How combining tech and distributors can help unlock the next $100T economy

As with all periods where stock markets do well, individuals start looking for avenues to benefit from this upsurge. This has led to a surge in the number of investors entering the stock market. In FY2020, Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL) added nearly 1.22 crore new accounts, increasing the total number of Demat accounts to more than five crore.

It seems that India is having its own “Robinhood” moment – with retail investors having tech-enabled DIY platforms to choose from. Yet, the average amount of such first-time investors (estimated to be ~ Rs 5,000) shows that few people are seeing this as a sustained investing avenue, and more like a “one-off” “lets try something new” movement.

This hesitancy stems from: a) lack of financial awareness, b) lack of trust in “source of advice” and c) actively saving with a long-term objective requiring discipline.

And therein lies the need for a “financial advisor” – one who provides the “bridge of trust”, who not only has the experience and knowledge to help but who understands and can use technology to enhance their advice and to provide the digital tools to execute and communicate, but one that is quite different from the past.

Need for financial advice

Simply put, it’s the need for having someone with the experience to interpret information into actionable steps. To help customise and create a basket from the various investment options that are available and best suited for not only the founder’s risk appetite, but also goals, time horizon, and means.

Financial advisors bring their expertise to the table and help investors better understand their financial goals. These advisors chart out a customised portfolio that helps investors diversify their investment to mitigate risks and reap the most rewards.

They also review and reallocate funds based on the market conditions and performance of the curated portfolio.

As can be imagined, with increasing financial inclusion, the availability of such advisors, especially beyond the top 50 towns/cities, is very low. According to a report done by BCG + AMFI, the number of advisors has to grow by 100x to be able to cater to the needs for the next 10 years. Technology will play a crucial part in equipping, upskilling and creating this need of the investors – a hybrid of physical touch and technology.

The large influx of investors in the market, complemented by only a moderate rise in financial advisors, has caused an imbalance in the supply and demand equation. This increase in the number of investors creates a greater requirement for financial advisors. However, churning out professional advisors is time-consuming.

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Digitisation

With technological advancements, many scaling challenges can be eliminated.

Existing distributor/agent networks – who traditionally served only one product/manufacturer and insurance agent can, with the use of digitisation, be upskilled to become Independent Financial Product Providers (IFPPs) – with the ability to advise, source and execute on multiple asset classes and products.

Such a model also makes the distribution business more viable, with digitisation enabling the distributor to expand their business to cater to more investors by taking care of the mid/back-office operational tasks.

The use of technology, especially AI and Machine Learning, further improve the services that the IFPPs can provide – in selecting the right fund, asset allocation, reporting and monitoring of portfolios. This effectively creates a virtual infrastructure for each advisor – helping them keep their independence while supporting them with institution-grade research.