It’s the Quarter End – a barrage of requests from bankers, investment advisors, distributors about new investments or topping up old ones. Deepak Shenoy and Shray Chandra speak about how financial advice has evolved.
Here’s the podcast: (See more episodes at The Capitalmind Podcast.)
Notes:
1) How did we get here? What’s been the evolution of financial advice in India and where are we now?
From the world of bankers, to brokers to independent financial advisors to now, robo advisors: India’s seen a large move in this space.
We have growth from Product Pushers (where even the 65 year old was sold insurance) to Asset Allocators & Planners.
2) Who actually needs financial advice?
Basic Level of Advice:
- Anyone who either spends less than they earn (invest in say fixed deposits or mutual funds)
- Anyone who is way too deep in debt (advice on how to escape their debt situation)
Intermediate Level of Advice:
- You have saved some money and you have dependents say kids and parents
- My spouse and I will retire and we’d like funds to last during retirement
- You have reasonably well understood near term or long term liquidity needs (kids education)
- Need to plan because inflation (and overall salary growth) won’t negate the need for financial planning
- Deepak started his career at Rs 6,000 per month which is an irrelevant sum today because of inflation and India becoming richer. However, people in the initial years of their career earning Rs 30-50k per month today – they may not see 50x to 100x growth in incomes over their lifetime like say the previous generation did. Planning matters more.
Advanced Level of Planning
- You have excess money beyond needs but you don’t really know what the money can do
- You may be able to retire at 55 vs 60, you can stop saving for your kids when they are 14 instead of 18, can try different holidays or events
- If you’ve got this money from a sudden liquidity event like an exit from a startup, inheritance – you may not know your risk profile as yet and a financial advisor can help there.
- If you want to change careers, switch to a different paying job etc. – advice gives you another way to think about this
- Special requirements: Will, charity, ongoing charity, trust, angel investing and so on
3) What is an advisor’s role, what should the customer expect and what should the advisor be doing?
An advisor shouldn’t start with telling you what you should buy. We now have customized products for everything – minimizing taxes, paying more taxes, low liquidity, low or high risk. This doesn’t make for the best starting point.
An advisor should go one step higher and figure out what you need – basic needs, emergency needs, life goals, insurance levels. It may not be what you say you need. People often say they are high risk investors but they are only comfortable with the high returns part and they exit at the first sign of a loss.
Advisors can do an ongoing analysis to check if all the assumptions are still valid – does the customer still needs money for goal X, can we reduce the retirement age, save less and enjoy the money more today.
For wealthier customers, a single advisor may not be suitable either. There are several asset classes (stocks, bonds, real estate, commodities, art, private businesses) and they are structurally different. A family office (probably available to people with 50crore+) make sense for them. Maybe shared family offices in the future will be a solution for wealthier customers.
4) What’s wrong with the current state of financial advice?
Information Arbitrage: What’s obvious for people in finance isn’t obvious to people who don’t invest all the time.
Opaque about Fees: The more complex a product, the more likely the fees are too high.
People outright lie about returns and avoid talking about liquidity.
No Alignment of Incentives:
No retribution for false, incorrect or wrong advice.
5) From the Customer’s POV: how do you identify bad advice?
Words lie: Sure-shot/guaranteed – Too good to be true and start becoming wary
Do they disclose the costs of getting in and staying in the product/investment?
Fees, both implicit and explicit: What’s in it for the advisor and the product manufacturer?
How easily can you access the money, is there liquidity? How much does it cost to exit the investment? (selling gold for example often has a friction while selling)
The minute the product is too complicated, let it go.
6) What do you see changing with regard to financial advice?
Customers are fed up of aggressive sales practices and looking for simpler and more transparent options, these Simpler solutions will also find popularity among the wealthy too.
Someone will figure out a better fee way for customers to pay fees.
Reference: Invest like the Best with Patrick O’Shaughnessy interviewing Michael Kitces on the past, present and future of financial advice.
Inactivity will be a respected/acceptable option – your second meeting with the advisor shouldn’t always require you to change things.
Solutions need to be married with technology. Technology could tell you the actual risk profile vs. the stated risk profile, technology helps adapt your financial plan to new realities like say universities no longer costing as much.
Q7) What should our customers or listeners do with regard to financial advice or advisors?
Identify who you are in the ecosystem – do you want to be on top of this or do you want someone to do it for you.
Find a partner/financial advisors with what you need and who can give you a bill of financial health say once in 6 months or once a year. Calling someone once a year to ask how the market is looking isn’t really financial planning/advice.
Wealthy? Understand you will need multiple sources and not a single advisor.
Transcript:
Shray: Hi everyone and welcome to episode four of the capital mind show. Today’s episode is going to be about the state of financial advice in India. And here’s how we got to it. It’s about quarter end right now and nearly everyone we know has been at the receiving end of a barrage of requests from say their bankers, investment advisors or other distributors about new investments. They should make or in some cases just request to top up existing investments or bank accounts.
Deepak himself was actually with a customer recently in a bank branch where he had a very interesting experience and I believe the whole bank brunch descended on Deepak and this customer and were suggesting many, many options to them. So that got us thinking and has led to today’s episode where we’re now going to discuss and try and get to how we’ve got to the current state of financial advice in India. So Deepak, first up, welcome. And here’s the question. How did we get here? What’s been the evolution of financial advice in India and where are we now?
Deepak: Thanks Shray and welcome folks to our wonderful evening at the Capitalmind. We are at the Capitalmind office recording this podcast. The idea is to talk about financial advice and how it’s evolved. If you look at it Shray, from the perspective of an investor, there haven’t always been all these options available. From the 70s, you had bankers who were primarily interested in getting more fixed deposits or even deposits, they would go house to house and collect deposits, sometimes in cash, small amounts every day. And, bring their customers into the banking fold.
There have been chit funds, there have been other products in the seventies and eighties that grew as investment products. The early mutual funds happened of course in the 80s and they moved on into the 90s. Those are the primary products. The guys who would advise you to buy weren’t the mutual funds themselves, they would typically be, again, the banks and the stockbrokers who would buy stocks directly.
Mutual funds are relatively small. So some of them were being pushed by stockbrokers. In the year 2000 we saw the massive evolution of mutual fund distribution. We saw ULIPs, private insurers come into play. The old LIC insurance as an investment model was grabbed upon by a number of private sector insurers. There were other sales persons as well, who would say, “Put some of your money here, put some of your money there.”
Primarily product pushers. And you saw this early launch of actual financial advice, which would be, now the fact of saying, “Listen, we know that every product isn’t suitable for everybody. So a fixed deposit for you and asset allocation framework for you, a longterm retirement plan for this person and so on.” That has evolved into the 2000s where you’re looking more at people doing their own investments individually and the platforms empowering them.
So you have people looking at direct plans where you’re saying, “Listen, I don’t want advice on which product to buy, I don’t want the product to pay the intermediary any commission. Just tell me what to buy and I’ll buy it. But as long as I take your advice.” So direct financial models have started to come into play. Advisors have become independent. We’ve got registered investment advisors now and there’s robo-adversaries, there’s free websites there.
There people who say, “Listen, if your needs aren’t complicated, you don’t need a full fledged financial advisor. Come to us. We’ll help you build a financial plan for a fee.” Or in the age of Amazon and Flipkart and Swiggy, almost completely free as well. We’ve moved from perhaps the product pusher model, which is, I have a bunch of products and no matter who you are, I’m going to find one product that suits you.
So the 65 year old got sold insurance because the guy who was selling it was an insurance salesman and he had to sell insurance. So a 65 year old doesn’t need insurance, got sold that product, to now you have a person who says, “Listen, you’re 65, you don’t need that kind of a product. Maybe what you need is a, a relatively safe product for your liquidity needs less risky product for your longterm investment needs, keeping in mind that you’re 65.”
So you’ve got asset allocation, you’ve got planning, you’ve got advice. Those I think have come across in the last 10 years are very different from the US which probably did, this 25 or 30 years ago. Verses in India. This is a relatively new phenomenon. One of the issues that’s changed and things perhaps should change also, is that the qualification for being an advisor in the 80s was that you had a pulse, your qualification now is that you need to be a little more than a pulse.
You need to have, some experience in the products you’re pushing. There’s an interesting bunch of things here. We’ll talk about that as we go along. But I think the person you receive financial advice from, should be well versed enough in the product to tell you the negatives of it. Which I think is happening more now than it ever used to. Most even insurance salesman, used to be surprised when I used to point to them that the return in actuality is actually 3% and not 8%.
When we did the calculations they would be like, “Oh my goodness.” So that’s changed, today people are aware, of course they still sell you the 8% product at as the 3%. Now just that they know about it before you tell them about it.
Shray: Okay. So just summarizing, we’ve had bankers, we’ve had stock brokers, mutual fund distributors, the other distributors for products like ULIPs and so on. And now we’ve slowly started migrating to a world where the beginnings of, let’s call it, robo advice direct mutual fund websites and direct mutual fund plans. And of course, also very low cost, demat and trading accounts. Simultaneously you’ve seen the evolution of the industry from more of pushing a standard set of products to people actually helping you with asset allocation and an element of planning.
Fair enough. So now let’s frame this discussion a bit more. Just as you look at it, who actually needs financial advice? Is this anyone who has any money? I mean, surely the needs are not the same. So what are your thoughts on this?
Deepak: So I qualify advisory as something that people need beyond just going buying vegetables for instance. Where all you need to know is something is good enough and you’re going to bring it home. But at the very basic level, if you’re spending less than you earn, that means you’re saving money and you need some degree of financial advice. This could be very basic as in put in a fixed deposit or more complex. But, that’s one person that does.
The second person that does is someone who is way too deep in debt. So they need to get financial advice of a different sort. Not of where the investments will earn them more the more money, but how to reduce their debt substantially. We won’t go more into the second because that is more a clinical doctorish kind of examination. It’s very different in nature to what we call financial advise nowadays, but they do. The intermediate level would then be people who have gone beyond the basics, that when they do yes, save money but they have dependents.
So it’s not just them. They want us to save money in order to reach very specific goals. The specific goals could be, “Listen, I have kids, I have parents, I have to ensure there’s enough money that will serve us in an emergency. My kids education needs will be met in the longer term. My spouse and I will eventually retire and therefore we need to have enough money that can last us beyond our retirement to the time we expect to live. We have reasonably well understood near term or long term liquidity needs.”
When I say that it’s a very complicated one, it means, when do you need money. So if I have money and I don’t ever need it, I mean I might to be 25 years old, don’t have any dependents and don’t have any near term need of any money because I have no idea when I’m going to spend it. The level of financial advice I might need is very basic. Just park your money somewhere and just be done with it. Whereas, if I have kids, I know they’re going to turn 18 someday, that’s going to be the time when I’m going to have to pay for their college.
I’m going to need very specific liquidity requirements at that time. So I need to plan for it now, the earlier plan for it, the better it is. Today, it’s more likely that I have to plan because inflation isn’t going to give me a higher return on my higher income in future days. So that I don’t have to worry about it. I’ll tell you this as an example because for me, my salary when I started off was 6000 rupees a month, 20 years ago. Today, that sum is so irrelevant that even any financial level of planning that I’d done at that time would have been irrelevant today.
Whereas, today when you start off, most of these young kids now start with 50000 to a lakh rupees a month. They’re not going to get the 100 X or 500 X increment that people have seen in the last 20 years or even a 50 X increment. So I think personally that inflation is not going to give you these longer term returns. So you’re going to have to plan for it.
These are the level where you get to an intermediate level. Those in advanced level, you’ve planned for these needs, you still have an excess amount of money. And that’s where it becomes complicated because not only do you have this excess money and you don’t know what to do with it, you don’t know what the money can do for you. For instance, you might think I will retire at 60. It can make you retire at 55. You need somebody to help you understand that and therefore plan for it.
You have kids who’ll turn 18 and you need some money, but maybe you can stop saving for that money by the time they’re 14. The other thing is that you can do more things. So for instance, you could plan for purchases or new things that you thought were unaffordable. Maybe, the certain kinds of cruises or holidays that might have cost you 25 lakhs and was way too much in your earlier scheme of things. But now that you have the money, it’s not quite as much.
So that kind of thing is where your advanced level of financial advice start coming in. Plus many people who have this kind of money maybe comes from a certain bonus, sudden liquidity, maybe an inheritance or something like that. They really don’t know the time when they’re starting off, what kind of risks they can take. Therefore, a financial advisor can actually help you understand or glean from the person you are in terms of risk. And they’ll create product or roadmaps for you to say, “This is what we can do.”
Thirdly, you may be the person who you have a lot more money than your basics need, to be able to change course suddenly or a rapidly. Because, you may have a cushy job today and you’ve just got a big bonus and therefore you want a plan. You don’t know what you want to do for it. But tomorrow you might say, “Listen, I want to go do a startup myself. I’m gonna need one crore of my own money to invest in it. So I need this money that I have as an extra bonus available to me when I want. But can it also grow in the meantime?”
This is the time when you need a more detailed level of financial advice. Lastly, think of special needs. I have enough money for myself, my retirement, my kids, I have extra money left. What am I going to do with it? I’m going to have to will it away. Either I will it away to charity or I will it away to my children. But I need some help on that front. Or I want to do charity but I don’t want to do just one time charity. So help me create a trust for charity, do different goals every month.
I want to do some angel investing. I want to do some social investing. I want to do different things for different … things that actually give me a good feeling in my heart. And that stuff is something that you don’t know necessarily what you want to do, but you know that you want to do it and you want to ear mark some finds for it. Therefore, I think this is where a financial advisor helps because it builds a structure into all of these needs and says, “This is how we should do these things.”
Shray: Understood. So again, to summarize, I mean at some level, financial advice can start right at the very basic level when you’re finally earning more money than you’re spending and you have something to put away. There to be a very, very simple level of financial advice. But presumably you don’t have to pay much for it. In fact, it might be just a line on a website somewhere and you can work with that. And all the way at the other end where you now have to figure out the estate planning where even your kids are taken care of and you now want to figure out how to perhaps leave money to charity in some sustainable way.
And maybe figure out how you can invest in life experiences or say, just do angel investments and stuff like that. Fair enough. So now we know who needs financial advice. Let’s go to the other player in this. What is the advisor’s role? So I come to you, I’m a financial advisor. What should I be doing and what should you as a customer be expecting?
Deepak: Shray, this is important because you know, first thing is that advisors look at you and people actually look at advisors and says, “What do I buy?” That’s actually the wrong question and in fact, an advisor who answers that question is going to be in trouble because what can I buy is a product need. There are products now customized for every single need. I want to save taxes as a product. I want to pay taxes as a product. I want to do something else is a product, I want to buy real estate is a product.
So there is product for all sorts of liquidity risk or asset allocation parameters which has muddied the landscape. We have a 6000, 7000, 8000 product range which you know somebody has to make sense of it for you. But more importantly, of these products you’ve got to go one step higher and the advisor needs to go in and say, “What do you really need?”
So what are your basic needs? What are your emergency needs or they are our life goals? What are the events in life that we have to plan for? Are you insured well enough? Do you have enough health insurance? Somebody who discerns what you need, it’s not necessarily what you say you need. Because most people will tell you that they’re are high risk, they can take high levels of risk. What they really mean is they want high levels of return.
When the portfolio falls, they are a very jittery on the downside and it’s fine. It’s just that you didn’t assess their risk taking ability properly and therefore some products which are highly risky will be unsuitable for them. So even if you didn’t recognize this immediately as an advisor, it’s useful to course correct once you do.
So, an advisor also needs to be able to say, I will adapt according to how I see the customer grow. I will marry his requirements or her requirements with products because I know the product landscape. I know what suitable because now I understand the customer. And then your regular analysis to say, “I’ve made these assumptions. Are they still valid? Is he still short of money to reach this retirement goals? Is he way beyond and therefore has excess money and can do something else with it? Can he further or can he reduces retirement age? Can he reduce the amount he needs to save every month and leave more free for just enjoyment of fun.”
This is the job off an advisor and to the larger and wealthier customers, a single advisor may not be suitable as well because today you have asset classes that span across from the equity and bond markets in India to worldwide bond and equity markets, REITs and structured products and nonfinancial secure investments like say real estate. Or we’re talking about art as an investment, we’re talking about, jewelry or however it is businesses. There are asset classes that are differently analyzed by different people. They’re different … they’re structurally different.
Deepak: So a person who’s good at art may not be the right person to tell you, which stocks or bonds to purchase. So maybe a family office for the wealthy makes a lot of sense. Today, it’s possibly available to people who are 50 crore net worth or above. But I’m sure in the end we will have … or at a later point, we will have shared family offices. Like we have shared offices today, coworking spaces, co-investments spaces if you may, that will eventually create customized structures for people with more than ordinary requirements but not extraordinary requirements.
Shray: Right. Understood. So that’s what I guess an advisor should do or what you should expect from the advisor. Now, I guess thinking back to the experience which if I’m not mistaken, you use the word hit job. That was the experience when you went with a wealthy client into a bank recently. Can you tell us what’s wrong with the current state of financial advice or what the advisors currently do if they are advisors at all?
Deepak: Yeah, I mean, so the experience has been kind of chilling in multiple ways. Like we were speaking, sometimes the banks themselves are overzealous. They find a customer who has a reasonable amount of money. The thing that they look at is can they meet their monthly targets, their weekly or quarterly targets by just deploying this person’s money into some financial product that will earn the bank commissions. After a while it starts getting obvious that this is being done primarily for generating commissions rather than from the longterm financial health of the client.
The reason why this is a problem is because there’s so much information arbitrage. What’s obvious to a few set of people in the financial industry, Oh, you should invest in equities, you should invest in index funds, you should invest in bonds, is not obvious to the ordinary individual. Many of whom are wealthy, not because they were in the financial world, but because they created businesses that are enormously successful in their own merits.
When they come to the financial world, they get hit by these acronyms, these phrases they don’t understand and the fact that you could make 12%, 13% or 14% and 14 is good and 12 is bad. So they don’t necessarily know why. So one of the things that people get afraid of is these acronyms. There’s an information arbitrage and that causes a feeling of superiority, saying, “I know about these products but you don’t, but you know what? I’m the right person to help you with.”
But once you get to know what these products really are, I can tell you this is X is going to give you Y and this is what’s the expected return rate and these are the risks involved. It becomes plain and obvious that every product can be brought on into those characteristics. If you do bring it down to those characteristics, there’s no sense of superiority. So people hide behind, so the people hide behind it and say, “Don’t worry, bank X has given you a guarantee.” Even when there isn’t a guarantee.
They might tell you something about it and confuse you. Which is also why it scares a lot of people because the information arbitrage itself is scary enough to say, “I don’t understand this product and maybe I should just give you my money and you figure it out.” The issue with that is that there’s opacity in the fee charged, because the more complex product is the more likely it is that you’re getting gypped on the fees.
So they tell you product that gives … “Oh, this is fantastic. You know what? If you go in here and you buy this debenture and …” The debenture sounds like a fancy word but it’s just something like a stock or a bond, something that eventually pays you some money back. The point is how much will it pay you back? It’ll pay you back … if the nifty goes up, you will make so much money and if the nifty goes down, you won’t lose so much money. What they don’t tell you is, “Listen, there’s a 2% fee for getting in and there’s a 2% fee per year until this product maturing. And if you want to get out in the middle, there’s a 5% fee. And if the nifty goes beyond a certain level, then you won’t make any return. And you know what, if you actually put your money in a fixed deposit, you’ll probably get better returns than this. But I won’t tell you because then you won’t buy my product and I won’t make those 2%, 2%, 2% fees all over the place.”
The opacity on fees is starting to go away now because in certain industries … for instance, you don’t know that if a person sells you a term plan he makes 25% of the premium. It’s fine because everybody sells you the term Insurance plans, saying, this is the best thing that you can do, but still 25% does go to them or 20% does. The same thing happens with a mutual fund, a person will tell you his getting 0.5% commissions, but he might actually get 1%. You won’t know.
I mean, there’s no way to find out how much. This opacity of fees now stretches into dishonest territory, where people lie to your about returns. They will tell you, “Oh, this product is guaranteed.” It’s not. They’ll tell you that a product is great for you when it’s not. They’ll sell insurance to a 65 year old saying that you need insurance when a 65 year old most likely doesn’t because insurance is about insuring your dependants that if something were to happen to you, their source of income is not deprived.
When your 65 you probably don’t have a source of income in the first place and therefore you’re dying or passing away is not going to change things. But it is not in the benefit of the person who’s selling you insurance to tell you that. Therefore, he lies. They also avoid talking about liquidity. They tell you, “You should invest in this for three years or four years.” Say, “Great.” What they tell you is after two years, if you want money urgently, there is no way to get it because there was no liquidity in this product in the first place.
You would have thought a locking means, Oh well, you know what, if I get out, maybe there’s a fee I have to pay, a 1% 2% fee. But no, some of these products are locked in. If you wanted to get out in most insurance plans, for instance, you want to get out after a year, you’ve lost 100% of what you’ve paid. The people didn’t tell them that this was the problem. It was hidden in some legal documents somewhere, which nobody wanted to read in the first place.
So that is the other part of it that people lie about and that’s what’s wrong in the industry. The alignment of incentives simply doesn’t exist. If you say that, “Listen, I will take a percentage of your profits.” It encourages the advisors to take the maximum risk because he’s not percentages of losses. If he makes profits, 20% of it is his, if he makes losses 100% of the losses of yours. So you essentially have that incentive also lost.
In most of the cases that incentives simply are about, “I want to make you do something that I said and I will make certain level of commissions. My incentive is not to give you the most seamless, easy, simple kind of return product that you could understand, but to give you a product where your returns are opaque. It seems like I’m doing some really smart work for you, therefore you’ll pay me more.” So this alignment of incentives simply doesn’t exist.
Lastly, and I’ve seen this, you know, in the last maybe 10 years because it’s gotten worse. There’s no retribution for doing something bad or dishonest. If you give people bad advice ways, and knowing that it is bad advice for them, they should have been retribution. Even banks, when they mis-sell to their customers, they don’t even get charged a fine notice. Even if there’s a charge of fine … I remember there was a case in which HDFC bank was fined for something. And then there was a five lakh Rupee offense per instance.
But they earned so much money out of it, out of hundreds of Crores that they just preferred to pay the fine and then go on with it because there was no decent retribution at all. Introducing high levels of retribution is going to kill the industry in the near term. I understand that, but that doesn’t mean you let people get away with murder, because that’s gonna always backfire on you at a later point because too many murders will be committed.
So you do not have a retribution for anything. I mean, wrong advice given in good faith is fine. Wrong advice in bad faith, like selling insurance to a 65 year old, should according to me involve jail time. But forget jail time, there isn’t even a slap on the wrist for something like this. So this is all the stuff I feel is wrong for the financial industry.
Shray: Fair enough and you’ve articulated this. I know you’ve spoken really force forcefully about this in the past. So now put yourself in the customer’s shoes. The fact that they’re going to someone for advice means that they feel they wanted or perhaps they do need it and now they’ll be told something by some representative and so on. How do you as a customer who’s not spent their whole life reading up about financial markets and figuring out what’s the real meaning behind these acronyms.
How do you identify what’s bad advice? Are there some simple rules of thumb, some questions you can ask so that, again, without having to let this take over your life, you can still be fairly well versed and not fall prey to obvious scams and mistakes.
Deepak: Shray, I think the biggest problem really here is, who gives you this financial advice. Typically, nowadays you can get financial advice from a Panwala in good times, which is typically a time when you should stop investing in anything. Not this is denigrating Panwalas, it’s denigrating the system, which basically, says that there is no qualification required by anybody. It’s probably a good thing also, to give financial advice.
Now, Anybody can give you financial advice doesn’t mean that anybody should. So, that doesn’t mean also that you should start looking for people’s educational qualifications or the number of degrees they hold. But the more important thing is about what they say. Analyzing what they say typically is, if somebody tells me something is a sure shot, guarantee, 100%, for sure, is simply something that is too good to be true and therefore it is usually not the right advice.
So if somebody tells you things like, I can guarantee that this will give you 10% or 15%. I think they’re talking through their hat. I also think that you should now start getting wearier when any of these items, which I talk about happens. One is, if they tell of something is too good to be true. They don’t tell you the kind of costs it takes to get in and out of a product, the ongoing cost of maintaining the product. That is another reason why you might say this is not great financial advice because knowing the costs and not just the returns is an important part of why you should make a decision.\
What’s in it for the advisor? What’s in it for the product manufacturer? These are questions that effectively make or break good versus bad financial advice parameters. Another part, which advisors really don’t try to delve on is, how easy is it for you to access money? Is liquidity there in the product, not there at all. How much is it going to cost to exit the investment? I have met advisors who told me, “You know what? You should invest in these funds.” What are these funds? They’re EIFS, which is one crore rupees per ticket size.
But you know what? They don’t take all of the money at once. What they didn’t tell us was that this was a fund that required money but would not give you back any liquidity for 10 to 15 years. Literally, you would invest in this business as if it was charity and if you everything back it was a bonus. So it needed to be thought of like that, but the adviser was using words like, guarantee and Oh this is great, they run for 55% in their last investment, which was one out of many. The cost to exit investments, may be 4%, may be 10%, may be 15%.
Gold for instance, you could buy gold today at a 10% premium or even a 5% premium. Sometimes at a 0% premium, but when you try to sell the gold, you’re going to pay a 10% cost making charge or wastage or whatever it is in order to just sell it. So what they don’t tell you when you get in is how much does it cost to exit and therefore you might be less inclined to buy it if you knew that it was going to be more difficult to sell it.
You will also meet people who look at you and say, “Listen, you’re wealthy, your risk profile must be extremely highly risky.” I have found that most wealthy are risk averse. They like to protect what they’ve built and they’re actually not in the wealth creation phase. They’re in the wealth protection phase. So you should create structures as an advisor for them to be able to live through that risk. Simple structures that we’ve talked about.
In capitalmind we do this a lot, is to tell people, “Listen, put your money into liquid funds, whatever might come out of it. Whatever interest you earn out of it every year. Why didn’t you take that and put that into equity or some kind of risky exposure. Even if you started with nothing today and you would put only let us say, if you started with a Corpus let’s say just to give a big numbers a 10 crores, you’d earn about five to 5.5 lakhs per month. If you were to invest just that are into equity within five years you would probably be about 25 to 30% in equities without having touched the original Corpus of 10 CR, which continues to remain in, in say, liquid funds.
That’s more simplistic, more easy to do and more palatable to risk averse customers even if they’re wealthy. The last thing that I’d say is products become too complicated and when they get too complicated, you should learn to let it go in the sense if you don’t understand it, if they can’t tell you in, I invest X and I get back Y. I’ll tell you why it sounds interesting. I’ll give you an example. A customer told me this, he was sold this product that said, give me 10 lakhs per year for 10 years, then I will give you back eight and a half lacks per year for 10 more years. And then I’m going to give you one crore rupees.
Now this sounds fantastic, 10 lacks for 10 years. I am paying approximately a crore. If you’re gonna give me back eight and a half lakhs a year for another 10 years, he’s going to give me about 90 lakhs back. So what’s remaining with him is only 10. Now he’s going to give me one crore for that 10, that’s 10X my money.
Deepak: But it’s 10X your money in 21 years and if you do the cashflow calculations on this, it will actually tell you this is lesser money than you can get by keeping your money in a savings bank account.’
Shray: Not even a fixed deposit.
Deepak: Not in a fixed deposit. So if you-
Shray: Oh, I remember this story, yes.
Deepak: This is a terribly complicated
Shray: This one of our wealthier customers
Deepak: The problem really is you don’t have the time to put this in our cashflow statement, do XIRR. So you’re like, “Okay, he must be saying something, it sounds right.” But when it’s only 3.3%, if I ever told him a product, I’ll give you a product which is 3.3% return. He looked at me and say, “You know what, the door is that way and don’t hit yourself on the way out.” So it’s pretty much that, if it’s a very complicated product enough it sounds like a genius product to you.
So you would want to avoid those products why you don’t understand. It doesn’t mean that you should avoid all products that are complicated. Most complicated products for people who are in the financial industry make a lot of sense. For instance, I could tell you there’s an arbitrage between Tata steel’s partially paid shares and it’s near term options. If you were to do this with almost a well established 3% return per month. It sounds very complicated. But to a person who understand what this is, this is actually something that’s actionable and you can do something about it.
You don’t understand anything that I said, when I said Tata steel has a partially paid share. At which point I will be like, you know what, this product is not for you. This is not something that demeans you because you’re, you’re so rich, you should understand these products by nature. But it’s like if you go to a heart surgeon and no matter how rich you are, he will use one term that you don’t understand and you will look at him and he will look at you as if you are really stupid for not understanding this. He’s not going to explain.
It doesn’t demean you because you don’t know what that word means is that you’re not trained for it. So you should let it go if it’s just too complicated. Another two pieces of expert advice I would say is, don’t look at real estate beyond the house you’re living in. Not because of anything else, because it’s just India is not the right place to do this.
If you can get a loan or even deploy your money in the US or in Canada or even Dubai, you might actually get a better return on investment than you get in India because yields there may be of the order of eight to 10% in certain pockets. And therefore give you a much better return than you might get from real estate in India. You might want to consider that. But in India it sounds like a dying proposition right from day one.
More important about real estate, is most people think of real estate as a great investment. What they fail to realize is the largest leveraged investment they will ever make especially on the second house. The first house is fine because they’re living in it and then their net worth is one, two crores and they go and buy another house worth one crore. How do they do that? By taking a loan, it’s on leverage, it’s large. It’s too big.
If you’d spend the same one crore on stocks, you might’ve gotten a much better return. But no, you’re comfortable owning the house. Then the government gives you incentives to own multiple houses Vs they don’t for multiple stocks is a bad thing according to me, because more stocks make more sense than more houses. You would want a wide leverage and advisors who tell you to take loans without understanding the nature … So for instance, many advisors say, take a loan for a house because you can save on income tax. I mean, in one case you pay the bank, another case, you pay the government both ways it doesn’t make any sense. It’s not yours.
So saving on tax doesn’t always make sense when you have enough money to pay up that housing loan. And in many cases it might actually make sense to pay it up. So bad advice is complicated, but because it’s complicated, you can identify it a little bit easier.
Shray: Fair enough. Let’s start coming towards the end of the conversation. So first let’s look ahead. How do you see this changing or how would you like to this to change? What do you think the world will look like, the world of financial advice in say five or 10 years?
Deepak: This is quite interesting Shray. I think the world’s changing. It’s not nearly all about Robo advice, because I don’t think you can customize robo advice to a point where people will be comfortable. But I do think people are fed up of aggressive sales practices. I think they want things to be simple. I think they want things to be more transparent. This is where we’re going to go going forward, is that we’re simply going to see things that they say, “Listen, this is exactly how much I make by giving you this kind of advice.”
Charles Schwab is on this in the US, they have said it’s a $30 a month subscription plan. No matter how much money you bring in, you could have $5 million, would have $100000. It’s still $30 a month on financial advice. I don’t know the specifics, but that might be the model that goes forward in India as well. Maybe much easier for people to implement and do. Remember, when you go to a doctor, it doesn’t matter what kind of disease you have, he still charges you 500 rupees. It’s the specialists that charge you more. But then you only go to a specialist after you’ve gone to a basic doctor.
So everybody has a staggered fee, but it’s not based on how much wealth you have. It was just basis on what kind of specialized specialization he’s done. We also feel that simpler solutions will be popular among the wealthy as well, because the more wealthy you are, the more options people get you into. They’ll put you into 50 options, some REIT, some structured bonds, some structured debt. Then in the end, it’s such a khichdi that you kind of need another advisor to just help you decode what the first advisor has done and just give you an impartial decision.
The simpler the financial product, the better it is for a customer. It may seem so for the less than rich customers, which means the early savers, but it’s also true for the richer customers. Is that simplicity trumps everything else. We feel also that … at least I feel, we will have a better way to pay fees, create the fee structures as, and we’ve talked about it. People have in the podcast, they talked … I think there was this podcast we both listened to-
Shray: Yeah, I’ll bring it up in the notes at the end.
Deepak: People hate actually paying out of their pocket. Even if it’s a small amount of money. So if you look at paying out of my pocket versus the product already calculated for me. I’m actually more comfortable with the product actually paying out the commissions on my behalf and me not being anything from my pocket. I think there can be an intermediate fee structure. I think it could be quite interesting because you could say, you go to a customer who has, let us say 10 crores of money. If you tell him I’m going to charge you 0.2% of your capital. That’s two lakh rupees.
And he might look at two lakh rupees and say, “This is too much?” For whatever reason, even though you’re advising him on 10 crores. On the other end, if you tell him listen what I’m going to do here is this, I am going to take your 10 crores and I’m going to put say, 50 lakh rupees into a fixed deposit or liquid fund. So what you’re going to pay me is effectively about half of what you will earn on that liquid fund every year.
So you’ll put that money in and whatever comes out of that fund, half of it is yours, half of it is mine. So we’ll earmark that the remaining 95% of your money is going to be invested in something else, and we’re going to tell you what that something else is. Therefore, we structure it in such a way that this is done. If you don’t like what my advice is, you just stop it, take the liquid fund away and no more further fees will be paid. So maybe it’s easier to do that than to do an explicit fee arrangement, which would be according to me more transparent and also worth the advisors time. You have to be worth the advisors time, otherwise, the advisor is not going to advise you.
The third thing I feel today, advisor feels that when he meets a customer for the second time, for the third time, he needs to do something different. So he’s going to look and say, “Hey, you know what? We did 10 investments last year, five have done well, five have not done well. Let’s churn the five that are not done well and move them into another five that were also doing well. So you look at it and say, “Hey, good advice. He’s doing his job.” But maybe, maybe and possibly in most cases I’ve seen this, the correct advice is do nothing. It’s fine. There are 10 products, five have done well this year, the next five will do fine the next year. I have looked at them, analyzed them in detail, and I figured out that what you did was right and what they’re doing is right.
It’s just that some of them the timing is off. Some of them the timing is better. So when you give me more money to allocate, perhaps I would allocate it slightly differently from last year. But otherwise roughly this asset allocation is fine and let’s just stick with it. Inactivity, is actually activity in the sense that I’ve actually got to research my work in order to know that not doing anything is better than actually doing something. Because doing something involves taxation, involves transaction costs, involves a bunch of other things. So if I were to say that inactivity was the best thing for you and after having researched the other options available to you and the tax implications and the transaction implications of doing something, then I’ve actually done work for you. So in activity is an option and therefore it will be respected and acceptable in the future.
Lastly, I believe tech will change matters. We today have much more deeper understanding of the activities of a person by looking at technology. Even that person’s own technology, when a person tells he’s risk averse but his actions in the technology which you can harness using technology tell you that he’s not. Sorry … if he tells you that he can take a lot of risk, and his actions prove that he’s not, then you could harness a lot of this using technology and try and build a better risk framework than he actually has in front of you in the first place.
Today, a cursory look at a bank statement will tell you whether a person is risk averse or not. If you’re to look at it over longer periods of time. You look at technology from the perspective of finding new things that a customer can do. For instance, we tell people about planning for their kids’ education. The education costs can change, can dynamically, dramatically. We’re already seeing the emergence of no fee colleges, where you don’t pay a fee, you go in and do a course and they actually guarantee you or promise you a job at the end of it, a best effort basis. And if you get a job, you’re supposed to pay them 10% of your salary for the first two years. And that is the fee the college or university or structure makes.
This is great because, A, you don’t want to pay for your kid’s education. If this model became immensely popular, you would literally not need to fund your child’s education in the future. If this were to become prominent and you will probably know only after it actually has become prominent. But what happens now to all the money that you’re saving for your kid’s education? Does this change everything dramatically? Does this just create a Corpus that you can use? Or maybe you should create it as a trust fund for a child to maybe set up a startup at a later point in life.
The fact is technology can bring you a lot of these pieces, not just by making them happen but when they happen in the external world, making you aware of them, finding out what the kind of retirement costs are in different places. So once you’ve identified the kind of place you want to live in, your retirement costs may change. If you have technology, you can track them, you can track your own portfolios as a benchmark against a bunch of others. If you ask me personally, I think benchmarking against something is a wasted piece of time because if you’re on track to reach your goals with the lowest risky option, why does it matter to you that the Nifty gone up 5% more?
If had a lower risk, I can achieve what I need to achieve. That just gives me peace of mind. Peace of mind gives me more happiness than anything else. So, I think solutions married with technology will be the future simply because we just don’t have it in ourselves to manage everything in our own heads. Or even our advisor doesn’t have a way to handle 200 people’s goals and thought process in his head at any given point in time. So that’s where I see things changing.
Shray: Let’s end with the final question. So again, it’s the CapitalMind podcast. So we have customers, we have listeners. What should they be doing right now, maybe after hearing this podcast. How should they now approach financial advice and financial advisors going forward?
Deepak: I think you specifically need to identify who you are in the ecosystem. Are you a financially savvy person, that means you know the products that we’re talking about, you know the different terminologies or at least you want to know. You’re inclined to know, you’re willing to spend the time to understand this. In which case, you might do a more self help option saying, “I will do it for myself and I just need financial advice on what kind of products are available and what kind of solutions are available, what I should be doing. Roughly, I can understand, do this stuff myself.”
Perhaps, sometimes, I don’t have the time, sometimes I just need someone else executing for what I do. The other person is a person who says, “I need help because I don’t understand or I don’t have the time. I understand just a little bit and really somebody else needs to take care of this for me.” You want to find yourself a financial partner who will correspond with what you need and give you a bill of financial health every once in a while. So maybe once in 6 months or once a year.
It’s not required to be done every day, every week. So calling up a person and saying, “Acha, market kaisa lagta ha?” What is good to buy today, is not the right way I think to look at a financial advisor. It’s more like, “Listen, I’m I on track, I’m I doing the right things? Have certain things changed?” You need someone who’ll question your assumptions, validate your assumptions and meet you every once in a while.
The more wealthy you get, you need to understand that you might need multiple sources of inputs for different fields. It’s perfectly fine, they don’t have to clash with each other but, one person may not meet your entire needs, the wealthier you get. That’s where we are, I think from a customers or a listeners point of view you should just identify where you are. Many of you will actually be financial advisors by yourself.
You sometimes are in the need of financial advice for yourself as well, because mostly people don’t analyze their own risk profiles. So it may still be useful to get a bill of financial health from someone close to you. But it’s also important that as financial advisors, we adapt or change to this environment as well.
Shray: Fair enough. I mean, after all this I’m just reminded of this bumper sticker or the sticker I saw on a doctor’s office, where they said, “Don’t confuse your Google searches with my medical degree” I think that makes perhaps for a doctor’s office where they’re pressed for time. The expertise they have built is just so different from your lived experience unless you’re another doctor. That engaging with them beyond a point isn’t helpful for either you or them.
But I don’t think as you pointed out that’s the case when it comes to financial advisors. Even if you’re not financially savvy, you’re not financially inclined, you don’t care about this words, these acronyms and things like return rates. You can still ask questions, you can still find out how much you’re investing, how much they’re being made and when you can access your money and when you can get it back.
I think as a customer you should always have that level of comfort and if you’re not feeling comfortable, are a bit intimidated or are sort of led to believe that the social setting makes those questions awkward or uncomfortable. Then I think you’re being played and you need to be able to break through that. So thanks for that Deepak and we’ll sign off over there.
For everyone, you can find us, I think everywhere podcasts are found, bylarge or even on spotify. You can contact us at podcast@capitalmind.in and just find us on twitter, capitalmind_in. Our websites are capitalmind.in and capitalmindwealth.com. So thanks everyone, bye, bye.
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