17 March, 2017

The elusive quality that brings the world to their feet

The shopkeeper finds out why you are buying a product & sells a basic, low price product as your requirement is such.  The refrigerator mechanic looks at the fridge & finds that it is not cooling properly as a plastic bag was blocking the air vent. He takes a nominal Rs 100 for the visit and refuses to charge the usual Rs 500, as there was no work involved. An insurance agent asks why you want to buy a policy and when he understands that you don’t require insurance otherwise, suggests investment in PPF.

 Do these things happen in real life? They do happen… but very rarely.  There is a vested interest in all of us and we all act based on what is in our best interest. This happens across industries. The self-interest is so strong & our greed so endemic, that self-regulation seldom works. We see excesses in virtually every industry, even though some of them are regulated. 

The 2008 financial crisis itself can be traced to such unbridled greed which led to the birth of exotic instruments that couched the true nature of the underlying products. It was a deception & a fraud of such proportions, that it precipitated a global crisis. Selling unsuited, costly products is a malaise worldwide in the financial services industry. 

Volkswagen was an example of fraud in the automobile field where they had a cheat software that got triggered, when emissions were measured. Medical field is replete with unethical practices – doctors suggesting costly medicines in collusion with manufacturers, suggesting unwanted procedures, suggesting C-Section when normal birth would have been fine etc. Recently, National Pharmaceutical Pricing Authority of India has brought down the stent prices to between Rs 7,000 to Rs 30,000. The stent manufacturers and importers were making profits between 250% to 1000% & the citizens were reeling under the onslaught of high medical expenses borne out of profiteering & lack of scruples. 

This is happening in industry after industry. We have become accustomed to people taking advantage of us, in every way. We are perpetually forced to be on the lookout. Caveat Emptor is the reigning sentiment with people – they have no choice. 

Consumer protection is hence raising its head everywhere & the incumbents are not liking it, one bit.  But, once there are regulations, does it work? Not always. 

Regulations impose the base minimum standards which an industry participant has to comply with. In industry after industry, regulations are complied with grudgingly and to the minimum extent possible. But that is hardly the intent of the regulation, which assumes that the participant will take the regulation as a guiding factor & rise well above the minimums, which it seeks to impose.

 In financial services industry too, regulations have been closing in as the citizen at large had been taken for a jolly ride. More than in any other field, financial services impacts the well-being of a person, nay, their very survival based on what financial decisions they take and which products they buy. 

This is where ethics come into the picture. Ethics are the moral principles which govern a person’s behavior. Some people are endowed with it. Many others are not blessed with it. That is why regulations are required in the first place so that they can prescribe the basic minimum standards to adhere to. This then becomes the hygiene factor; the bar which everyone needs to jump over. 

But in every industry, we need torch bearers who will go far beyond the call of regulation. That is when the industry will acquire credibility & respectability. 

Fiduciary standard is now becoming an important component – often the centerpiece of the financial services regulations worldwide. This is a higher standard which imposes huge responsibility on the adviser, whereby the adviser places the client interest even higher than one’s self interest. Hence, the regulation of today may seem bullet proof. But even here, those that want to merely comply with regulations can get away with doing the minimums! 

An example – in the Investment Adviser Regulations 2013 by SEBI, fiduciary standard is imposed on those coming under the regulation. This regulation also imposes other responsibilities like getting remunerated by client only and not by product manufacturers. The intent in this case was to create true blue advisers who are completely aligned with client’s interests and who represent only their clients. 

I heard some advisers the other day discussing about whether SEBI RIAs can sell products coming under the purview of other regulators. To me, the question looked self-evident – one cannot sell any commission bearing product whether the product comes under the purview of SEBI or not. That’s because of the principle of representing the client’s and their interests alone and not having any conflict of interest. If one were to have inducements in the form of commissions, an adviser cannot rightfully say that they are acting only in their client’s best interests. They may probably be complying with the regulation in form but certainly not in spirit. 

This essentially is the problem. When you buy a bathing bar, there is nothing wrong with it. But it is not a soap, which the customer mostly thinks it is! When you buy a tea blend thinking it is tea, again nothing wrong there. But read carefully – it has a whole lot of things other than tea, like tapioca! Are these manufacturers misleading people? From regulatory standpoint, they may not be. But, ethically, they are misleading the public by offering something and leading them to believe it is something else. 

Ethics is a scarce commodity – in finance & elsewhere. Finding someone who acts in the true spirit of the professional standards who goes beyond the call of mere regulatory requirements are those who become legends in the profession. 

Let me end with an anecdote. A sculptor was bringing to life a statue. An onlooker sees another similar statue in the room and asks whether he is creating another one of the same type. Continuing his work, the sculptor replies that the other statue is flawed & hence he is creating a new one. The onlooker inspects the other statue and is not able to find any flaw. Intrigued, he asks the sculptor as to where the flaw is.

The sculptor stops work, walks around to the other statue and points to the nose, where there was a small chip on the otherwise flawless nose. The onlooker then wanted to know where the statue would be placed. The sculptor, shows him a place high above on the temple roof. The onlooker is very surprised – “If the statue is going to be placed 40 feet above the ground, no one will know there is a flaw. So why are you making another statue?”. The sculptor quietly says,” But, I know it has a flaw!” 

That is what integrity & ethics is all about. It is what you display when no one is looking. It may be difficult to comply with such high standards. It’s rare. It’s priceless. That’s why those who have it, are valued very highly – they straddle their profession like a colossus.




Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in


#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

08 March, 2017

What is fair compensation for your adviser?

If the charges are almost static, there is no incentive for the adviser to perform,




Change is a constant now in the financial services space. The financial community has had to adapt quickly to the fast-changing regulations. 

Here is one change. Financial service providers had traditionally been selling products and bundling incidental ‘advice’ with them, for ‘free’. All good, but the problem was that the distributors’ were guided by the interests of the principal and of their own. While customers thought they was getting ‘true’ advice, they were being sold what the distributor wanted to sell. Apart from that, often, distributors did not have certification, hence their ability advise was constrained. The Securities and Exchange Board of India (Sebi) introduced the Investment Advisor Regulations in 2013, so that customers had access fiduciary advice. These Registered Investment Advisors ( RIAs) were prohibited from getting commissions; their remuneration had to come directly from the customers. Today, there are over 530 RIAs. 
Worldwide, there is a debate on the fee-based model. There are also those who vouch for the asset-linked model. They say that as the value of assets goes up, so does the complexity, hence expertise and more time is necessary to manage them. 
The other argument is that if advisers nurture clients’ wealth, they should be allowed to participate in the upsides too. A CFO in a company is well compensated as her acumen in managing the financial affairs of the company is vital. The compensation reflects the value added, and not just the time spent. The same holds true for a ‘personal’ CFO, which is what an adviser is.
Even in the investment field—mutual funds, insurance, portfolio management services—the prevailing and accepted model is to charge fund management charges as a percentage of assets. Apart from these, there are management fees, premium allocation charges, policy management charges, and profit sharing too, in different products. 
Those who disagree with the asset-linked model opine that the effort involved in managing a Rs1 crore portfolio is not very different from managing a Rs1.5 crore portfolio. Hence, the extra charges are unwarranted. Again, there is again some truth in this. 
But if the charges are almost static, there is no incentive for the adviser to perform. The costs for an adviser are going up and without a compensation structure, the relationship will not work. So, is there really an alternate model? There is.
A project-based compensation model could work well when there is a clear-cut project that needs to be completed and delivered. A financial plan would work well under this model. After this, various services can also be accessed a la carte. This means that a customer could opt for some services and not others. So the adviser-client relationship is an on-off affair and not a continuous one. The disadvantage is that the adviser does not have a regular source of revenue. Plus, she also does not have an overall control over the client’s financial well-being. So, the amount an adviser could earn is capped, and scope of engagement is limited.
If a project-based compensation model was the best model, the corporate world would have only consultants and no employees. 
Consultants need to have many rods in the fire as a project has a specific tenure. After one project is done, they have to move on. They would receive less and their long-term engagement is at the whims and fancies of the client. From the customer’s point of view, they would be paying less and would be getting a less engaging relationship too, in this project-based model.
There are advantages and disadvantages to both models. Which model the client wants to choose, depends on how deep she wants to engage with the adviser. The asset-linked model enables a deeper engagement. The adviser is invested in the customer’s future and is the client’s CFO. The benefits in this engagement could be high, though the fees paid will also be more than in the other model. 
The project-based compensation model would allow the client to pick and choose what she wants. This pre-supposes the client’s clear understanding of what is useful for her—it may look straightforward but may actually be complicated. Most people don’t know what all is needed to live a financially well-funded life. So, with this model, they may pay less but also achieve a lot less. 
The fee alone should not be a determinant while choosing a model. Rather, the choice should be based on the value an adviser could add and whether they can live a fulfilling life, bereft of financial worries. But it’s best to leave it to the wisdom of customers to choose what is best for them. 



Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in


#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7


07 March, 2017

The coming tech-tonic shift in financial services space!


Technology is an enabler. Tech is used to make things easier, ensure good quality at low cost, remove mind-numbing repetitive jobs and act as an aid to mainline functions like Sales, Finances, Manufacturing etc.
The role of tech has slowly changed. From being an ancillary function, they have started occupying centrestage – across industries. In many new age businesses, technology is the heart itself.
Technology as a disrupter - Seismic shifts are happening across industries & is going to make a whole lot of people & current processes redundant.  Technology also will create many new jobs – but many of these jobs will be highly skilled jobs, which has a high entry barrier.
Whoever thought an app can disrupt taxis/ autos!  Drivers stare at the prospect of losing their livelihood as more and more people choose to travel using Ola/Uber. People may not feel the need for cars at all in future – at the least, multiple cars will go away if a car is just a click away, any time of the day or night.
Driverless cars are another trend that may mainstream, maybe in the next 5 years. This has huge implications not just for drivers but for car manufacturers as well.
If driverless cars and carhire services are the future, then the number of cars sold could plummet. The way taxi aggregators operate itself will change. There will be, say, 200 depots throughout the city & the driverless cars will pick/drop a passenger nearest the depot & return to the nearest depot, till it is hired again! This way the number of cars required to service the car using population could probably come down by a factor of 10 – that could be a worry for the auto companies.
Again tech is disrupting a lot of other areas. Eat out/ Restaurants industry, for instance, have both been benefitted & buffeted by technology. The reach of restaurants in an area has increased due to apps, but many times, they are also forced to lower their rates.  Now, the traditional restaurants are facing stiff competition from two new sources – purely online delivery services & home cooks.
Online delivery services may be aggregators or actual service providers. Aggregators would assist existing restaurants to expand their footprint.  Purely online delivery services are the new kid on the block, which is today posing a threat to the traditional restaurants all over a city or atleast vast swathes of the city. They have the advantage of having their kitchen & operations in parts of the city, where rental costs are low. Unlike the restaurants, they need not setup an eatery in a prominent place, need not do up the place, spending a fortune.
The other competitor is Home Cooks! Now we can all get home cooked food instead of ordering from hotels. In Paris, it has gone one step ahead… Chefs are inviting people to their homes with the prospect of a six course meal with their family, at about one-fourth the price of such a meal in a fine-dine restaurant!
Disruption is hence everywhere. A mobile phone is all we need today. We can call, click photos, chat, search, purchase, pay bills, check mails… the list is endless. Purchases & payments are increasingly migrating to mobiles. In future, we will use our mobiles for everything else as well – from switching on the TV, checking what is happening at home sitting at office, dimming the lights or starting the washing machine an hour before one gets back home etc. This comes under the head of Internet of Things.
The coming tsunami in Financial Services - While there is so much disruption everywhere, is financial services immune from it?
No way! The disruption in financial services has just started… we have seen nothing yet!
The Robo Advisory  platforms of today are rudimentary. Today, they are asking a few questions & are suggesting a portfolio for the investor. There are others which go a bit further, gather a bit more data, do risk profiling & draw-up  a basic financial plan as well. This has led to the financial services community to derisively dismiss Robos, almost concluding that they will never be able to replace human advisors.
Machine learning, deep learning & artificial intelligence are progressing rapidly. Deep Blue, a software program by IBM, has beaten the best chess players in the world, over two decades ago. Deep Stack of Bowling’s lab, University of Alberta, has won against the best players in Poker, in the no-limits-on-bets version, very recently. This is a huge achievement as Poker is a game with lots of uncertainties & lack of information about others’ “hands”. This program can run off a gaming laptop – not a super computer! This kind of programming would have potential application across areas - from defence to medical sciences.
If such is the capability of AI, why do we think computer programs would not be able to advice competently?  Advisors would be deluding themselves if they think they are indispensible.
Yet, in conference after conference, I hear “comforting words” which imply that advisors cannot be replaced as they offer counsel , are the client’s trusted  confidante, assist them navigate turbulent waters & help them keep their cool. The “psychological counseling & hand holding” portion is being over emphasized. 
AI is advancing rapidly & soon can interpret emotions based on pupil dilation, breathing rate, flushing of the face etc. & offer expert counsel, the likes of which we will find hard to compete!
Financial Advisors need to work much harder  - Does all this then mean the death knell for advisors?
Not necessarily. Robos would attract a huge following by offering advice that is accessible to the population at large, at a small fee, be able to service a very large target audience consistently & by driving the cost to the customer down even on products suggested. As an example, Vanguard has USD 4 trillion in assets & charges an average of about 0.18%!
But, still the advisors will be there. However,  what advisors will be able to earn may come down dramatically, as the new-age Robos become mainstream, acquire human like capabilities & drive costs down – in terms of fee charged for advice, commissions from products & portfolio management fees.  
However, most in financial services field are in denial. They don’t think people will go Direct, don’t think ETFs will mainstream, don’t think robos can advise clients competently…  the  truth is that financial services landscape is going to undergo a sea change & everyone will be touched. The product distribution & advice is going to be commoditized like never before.
Product manufacturers would need to change as well - they have to respond with low cost/ high volume products & an online friendly ecosystem to suit the needs of the online advisory.
There is one thing going for the advisors. People prefer dealing with real people, instead of interacting with a computer program, however good & prescient the computer algorithm. Hence, if the advisor offers a good value proposition, they will continue to be in business.
Advisors also have to move up to the ground that Robos may not be interested in or may not be able to compete easily. There are many areas where advisors can deliver significant value to a client – life planning , major transition assistance, financial therapy, estate planning , philanthropic planning, life coach, coaching the next generation for wealth transition etc.  Advisors can well thrive if they manage this transition well and use Robos for the basics & focus on these high touch, high value areas.
Conclusion – The coming tidal wave is real. It will swamp the financial services space, as the current business model will no longer work. The high earnings on commissions & fees would go away. Financial products / services will be largely commoditized.  Advisors need to recognize these and use technology to drive down their costs of servicing customers and at the same time moving to high value areas that would add significant value to customers. Those willing to transform are the ones who will survive & thrive.  We hope that number is significant.
Article first appeared on Linkedin: The coming tech-tonic shift in financial services space!

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in


#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7