Developing markets such as India like studying the growth of developed markets like the US or UK. When expanding Mercer’s wealth management business across Asia Pacific a few years ago, I also had to segment my region by the stage of development. I put Australia and India at the opposite ends of the spectrum. As I re-enter both markets after a break, I am sharing my observations on what I see the different aspects of the money management industry – product, distribution and communication.
Product
Starting with the macro environment, Australia has had low interest rates pushing savers to seek higher returns in capital markets. India has had nominal rates, albeit with high inflation, the implications of which savers don’t understand. So Indian asset management companies have to start by educating savers about mutual funds vis-à-vis fixed term deposits, real estate and gold.
Once they convince savers to consider financial products, Indian asset management companies have to compete with insurance companies. In Australia, insurance and asset management companies operate completely separate product suites, with the former outsourcing the asset management of insurance bonds – the only place where the worlds collide – to asset management companies. In India, even the respective regulators seem to have turf wars. Not only do insurance companies have outdated products (whole-of-life and unit-linked insurance policies), the management of which they can’t outsource to asset management companies, but they also have bigger marketing budgets and more lenient rules.
The Australian asset management industry also separates its institutional and retail businesses by offering lower priced products for the former while pricing in a retail distribution cost for the latter. The ‘mezzanine’ funds appeared on the scene along with platforms, which meant that the total cost to investors was still 2-3 per cent per annum. The Indian industry was forced to offer ‘direct’ versions of funds, without distribution cost, for retail investors about three years ago. Needless to say, the distributors didn’t appreciate any asset management companies seen to be going direct to their clients.
On its part, Indian asset management companies tried to support distributors by offering a confusing variety of equity and debt funds as building blocks, leaving the asset allocation decision to the distributors. Even here, the regulator has recently asked them to rationalise their product range. In the meantime, the Australian market started with diversified (capital stable, balanced) funds in the early 90s’, moved on to asset class building blocks, being put together in multi-manager funds, and now appears to have come full circle with multi-asset funds.
Distribution/Wealth management
While the Australian dealer groups are now predominantly owned by banks and insurance companies, the Indian ‘mutual fund distributor’ community tends to be roughly equally divided amongst banks, ‘national distributors’ and independent financial advisers (IFA). Most of the national distributors are non-bank organisations with salaried relationship managers; only a handful of ‘IFA aggregators’ are similar to the Australian dealer groups. In spite of the salaried nature (with resultant reputational risk), the level of training is abysmal because the regulator hasn’t set high entry hurdles or continuing professional development standards.
Interestingly, the regulator has set higher educational standards for a new class of licensees called ‘investment advisers’. However registered investment advisers can’t charge any commission on any product, and have fiduciary responsibilities. Hence, it’s not surprising there haven’t been too many takers.
While there are some research players, including Morningstar and S&P-owned CRISIL, the majority of distributors tend to do their own research. Model portfolios are rare.
Communication
In Australia, asset management companies have to communicate with research houses, dealer group head offices, advisers and investors. In India, the B2B communication is largely missing. While asset management companies do organise conferences and junkets for important distributors, the content is aimed at the lowest common denominator, perhaps because of the low educational standards and industry churn which means the distributors’ knowledge is almost as low as that of investors’.
Overall
Australia is called the ‘lucky’ country. It’s been rich enough to fund a social security system, which has allowed its regulators to implement a long-term vision for its pension savings. It could raise the compulsory minimum contribution to superannuation from 3 per cent to 9.5 per cent accompanied by a myriad of regulatory changes, thereby guaranteeing not only a steady pipeline of funds under management for the industry but also enough complexity for the advice industry to be in demand. The industry didn’t really have to fight for customers. Investors also trusted the industry, sticking to default options of their superannuation plans, probably a little complacent with the belief that they can rely on the age pension if their super falls short.
In India, you would think the sheer size of the population should ensure a steady supply of customers. But nothing is as it seems here. Having grown up in an era of scarcity (before the deregulation started in the early 90s’) and with no social security fall-back, Indian investors are comfortable with the certainty of fixed term deposits and brand of government-owned Life Insurance Corporation. They don’t trust the stockmarket, directly or through mutual funds, because of volatility and scams. The asset management companies and distributors keep squabbling about whose job it is to educate the intermediaries or the investors. In fact, I find one theme pervasive through the industry – that of short-termism. Everyone wants to make money in the short-term, thinking they will do better when the market is ready.
The question I have for leaders in the Australian industry is – what would they have done if they were operating in Indian conditions?
Hansi (Rashmi) Mehrotra is the founder and editor of MoneyManagementIndia.net, an industry content portal for anyone considering investing in India. She also runs a financial education initiative called The Money Hans aimed at retail investors.
