The Indian mass market segment, broadly defined as 'families having investible surplus of INR 2 lacs to INR 10 lacs', is estimated to consist of more than 18 million families. The segment is further expected to grow at a handsome rate of more than 18%. This large pool undoubtedly offers a significant opportunity for wealth management service providers.
Traditionally, organized (banks and broking houses) and unorganized (independent financial advisors (IFAs) and insurance agents) players used the transaction-based selling approach to tap this market. Under the transaction model financial intermediaries approach customers with certain set products. Advisors don't charge customer explicitly for their services, but rather are incentivized by the manufacturer of the product in form of commissions. Most popular products among this segment have been insurance and mutual funds followed by direct equity investments.
However, the changes brought in by regulators in MF and insurance industry in last two years have completely shaken the existing business model, making every intermediary reexamine the feasibility of their business. Some of the changes like removal of entry load, limiting expenses (commissions) in insurance policies and new ULIP regulations have already reduced the incomes from insurance and mutual funds business. Proposed direct tax code whereby tax benefits associated with investments in insurance are proposed to be taken off considerably and removal of ELSS schemes from approved instruments for tax saving would impact the distribution business further. This considerable loss of revenue and profits can be catastrophic to many distributors as cost of procuring business is fairly high. Investments products like mutual funds and insurance are still push-based products. Advisors spend considerable efforts with each investor to procure business. General awareness and comfort level of investors with investment products is still low, especially in the mass market segment. High volatility in market in last few years has only added to investor' and advisors' woes. A large section of the society which is comfortable with these instruments prefers to invest directly without involving any distributor, saving distributors' fees in the process. All these factors are driving the case for change in business model among wealth management service providers in both organized and unorganized space.
The unorganized sector might be hit more significantly due to the limited product portfolio available with the advisors. Only those players from unorganized sector who can transform their business to provide credible and structured investment planning and advisory services in addition to the standard products may succeed. The impact of the changed environment has been felt equally by the organized sector. Many banks have reduced their focus on mass market segment for wealth products and are trying to capture the investible surplus of the segment through term deposits. Many others are still trying to keep the business alive based on charging explicit fee on transactions while few others are experimenting with model where transaction fee is supplemented with advisory income.
Considering the new environment it is essential to have a customer-centric business model with higher focus on value added services like financial planning, need based advisory, structured investment execution, periodic portfolio reviews, to name a few. This will help service providers generate additional fee income on top of the commissions earned on the investments processed.
Structured investment planning and advisory services have been traditionally offered to high net worth individuals. The challenge now would be to make these services or certain components of these services available for the mass market audience at a reasonable fee. Technology would play a significant role in making this transition for the financial intermediaries. However, technology adoption by wealth management services providers in India is fairly low in general. Most of the firms still mange a large number of investment processes manually. Such organizations fulfill investment requests in various instruments like mutual funds, insurance and corporate fixed deposits manually without having any system support to record, process and track these transactions and subsequent holdings. With such operational models, it would not be possible for organizations to provide customer centric wealth management services at a large scale. Organizations need to take a big leap in their IT strategy to make the mass market services profitable. Here, IT vendors need to play a significant role and have to deliver solutions in a manner which does not necessitate a big capital spending. Market would be keen to consider hosted solutions which can help them reduce both time & capital required for launching their services.
Organizations which are making/have made investments in deploying wealth management solutions for HNI and private banking segments should look at leveraging components of those systems with appropriate changes in operational strategy to meet mass market requirements. This is because the core science of structured customer-centric investment planning and execution is applicable to all segments of the market equally.
Independent financial advisors and small organizations should look forward to have specialized entities that can deploy client centric solutions and license the platform to them to manage the clients effectively. Similar model has already been successfully implemented in many developed economies. Vendors like Advice America and Wealth ERP have already made a start and launched hosted solution services in India in financial planning space. It is expected that going ahead this model would gain significant traction with advisors and organizations looking to transform themselves into customer centric service providers.
(I have authored an in depth paper on this subject. You can access "Addressing the Wealth Management Requirements of the Indian Mass Market Segment" here.)
