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India accumulates advice

In the first in a four-part series looking at the business of independent financial advice around the world, Lee Jones reports on the fast-growing Indian market serving a youthful population focused on consumption rather than pensions and which faces some familiar problems with regulators.

Delhi advisers
Kartik Varma (left) and Dhruv Agarwala: Delhi advisers feel India today is where the UK was 15 or 20 years ago when the IFA market was starting to develop

While IFAs in the Western world may be focusing their businesses on pensions and investments for an aging demographic, advisers in emerging markets such as India are doing the opposite to serve their young, growing populations.

Two such advisers are Dhruv Agarwala and Kartik Varma, co-founders of iTrust, a financial advisory firm based in Delhi. The two men were both educated in the US and between them have experience of working in the US and UK and have worked widely in finance and management but are now hoping to see their country’s financial advice market grow.

Varma says: “India today is where the UK was 15 or 20 years ago when the IFA market was starting to develop. We are a very early-stage market right now as it is the very first time ever that middle class Indian families have the means to buy a home. We are young, so we are focused on consumption because it is the first time that people have earned this much money.”

The firm is doing little pension and investment business but is seeing a huge rise in the number of middle class Indians looking for mortgages and general insurance.

India has a population of around 1.18 billion with an average age of 26. iTrust is focusing on accumulation, not decumulation, and this is well illustrated in its company mission on its website: “To help Indian families get rich.”

Varma says: “Not a lot of people are thinking of a pension at 26, so that side of the market is going to take a while to develop.

“The infrastructure of the financial advisory industry as well as distribution of financial products is just taking shape right now, it is all very nascent. As a result, the markets in India are a bit like the Wild West – anyone can theoretically call themselves an IFA and the customer will not know any better because they are usually inexperienced first-time buyers.”

iTrust says there are four financial regulators of sorts in India – the stock exchange regulator, a self-regulating fund association, an insurance regulator and a brand new pension regulator – but there are, as yet, no watchdogs for financial advisers.

Varma says: “With all these young regulators, the market is just being born and the rules are being formed. Like any regulation, any new rules can make your business easier, some make it more difficult. As more rules are implemented, fly-by-night operators find it very difficult to adhere to the regulation, so the quality of advice is improving but it is not happening overnight, that will take a decade to happen.”

Varma and Agarwala hope to use their experiences of the UK and US markets to build a professional, branded business but say it is difficult to aim for national coverage due to the size and diversity of India.

He says advising in India has to take into account different social factors that do not exist in the UK. Varma says: “People have different preferences depending on their socio-economic background and in the culture they were brought up in, whereas the UK is more homogenous, based more on wealth than social preferences.

“Take gold, for example – India is the largest market in the world for the consumption of gold on a per capita basis. That is purely because of India’s socio-economic background and religious reasons.”

iTrust is confident the IFA sector and its own business will grow. Varma says the firm aims to be “at the top of the tree” as professionalism develops through the Indian financial services sector, allowing iTrust to become a big distributor network over time. One of the biggest concerns for iTrust is the Indian government’s move towards regulation of the way advisers get paid. Agarwala says Indian financial advice is currently almost exclusively commission-based but some recent regulatory changes are challenging that model.

He says: “Last year, the market regulator changed the rules so the opportunity to make commission on mutual funds is negligible, so it will get to a point where we all have to charge a fee when advising on investments. Also, our pension regulator has chosen the UK as an example, and saw how the UK is doing away with front-loaded commission on pensions and investments after 2012.”

iTrust is rare in India in that it operates a mixed system of fee and commission but Agarwala is concerned that the Indian regulators are considering banning commission too early.

He says: “The UK has had a personal finance industry for four decades, ours is five years old. You cannot force us to charge a fee when clients don’t know what the products are and why they need them.”

Agarwala says the commission ban on mutual funds has already led to a steady decline over the last six months in assets under management

The pension regulator introduced private pensions in India six months ago but, without incentive for distrib- utors, only 2,000 clients nationwide have taken out personal pensions since the launch. He says: “We need the commission right now. Hopefully, the regulators realise that soon enough that in India, financial inclusion is more important that remuneration.”


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