 "Trends that will shape the personal finance landscape")
One major change that is expected in the future is that the personal finance space will come to be dominated by highly educated and trained professionals who will offer quality advice. This is expected to reduce the scope for mis-selling, which has been the bane of this field in the past. Another important trend that is expected to gain momentum is investors’ desire to employ technology to gain greater control over the process of investing, and to simplify and ease their investing experience. Together these trends are expected to improve the investor’s experience.
Growing demand for financial planners: Investors increasingly realise that investing only in traditional options such as Employees’ Provident Fund (EPF), Public Provident Fund (PPF) and traditional insurance plans will no longer suffice to help them meet their ambitious financial goals. Many investors today have high disposable incomes, which gives them the confidence to assume higher risk. When you combine both these factors, you get a set of investors who are prepared to go beyond the ambit of traditional investment avenues and are willing to invest in market-linked products that carry higher risk, but also have the potential to produce higher rewards.
Such investors require a well-diversified portfolio. Each of these portfolios must have the appropriate mix of asset classes, keeping in mind the investment horizon and the investor’s risk appetite. Creating such portfolios requires investors to seek professional guidance and a willingness to pay for advisory services. This is increasingly happening nowadays.
Many retail investors, whom one would describe as belonging to the mass-affluent category, are now willing to hire a professional financial planner. These financial planners prepare a plan based on an assessment of the client’s cash flows. They also carry out goal-based planning. The charges for a financial plan vary from one planner to another. Some charge as little as Rs 6,000 while others ask as much as Rs 40,000 per annum. This trend of investors hiring the services of professional financial planners is likely to gain further momentum in the future.
Direct mutual funds and SEBI-registered advisors: Most investors lack knowledge regarding how and where to allocate their money. Instead of investing through a mutual fund agent, an investor can now invest in direct mutual funds via a SEBI-registered investment adviser. A registered investment adviser can provide conflict-free, quality advice, since he does not get remunerated by commissions from the product but by the fee that the customer pays him. Thus, it is in the interest of such an advisor that the client invests in the right funds and his portfolio grows at a healthy pace.
In direct funds no commission is paid to an agent, so the expense ratio of these funds is lower. This in turn boosts the returns from these funds over the long term.
While buying through a mutual fund agent will continue to be an option, more investors are likely to turn to the combination of direct mutual funds and SEBI-registered investment advisers.
Online investment platforms: More and more investors today tend to be IT-savvy. They want to be able to invest independently, that is, without using the services of an agent or distributor (to avoid the sales push that such interactions inevitably entail). Such investors also ask for frequent and on-demand reporting of how their investments are faring.
Numerous online investing platforms have emerged over the past few years to cater to this IT-savvy generation of investors. Most of the platforms that came up in the past depended on commissions for remuneration. In other words, they were reimbursed just as a human agent or distributor was. The big change that has happened in the recent past is the emergence of platforms that offer brokerage-free products (Invezta, MF utility, etc.). These platforms may charge you an annual fee but that’s it. They sell direct plans of mutual funds and receive no commissions from fund houses. Their emergence will help informed customers migrate to lower-cost direct mutual funds. These platforms are well-suited for the do-it-yourself kind of investor who wants to start small. However, professionals who do not have time to research on their own will stick to direct plans through a SEBI registered adviser.
Growing financial literacy: Progress on this count may have been slow, but it has been steady. Thanks to the growing proliferation of personal finance media (newspaper articles, magazines, TV shows, websites and blogs), investors are becoming more aware about what they should and should not do. To cite just one example, many investors now no longer mix insurance and investment. They realise the importance of buying term plans for their insurance needs and mutual funds for building an investment portfolio.
SEBI and the stock exchanges sponsor financial literacy programs. Even mutual funds nowadays earmark a portion of their fees for investor education. As the reach of these programs expands to tier II and tier III cities, one can expect more people to turn financial savvy in the years to come. Of course, there is a long way to go on this count before we reach a satisfactory level.
Brokerage disclosure: Sebi is framing rules that will require detailed disclosure in the consolidated account statement (CAS) on mutual fund commissions earned by the agent or distributor. The purpose behind this move is to help the investor assess whether the distributor sold them a lemon just because he stood to earn a high commission from the product. This is another step towards ushering in a regime of higher transparency.
Startup investing: A new trend that has come to notice is investing in a start-up without understanding its fundamentals. On the one side, there are experienced angel investors who know exactly what to look for in a start-up. Pitted against them are amateur investors. If more amateur investors invest in start-ups in the years to come, one can foresee many ending up with an unpleasant investment experience and losing money in the alternate investing space, just as they have so many times in the stocks markets.
Early retirement: Young investors want to be financially independent as soon as possible. Many young professionals want to start something of their own. This requires them to attain financial freedom quite early in their life. The trend towards people becoming financially independent by 40 is likely to gather pace in the future.
SEBI’s support for registered investment advisers will be instrumental in ushering in many of the above-mentioned changes. In the future, the personal finance landscape is likely to be dominated more by professionals rather than sales agents. While these trends are at a nascent stage today and it may be three to five years before they become widespread, this is the direction in which things are likely to move. As we progress towards an era of higher transparency and ease of doing investments, a greater percentage of investors are likely to be satisfied than is the case at present.
The author is a CFA charter holder and founder of investment advisory firm Ankur Kapur Advisory