The rise of the Indian equity investor – Challenge or Opportunity?

 

“I’ve bought 1000 shares of ABC company at Rs.XXXX and now they are down 30%. What should I do?” asks a panicked Mr. Shah.

“To invest in shares” answers Mrs. Revankar, when asked why she wanted to redeem her mutual funds

“Please keep it after 3:30pm” says Mrs. Engineer while scheduling our quarterly review meeting, which for the last 5 years has always been scheduled at 11am.

“Do you offer equity advisory service?” asks Mr. Koddapathi.

“Uncle, please ask her to lend me one lakh rupees to invest on Zerodha. I can make 15% return in one month easily!” demands Mrs. Mehta’s minor son.

Indian retail investors are flocking to the stock market in unprecedented numbers. Just today, I read that CDSL, the leading Indian depository has opened 5 crore active accounts. The figure was less than 2 crores in July 2020.

This meteoric rise has been spawned by several developments over the last few years:

  • New age discount brokers offering practically zero cost brokerage accounts
  • Easier KYC norms leading to quick and easy account opening (completely online, paperless process)
  • Better and more economical internet connectivity
  • Relatively muted performance by equity mutual funds in the preceding 2-3 years, making investors seek alternatives.
  • Low interest rates making fixed income investments unattractive.
  • Poor performance for several years by the residential real estate market.
  • And last but not the least, Covid19 related lockdowns forcing people to stay at home, 24/7. Paraphrasing the age-old starting line of India’s favourite singing game, people thought “baithe baithe kya karein, khelen bhi to kya, shuru karo antakshari share trading, leke (your favourite stock trading app) ka naam!”

A wide majority of these investors went the DIY route. They relied on the tons of online information and analytics, now within easy reach of retail investors. While most advisors were aware of this trend, it’s pace, extent and longevity has surprised many.  Some felt that this was just a fad that will wither away at the first signs of a bear market. However, increasingly it seems to be a structural shift.

Love it or hate it, you can’t ignore it.

Like all change, this shift in investor preferences and behaviour also brings with it, its own set of challenges for the advisors:

  • How do you provide holistic advice when there is no visibility or even predictability with respect to this part of the client’s portfolio?
  • How do you prevent it from affecting the rest of the client’s portfolio?
  • How do you track the client’s progress towards her financial goals?
  • How do you help the client avoid making any catastrophic mistakes that can derail his whole family’s finances and therefore, life?
  • How do you deal with the loss of wallet share and therefore, revenues?
  • How to provide unbiased advice if the client actually continues to do better than mutual funds over the long term?

What can we do?

Accept, adapt, thrive.

Accept:

Once you accept that this is the new normal, you can start actively conversing with clients about it and understand which clients are looking to invest in stocks, which clients are already doing it, how they are doing it, what their journey has been so far, whether their successes are repeatable or not, what challenges they are facing and what their apprehensions are.

These are the challenges/fears most frequently voiced to me by clients, prospects and friends:

“I’m making good money but what if the market crashes?”

“Why is my stock not going up?”

“I lost money trading in options. How do I make it back?”

“I sold too early. Now the stock prices have doubled. When will I get another opportunity to invest?”

“I was going to invest 20 lakhs but ended up investing 65 lakhs because of margin calls. I don’t have money left for further margin calls. But I also can’t sell and take such a big loss. What do I do now?”

Perhaps the most important challenge is the one that has come up in the last 2-3 months (with people returning to offices):

“I lost money because I couldn’t buy/sell on time because I had to attend to my client/boss/vendor/staff at the crucial time!”

Adapt:

Now that you understand the client’s equity journey: asset allocation can be tweaked to reflect this change in preferences, data gathering can include the money invested in equity, you can plan the necessary liquidity for market falls and in case of traders – extra liquidity for margin calls, track client’s overall progress more accurately, provide a clear picture about the client’s own performance, educate the clients about what major mistakes to avoid while investing / trading in the stock market…so on an so forth.

Once you’re doing these things, you are adding important value to the client’s equity journey, even if you’re not directly a part of it.

Thrive:

Some clients want us to “manage” their equity portfolio. Others want a sounding board; some want advice while keeping their own control and still others only want hand holding during tough times. Either way, if they want more than what the DIY approach can provide, what avenues are open to us?

  • Provide advisory service (in case of RIAs /RAs)
  • Provide broking service (by partnering brokers as remissiers or authorised persons).
  • Offer PMS products to larger investors
  • Offer “small cases” and other such services packaged by brokerage houses

Many advisors want to help their clients with equity investments but don’t have the required in-house expertise and resources to do it with confidence. The answer may be to collaborate.

Special situations

Apart from general preferences, many clients face special situations where help with equity portfolios is required:

  • US / Canada based NRIs: Due to regulations in their country of residence, it can be very cumbersome and costly for them to invest in mutual funds, ULIPs etc in India. Directly holding securities makes life a lot easier for them.
  • Inheritance:  Stocks held over a long time often come with emotional attachments. When such a stock portfolio is inherited, the heirs may not want to sell it and reinvest in mutual funds or other avenues. But these are often large assets, and their prudent management is important for the clients.
  • Ethical /religious preferences: Many Vegans/vegetarians don’t like investing in “hinsak” companies like those selling meat. Many Muslims don’t wish to invest in anything that is not compliant to sharia. For such investors, readymade products are few or non-existent. Creating a custom portfolio can satisfy these requirements.

So, should you offer equity services to your clients? There right answer will be different for each of us. Whatever our answers may be, we can still have a meaningful engagement with our clients investing in equity and add significant value to their lives.

Agar aap ke client ko equity ke risk se ishq hai, to aap ka equity pe dhyan zaroori hai!