A New Approach to Financial Literacy

A New Approach to Financial Literacy
December 25, 2009 05:54 PM
Krishnamurthy Vijayan

Source Money Life http://www.moneylife.in/article/2957.html

Investor education is a controversial topic. The cynics view it as marketing in sheep’s clothing. The idealists see it as a panacea for all our capital market problems. The truth lies somewhere in between

When it comes to investors, I have come across two extreme kinds. The first type consists of people who are not interested in being educated. They ignore articles on financial planning, bad cholesterol and smoking with equal contempt. Then there are those who are really, really interested; the amateur experts who spend hours listening to financial news, reading the abundant financial literature available and seeking expert advice. But the vast majority of the salaried savers is somewhere in between. They would not mind more of financial literacy and would be willing to practise basic financial discipline, provided it is conveniently available and simple. Investor education is most needed by this ‘middle’ class of savers.
So far, investor-education efforts have fallen into two categories:
1. Advertise, exhibit and use public relations to generate interest;
2. The large-format seminar model, where a crowd is gathered and presentations made by someone from the financial industry.

While these methods create some awareness, they are ineffective in truly educating the ‘middle’ segment. This is because:
1. Advertising attracts the eyeballs of those who are already committed to increasing their knowledge and are doing so in many ways. They rarely draw in the indifferent ‘middle’, since:
a. There is already an overload of literature and it has become easy to ignore;
b. They would rather spend their time at a saree or furniture exhibition;
c. There is a sense of embarrass-ment in going to a health or wealth exhibition—strange as it may seem to many of us in the profession.

2. Large seminars help in getting impressive statistics but:
a. Arranged by event managers, the audience usually consists of the already educated, that is, traders wanting to meet the high-profile speakers, retired people who have become amateur financial advisors and money managers and people who could not say ‘no’ to that attractive voice at the end of the phone line;
b. The speaker comes with an impressive presentation, sometimes canned for some other context. Some come without even that, assuming that their star power is enough;
c. Questions are asked by the chronic seminar-attendee and the trader. The average investor suffers in silence and sneaks out when the torture is over;
d. There is not much audience engagement nor is an effort made to create a call-to-action; not that it is possible with 600 people cramped into a banquet hall.
This is the easy way to spend the investor education fund and advertising money, create brand awareness, generate impressive statistics and create wealth for some of the stakeholders—all this while feeling very good about oneself. Yet, it does not answer how we can reach that elusive 15-crore middle-class segment as individuals in a meaningful manner. How does one give them simple, implementable rules to invest by, and ensure that they practise it? I know of some friends who are working on alternative models that make sense to me.

1. The small seminar format: Here, relatively homogenous groups of people (say, 20-25 executives of the mechanical department of a construction company in the age group of 30-40) are grouped together and taught the basics of personal financial profiling. At the end of the workshop, a personal financial profile is made for each one and an asset-allocation model is prepared. A financial planner/advisor conducts the workshop based on a pre-determined presentation to ensure quality control and product neutrality.

2. The one-on-one format: Again, the much-maligned distributor is the conduit for delivering a presentation at home. The ‘speaker’ is the prospective investor’s own financial advisor or agent. But instead of ‘pushing’ a product, the ‘speaker’ is taught to educate him. This has a few advantages:
a. The saver already knows the educator and the appointment can be fixed at mutual convenience;
b. Around 30 lakh insurance agents and one lakh mutual fund advisors are spread across the country. While we or the regulator may find it tough to schedule a regular, conveniently-timed seminar in Tamil for (say) all the railway clerks in Gummidipundi, the agent can do it. It would strengthen his own credibility and (hopefully) also help him move from being a seller to an advisor.
Of course, this format requires uniform, manipulation-proof presentations, backed by ‘mystery shopping’ to enforce discipline.

A Call to Action
Do it ourselves: Governments create committees, working-groups or departments; this is a global phenomenon. These are then staffed by retired or working bureaucrats and favoured expert-advisors. They first acquire huge urban infrastructure. Then, they all attend seminars to study how the problem is addressed in other countries. Private effort is the best way forward. We just need to drop that lip service to investor education and get down to business.

Engage the distributor: We and our predecessors have created a huge army of independent financial advisors (IFAs). Recently, it has become quite fashionable to bash them for ‘mis-selling’. This is a misunderstanding of the IFA’s profile and business model. The IFA who sells mutual funds has an ‘influence group’ of investors. Many of them are friends, relatives or mentor-patrons. He depends on them for his livelihood. He can’t hope to mis-sell continuously and survive.

Secondly, a majority of IFAs depend on us, the well-regulated fund houses and the regulator, to vet what they say to the investor. They work with our publicity material and regulator-approved products. If there are clear ‘target-audience-restrictions’, they will abide by it. Few have the capability or the confidence to create stories of their own to trap the investor. Finally, let us not discount investor greed as a factor in the so-called mis-selling.

Of course, as businessmen, they would sell the most remunerative product, but it is rare that they would push a fund ranked consistently in the bottom quartile against a top-performing fund. It is not by accident that the largest fund houses have funds that have consistently performed better than their benchmarks and are in the top/second quartile. They also fall off the sales charts when their performance is consistently poorer than their peer group.

Eliminating distributors from the equation, by making it difficult for them to earn a living, is not the answer to mis-selling (or mis-buying). None of us has the resources to reach every corner of India, and certainly not at a 1% or lower management fee.

In a country with the size and diversity of India, it would be tough to hope that we, in Mumbai, can meet the expectations and requirement of an army officer posted in Panagarh or the superintendent of police in Korba. We have to enrol that agency force built by us over 30-odd years and create a mutually supportive relationship between the saver and his advisor.

Like all alternative therapies, people will have extreme opinions on this approach to investor education. I can assure you that this is not going to solve every problem overnight; it may just mark a beginning. Investor education is a controversial topic. The cynics view it as marketing in sheep’s clothing. The idealists see it as a panacea for all our capital market problems. As usual, the truth lies somewhere in between.

Mr Vijayan is executive chairman, JP Morgan Asset Management. The views/opinions expressed are personal and for informational purposes only. These should not be construed as investment advice