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70% investors say they will go direct, but....

Bennis Kumar, FinalMile (

13th May 2017

In a nutshell

At the recently concluded FIFA annual conference, FinalMile (a consulting firm that specializes in behavioural science) gave a curtain raiser on the results of their study on investor behaviour - a pioneering exercise initiated by FIFA. Some of the questions that this study sought to find answers to include:

  1. Why are non MF investors choosing not to engage with mutual funds

  2. What drives MF investors to engage with mutual funds

  3. How do investors see their mutual fund distributors

  4. Will disclosure of direct NAV alongside regular plan NAVs in account statements drive investors away from distributors

  5. How much are investors willing to pay as advisory fee, in an RIA mode

The insights from this study are fascinating indeed - especially the responses from investors in "cold state" and "hot state" on whether they will opt for direct plans, when made aware of the difference in costs. And, in this insight, is a very valuable lesson for every MF distributor.


Bennis Kumar of FinalMile presented the key findings of this qualitative and quantitative research effort at FIFA's 3rd annual conference. FinalMile's key differentiation lies in its approach - rather than simply asking investors their opinions on different aspects, it simulates real life situations, puts investors into the "hot seat" where they are taking decisions on simulated data and situations, and then observes their decisions rather than just basing their findings on opinions. The study covered Indian tax payers from different age and income brackets - the common thread being that all of them are tax payers and therefore a natural audience for mutual funds.

Here are the key findings from this very insightful exercise:

1. Why are non MF investors choosing not to engage with mutual funds

Young tax payer: MFs may be good, but they are not relevant for me yet. I am not saving enough money yet to consider mutual funds seriously.

Tax payer with dependents in the family: MFs are risky and complicated. I don't want to mix up my emotionally salient goals (kids education, marriage) with risky equity market linked investments.

Stable family generating surpluses: Not yet satiated with familiar asset classes - haven't yet bought my second house or sufficient land or sufficient gold.

Senior citizens: MFs are too risky - time for me to consider only FDs for stable income

2. What drives MF investors to engage with mutual funds

Older you are, higher is the tendency to invest in MFs

Richer you are, higher is the tendency to invest in MFs

More educated you are, higher is the tendency to invest in MFs

Presence of dependents in the family, higher is the tendency to invest in MFs

Self employed are more willing to invest in MFs than salaried employees. Perhaps self employed people understand risk, volatility and upside better than the salaried class.

Biggest trigger than drives investors to mutual funds is change in personal circumstances (and not markets!). Responsibility towards dependents is the biggest driver followed by increase in income and therefore savings.

3. How do investors see their mutual fund distributors

Young investors generally see distributors as transaction facilitators.

Older investors see them more as advisors. However, they are seen as adding value primarily in fund selection. Very few investors see MF distributors as advisors who help create and implement financial plans for goals.

There is a lot of work that distributors need to yet put in, to enhance their perception from fund selection specialists to goal planners.

Taking insights from points 1, 2 and 3, FinalMile made the following suggestions for IFAs to consider:

  1. Young investor who thinks MFs are not yet relevant to him: don't talk about long term goals - he is not yet ready for those conversations as his outlook is currently very short term. Make a straight pitch to set up an emergency fund in this manner: "If you get fired from your job, you need 6 months salary set aside to support you until you find the next one. Let me help you set up an emergency fund."

  2. Young family with young children who consider MFs too risky: don't get into nuances of products to explain risks of each one - they won't be warm to such discussions yet. Pitch on enhancing the bread-winner's self image. Talk about how he should start thinking of setting aside 30% of his income as savings to discharge his growing responsibilities. Help him understand the importance of planning for his goals early, to enable him to fulfil his family's dreams and desires. Get to products at the last stage, once plans are made for agreed goals.

  3. Middle aged investor at peak of earning capacity, who has provided for key goals already: use aspirational pitches. "Why not plan a destination wedding for your daughter rather than a local one?" These investors will typically be very interested in understanding product nuances (large cap vs mid cap vs small cap etc), will be keen listeners for new investment ideas and themes. Use all your product expertise with this set of clients.

  4. Senior citizens: this is a segment that is being needlessly ignored by advisors as well as AMCs. Everyone is running after young investors, and have given up on senior citizens - but they haven't given up on themselves! They are all aware that they need to plan for 20+ years of retired life, they have life experience and wisdom to understand what they are capable of doing on their own and what they cannot, they are therefore happy to receive investment advice, they can be persuaded a lot easier to even pay for advice, they need guidance on how to beat inflation even as they try to secure their monthly income, they need advice on wealth protection, most of them do not know the role that debt and low equity hybrid funds can play in their financial lives. And yet, they continue to be largely ignored by advisors and AMCs. Every IFA must have a plan on how to engage with and advice senior citizens. This is the biggest low hanging fruit for the industry.

4. Will disclosure of direct NAV alongside regular plan NAVs in account statements drive investors away from distributors

A brief explanation of "cold state" and "hot state" will set the context to these findings. FinalMile put investors into the "hot seat" - they simulated an investment environment where the investor had a portfolio, was exposed to important news flow and then was asked to take decisions based on the newsflow and any incremental research they wished to do online. As they went from one scenario to another, they became fully engaged as investors and transitioned from "cold state" to "hot state". Decisions taken in a "hot state" better represent likely action as opposed to opinions given in a "cold state".

In the study, investors were given the new CAS, with direct NAV and expense ratio data available alongside regular plans for the funds in their simulated portfolio. Most investors did not notice this on their own, when they read their CAS.

Then, a sticker shock was administered - their attention was explicitly drawn to direct vs regular by highlighting this information in the CAS. When this information caught their attention, and then they were asked, over 70% of investors in "cold state" said they will prefer to opt for direct plans.

The story became entirely different when the same investors went into "hot state" - when they went through different simulated investment scenarios and were confronted with taking decisions on their own, using publicly available information. Over 80% of "hot state" investors said they would prefer to stay with their advisor, even after the sticker shock of direct vs regular costs was highlighted to them.

This, FinalMile says, is a classic behavioural trait: when confronted with uncertainty, human beings naturally gravitate towards the familiar option. A relationship with their distributor is familiar terrain, opting to go direct is unfamiliar - though may be exciting from a cost savings point of view. The moment they find themselves in the "hot seat" having to take decisions on their own, the value of good advice becomes clear to them and the cost difference pales into insignificance.

The message for all distributors is very simple from this insight: stay engaged with clients who left you to go direct. Most of them will return to you when they see a bout of volatility that they feel ill equipped to handle on their own. When this situation happens, if you have wisely chosen to remain engaged with them, they will come back to you - else they may scout for some other advisor because they believe their bridges with you are now burned.

5. How much are investors willing to pay as advisory fee, in an RIA mode

Even in a "hot state" 63% of investors are willing to pay 1% or less annually for investment advice. In a cold state, this drops substantially. Very few are willing to pay above 1% - a level which would maintain intermediary revenues, if the mode were to shift from commissions to fees. Whether in cold or hot state, the message here is that a full fee model to replace commissions, if considered at any point in time by the regulator, will mean a substantial dip in intermediary revenues, which can challenge business viability.

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