A double dividend business

The classic definition of returns from social entrepreneurship is that it provides a double dividend and a triple bottomline. The double dividend is, of course, the financial and the social one. The triple bottomline is “people, profit and social”. The financial advisory business seems to fit neatly into this box. For some time now, there has been a raging debate on the need to reduce cost of intermediation in the financial business — insurance, mutual funds, even portfolio management schemes. It is felt that financial advisors should help people select products that would fit neatly into their customised portfolio, giving them a reasonable return with safety. There are a few flaws in this idyllic scenario.

First, there is no scientific method to perfectly evaluate a person's risk appetite, risk-taking capability and future income. There are just too many variables here, including a person's present level of optimism/pessimism.

Second, it does not budget for the unreasonable expectations of an investor. Those who have been in the business of giving people financial advice know that most investors do not have reasonable expectations. Therefore, it is often impossible to find a product that is risk-free and, yet, can give a 25 per cent return.

Third, one cannot stop an investor from panicking when he is seen losing money, especially if they have overestimated their savings capacity or are confronted with an unexpected expense. At that time, it is much easier to let them exit, even at a loss.

Triple Bottomline

The first bottom-line : Therefore, the social role of a financial advisor cannot be defined as giving a perfect solution to an unaware investor. There isn't any perfect solution for all times to come. The social role of a financial advisor is to give the investor a solution that will enable him or her to invest with reasonable confidence. Indeed, a social bottomline that is achieved by the good advisor is that he/she brings money into the capital market, which would otherwise not be available. Perhaps, that is the best identification of the first of the third bottomlines that a social entrepreneur is supposed to deliver. “Channelling savings into the capital market, thus enabling the creation of capital market resources for the growth of business, and providing liquidity to the capital market itself”.

The second bottom-line : The ideal financial advisor is one who creates and protects wealth. The challenge of perception is whether a person whose remuneration is determined by the issuer, can act in the interest of the investor/saver. This, of course, does not take into account the fact that the financial advisor has his or her own reputation to protect, especially when they are individuals who exist in an eco-system from which they can't move.

Therefore, for the successful financial advisor, the second bottomline is from the goodwill he or she builds with people by giving them the most appropriate investment products that he/she can select — to the best of his knowledge and belief. Financial advice as social entrepreneurship : Let us look at the fiscal and social support that a social entrepreneur deserves and why a financial advisor needs to be given the same treatment.

He is usually self-employed or on contract to a larger intermediary. The business models vary from sole proprietorship to limited companies, but the vast majority of them are individuals. Were they running a laundry or a tiny animal husbandry units, micro-finance outfits would have had them featured on their Web site! Think about it — it is one of the few white-collar businesses available in small towns.

They provide a service which has consumers in the local ecosystem, that is, they really don't need to migrate to the city to deliver this service. In the smallest of villages, the “LIC Agent” delivers a local service such as the post office or grocery store. His counterparts for other financial service companies were emerging…but the environment seems to be turning hostile for them.

As explained earlier, they provide a social bottomline and a people bottomline. With investment in skills development to the bottom of the pyramid of the financial system, it is possible to make a huge impact in the opportunities available locally for the educated youngsters.

So where is the catch? It is the increasing hostility to the perceived remuneration received by these social entrepreneurs.

The third bottom-line : This is the revenue that the advisor earns for himself and his business, the agents' commission. Unfortunately, in all the noise surrounding cost to the investor, the third bottomline is becoming less attractive. Convincing a saver is a difficult job and is fraught with hurdles such as the desire to postpone decisions, irrational fear and exuberance and, finally, the need for on-going service and hand-holding. There is no data to support my view, but from what I have observed of fee structures abroad, the tipping point for making intermediation attractive appears to be around 5 per cent.

Mis-selling and the third bottomline : By attacking commissions to improve quality of intermediation, we are addressing the wrong issue. Better product design, more scientific study of which product fits which market segment and regulation of the sales process can all be answers, but not the reduction of remuneration. In the bid to create a level-playing field between various classes of investors, the environment has refused to recognise there is a differential effort and cost to providing service to various classes of savers. A Rs 2,000 per month saver cannot be given the same service as a Rs 20 crore saver at the same price.

To create socialist intermediation, it has been forgotten that the first and second bottomline can only be achieved if the third is adequate. This is specially so for underpenetrated areas and for investors who are small or marginal. In the bid to make intermediation more social, should we forget to make the third bottomline unattractive and difficult to achieve?

(The author is the MD and CEO of IDBI Asset Management Ltd. The views are personal. )

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