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Factoring in financial literacy in the changing landscape of mutual funds industry
Submitted by Rohan Jahagirdar (@rohanj) on Sunday, 10 December 2017
In the last few years a number of online platforms have come up which allow consumers to go for a direct plan - ones that don’t involve parting with a hefty trail commission.
While MF distributors prey on the lack of financial education of consumers, these online platforms rely on consumers’ understanding of dynamics of investing.
Although going direct has a number of advantages, there is increasing evidence mounting against an investor’s ability to accurately estimate their risk attitudes and their abilities to save, using current tools.
Some of these biases can even go unnoticed by advisors (both distributors and fee-only) who don’t factor in irrationality as the norm in their estimation of their customers’ behaviour.
Financial institutions and their advisors must factor in traditional assumptions about irrationality built into their current tools in order to provide reliable, consistent and accurate financial advice for their clients.
As Mutual Funds gain prominence as one of the primary vehicles for investments, the argument of going Direct versus via distributor has gained significant traction.
This argument of going direct has also been given credence by growing awareness of practice of mis-selling. Mutual fund distributors (especially banks) have been accused of mis-selling to consumers by choosing products that pay higher commissions over better suited ones.
With growing evidence of this practice, the RBI, in a landmark move, in June 2017 amended the Banking Ombudsman Scheme to take up complaints against mis-selling.
In this talk, we explore how investors often fall prey to misselling due to biases introduced by the contextual settings and the framing of advice and their effect on financial advice.
Exploration of solutions to these biases and regulatory solutions to avoid them.
Rohan is the co-founder of a new fin-tech startup, Base. Previously he has held leadership positions in NestAway and Teabox.