Demand for financial advice is considerable and will grow
7th February, 2012
Deepti Bhaskaran & Kayezad E. Adajania
7 February 2012
Financial sector reforms are under way, but what takes centrestage is how financial products get sold to investors. Mutual funds are now no-load products and agents' commission is now public knowledge. Even commissions that insurance agents earn have been reduced and the insurance regulator is working on new bancassurance guidelines that will allow banks to have tie-ups with multiple insurance companies in different states. Mint Money talks to Ajay Srinivasan, Chief Executive (Financial Services), Aditya Birla Group, to get his views on the changing distribution landscape and the scope of a financial services company such as his in the current market.
Mutual fund (MF) distributors aren't too enthused about disclosing their commissions publicly. They feel it's a violation of privacy and can attract unnecessary attention. What is your take on this?
There are two broad approaches to distribution and distributor commissions. In many markets, the focus is on transparency of remuneration and suitability of products. Here, disclosure on fees and commissions is emphasised with the principle that the customer should take responsibility for his decision based on the facts available. This approach also emphasises suitability - it suggests that products need to be sold to appropriate customers.
The second approach is to regulate or mandate levels of commission for different products, rather than letting markets or customers take the decision. The regulations in India have more recently been following this approach.
The issue of transparency in commission belongs to the first approach, which exists in many markets and will increase the consumer's trust in the industry.
Even as it adapts to significant regulatory changes, the insurance industry in India will need to pace itself with sweeping technological advancement and increasing customer awareness. In the current environment, insurers will need to evaluate their product suite and distribution strategy. In the future, which distribution channels are likely to become popular and why?
You rightly raise the critical issues for the industry - customers, products and distribution.
Increasing customer awareness about the need to plan for different needs - be it life protection, health, retirement, children's education or to build wealth for other needs - is important. Products clearly need to follow the customer's needs and it is important that products are sold to the appropriate segments. Frankly, given the low penetration and opportunity for mass India, we don't need very complicated products but need to match basic products to the needs of different segments. Every Indian, after all, needs life protection, health insurance and basic life stage needs.
In terms of distribution, a multichannel approach in a country like ours is always preferred as different customers have different requirements. I believe that while remote channels (telemarketing, Internet, etc) will grow rapidly in India, face-to-face channels will continue to dominate for some time to come. Within face-to-face, banks will probably gain given their network.
How will the draft guidelines on bancassurance help insurers? Will it be more beneficial for insurers without a banking promoter?
Across the financial sector, we are seeing changes that are empowering the customer, be it capping of charges in life insurance or removal of entry loads in mutual funds or deregulation of savings rates in banking. The ability for a bank to offer its customers more than one insurer's product is consistent with the theme of empowering customer choice.
Acquisition of customers at an acceptable cost is the main focus. The bancassurance channel fares well on this count due to the reach and natural customer franchise of banks. Opening up bancassurance to more than one partner could thus benefit all participants but will certainly benefit customers.
As long as the market expands due to this, everyone should benefit. However, if it merely leads to substitution of business, then non-bank promoted insurers may have a slight advantage.
In India, personal finance products still need customisation. This is where organisations such as yours can play a vital role since you deal with multiple products. For instance, a quick solution would be to offer a unit-linked insurance plan, but a careful analysis would reveal that a term plan-MF combo is better. Do your advisers customise solutions?
While some of our businesses are manufacturers of products, we also have an open architecture distribution business in the fold through Aditya Birla Money Mart. Here we provide financial planning advice to our customers; here we get a complete view of their requirements. Our view is that with the regulatory framework and with increased product complexity, distribution will be more about advice and value addition and less about product push. At the same time, single product distribution will become tougher as customers will want broader advice and distribution economics will require an increasing share of wallet.
With no loads in MFs and caps on commissions in insurance, do you think agents will go out of business? How important will be the role of financial advisers then?
The elimination of loads in MFs and caps on commissions in insurance has obviously led to a decline in earnings for a large number of distributors. This, in turn, has put a huge premium on increasing productivity to regain some of the lost ground. Increasing productivity will inevitably require a sharper focus on customers, improved sales management techniques to ensure adequate leads and conversion and finally a broader range of offerings to cater to a larger share of a customer's wallet.
While things have got tough, I do not feel that agents or other financial advisers will go out of business. The demand for financial advice and assistance is considerable and will only grow. The issue is not about demand for such products and services, but more about how that demand can be met effectively and profitably.