into account in a majority of savings, when planning for the future. Too many investment plans are made without specific goals / objectives / timelines, which lead to liquidation of investments for lifestyle expenses.

Also, there is a misconception that has been built over the years that Mutual Funds are highly speculative and only for the wealthy. The reason for this is possibly because of the way Mutual Funds have been sold in the past and the experience investors have had.

Some of the steps taken by SEBI to correct past mistakes and to protect investors' interest are very good and will show great results over a period of time.

WF: In many cases, investors finally go ahead with advisor recommendations largely based on trust rather than a complete understanding and personal experience. One normally "looks a person in the eye" to decide whether he/she is trustworthy or not. How do you earn trust in your proposition?

Harsh: In the modern world, "looking a person in the eye" is a highly debatable point! Most people if you see these days are always staring at some screen (TV/Computer/Mobile) and it's very difficult to make eye contact with anyone!

Trust is something you have to earn - it doesn't have to be instantaneous and can be built over a period of time.

Our clients typically have fairly long term goals and they do not jump in and test the water with both feet. They prefer experiencing our proposition first and over a period of time, we have seen most of our clients increase their investments multiple times. At FinEdge, we have a symbiotic relationship with our clients. For us it is critical that investors stick to their investment plan and we as a business are successful only if clients meet their long term financial goals. We are happy building our relationships over a much longer period of time.

WF: When clients remain uncomfortable about equity investing even after a round of phone based discussions, how do you typically get them around to doing what you know is right for them?

Harsh: Well, I don't think it is possible to convince everyone. We spend a lot of time with our prospective clients in understanding their requirements, goals etc. We believe, we have a good value proposition and it is our endeavour to communicate the same to our prospective clients. We have many clients who immediately start their investments thereafter while some take many weeks and months to start. Of course, there are always many prospects who do not invest at all.

WF: Times like these are a nightmare for advisors - when investors' convictions in your plans are severely tested by market volatility. "Holding a client's hand" is seen as the most critical input in such times. How does your team endeavour to do this, given the lack of physical interface?

Harsh: We firmly believe that redemption of investments before time is directly related to the way they have been "sold" to a client. If the risk profiling is correct, the investment is goal based and the advantages of systematic investing are communicated well, it all boils down to the expectations that are set at the time of initiating the investment.

If the entire interaction is based on timing the market instead of time in the market or if the conversation is around returns instead of advantages of long term power of compounding, then the basic foundation on which the investments have been made is incorrect. We all know that SIPs are the best for a volatile market with a long term view in mind. The key question then is whether the investor clearly understands financial terms like rupee cost averaging, compounding returns and how these are actually beneficial to them if the investment is through a long term SIP?

There is no reason that sharing and communicating this information or hand holding as you may call it, needs a person to be physically present across the table. We do it just as effectively, if not more, in our business model!

WF: 3 year equity SIPs are now showing returns less than inflation. Investor anxiety is building. How do you tackle this situation?

Harsh: Despite what I have said before, a bearish market / market crash news headlines / bad sentiment, does affect every investor. These situations do lead to anxiety and can lead to mob mentality where fear takes over rationale. There will always be some investors who will not be able to deal with negative returns and will question their decision to invest. However, increasing communication, explaining the situation and reinforcing the reasons for investing as well as the benefits of a falling market at a time when the investments are in "accrual" stage can help allay some of the fears that creep in at a time like this.

Such market conditions are always tough from an investor's point of view and it is exactly in times like this that the value of an advisor comes to the fore. The big difference at times like this is the kind of people and processes that the advisor brings to the table.

WF: Distributors tell us that despite adopting a goal based approach, investors usually track the first 6-9 months performance of individual funds within the plan very closely, before backing off from this "intense scrutiny" period. Often, plans get disrupted during this "intense scrutiny" period. How has your experience been with this phenomenon?

Harsh: Let me share our experience. When we were starting our business, everyone from the industry said the same thing - "the average SIP tenure in the industry is 6 to 9 months", "people will not do investments without physical meetings" etc.

Then and now, our answer always has been that the tenor of SIPs, whether the client invests through a person or not, depends on the way the proposition is taken to them. If they see value in what you are doing for them, if your communication is clear and concise, then people will buy into your proposition.

If you "sell products" then all these statistics are of absolutely no use! We did not agree with this data when we started our business and we absolutely do not agree with it now.

We have also seen from our experience that being goal based / doing the correct asset allocation / risk profiling etc. in isolation are not enough. There are 6-7 key activities which need to be done in tandem to ensure that investments lead to its natural conclusion. Reinforcement of objectives and goals also play a critical role in insuring longevity of investments.

We are happy that our SIP stoppage / redemptions are amongst the lowest in the industry and we are very proud of the fact that some of our processes have worked very well in serving and protecting the interest of our clients. At the same time, we are still evolving and learning. As we go along, we would like to strengthen and streamline a lot more of our activities.

WF: If we are to become a nation of smart investors and not just smart savers, what are some of the fundamental changes that we in the industry need to make, to enable such an outcome?

Harsh: I strongly feel that massive change is already underway. People are receptive to new ideas and understand the importance of savings. Information is readily available for people to review options.

We see transition happening all around us. The biggest disruption today are not business models but the way information spreads and is gathered. That in itself is changing everything we do and the way we do it. It is no longer easy to attract and retain clients if you do not have a clear plan of creating value for them. This is the disruption across all industries and not constrained to the financial industry alone.

Outside of this, the big change that is happening is the ease of investing. Revamps in some major operationally challenging areas, like ECS registration and e-KYC, will drastically change the experience clients have with initiating investments. The above two were the reasons why a lot of new investors faced severe problems and made investing a cumbersome experience.

Increase in investor awareness, more and more people crossing the critical age of 30+ (where a person starts having surplus), smartphones, internet penetration, mobile banking besides a choice of unlimited investing options / platforms, are the key things that will provide a massive impetus to the industry going forward.

We expect to see a pivotal point in the coming years (months maybe?) where the number of people opting for investments would go up exponentially. Since digital disruption is taking place at an alarming rate, the scale of this change will be rapid and the demographics of our country will throw up enormous opportunities for all the varied business models in the industry!

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