Why majority of IFAs struggle to scale up their practice?
Rajat Dhar, Managing Partner- Cogent Advisory
Gone are the days when the financial products in India were simpler, markets conducive and competition being lower among financial advisors / agents and other distributors for the same pie of business.
However, the past decade has brought a revolutionary change to the whole financial market in India, whether it is Indian financial markets being interconnected with the global financial markets and hence no longer immune from the global turmoil; or complexity of the products; or much severe competition in the market; or new regulations coming to define & regulate investment advisory, management and distribution business.
Single ruling that gave the jolt to the mutual fund industry was the removal of upfront commission on the funds. This led to wiping out of the majority of mutual funds agents from the investment landscape of Indian financial markets. The serious contenders, although less in number, in the said space continued their distribution business.
However, with SEBI coming up with the wealth service guidelines for banks and IFAs alike have now started posing the threat to the business of IFAs. With SEBI coming up with guidelines to regulate the financial advisory and distribution business, it will surely raise the cost of doing business, and inherently the cost of compliance will also increase.
So, this brings us to the key question: “Who Will Survive This Game….?”
There is no doubt that bigger distributors have the necessary financial war chest to comply and adapt to the changing regulations at a much faster pace than smaller distributors; and hence survive the business.
What option a small IFA or a boutique advisory firm has available? The answer lies in the scaling up of business, sooner than later. But, it has been observed that majority of IFAs struggle to scale up. The reason is not that they do not want it, but their perception of the way/form they should adopt with the changing market needs to change. This has been observed predominantly in case of distributors who had been in the business for the past 15 years or more, as while the market and regulatory dynamics have changed, they seem to carry out the business in the same way they used to.
There are various reasons that restrict IFAs to scale up, and many of this could be common for the new generation IFAs or the ones who have been in business for past couple of decades.
Breaking the Psychological Barrier:
The single main reason is the psychological barrier that an IFA has towards realising the urgent need of changing the business model. Handling clients' portfolio for decades have led an IFA to believe that there is no urgent need to look into revamping the business, but with changing guidelines and technological change would be the single most challenge that could risk his business venture.
Outdated Business Model:
IFAs have been generating income from commission received from the product providers. However, with SEBI rulings, its evident that the commission margin will continue to go on shrinking year after year, till the time its either nil or too low for even being profitable for an IFA to sell it to its customers. The intent of SEBI is to remove the conflict of interest in the sale of product and to promote the fee based selling.
Now, structuring the business model around the fee based structure will enable the firm or an IFA to meet, not only its ongoing expenses but also make a decent profit. This also stems out the probable conflict of interest in the product selling.
To implement a Fee based model take a lot of thought and implementation, and if structured well ensures the success of the IFA's business.
Offering Product Not Service:
Does the client of today need only 'a mutual fund' or 'investment management service'. And if the answer is the latter, are you as an IFA addressing his need well….!
Think of this like, TATA MOTORS is NOT in the business of Cars or Buses or Trucks. They are in the business of 'Transportation – Making people and goods to reach its destination'. That means, they have encapsulated their product-line as a Service Offering.
This leads us to the most critical point: Are We Product Sellers or Service Providers?
It is a very critical point, reason being when we see ourselves as a product sellers that our focus remains on the product that we have with us to sell, rather than the actual need and requirement of the client. When we consider ourselves as Service Providers in the Wealth Service space, we ensure that we have all the necessary product-line available with us and that we follow all necessary processes, like risk profiling, asset allocation with necessary due diligence, to ensure the suitability of the product to that customer. This brings customer a one step closer to his IFA.
Immune to Technology:
Majority of IFAs have availed reporting platforms for mutual fund distribution, however they do transactions manually, even for those clients who are comfortable doing it online. This may be because they have been doing it the same way for decades.
But, with changing technology and less time available clients need 'one click' service, i.e.., a holistic online service.
Imagine a situation, say 5 Years down the line when majority of clients who fall in the upper age bracket (senior and super-senior citizens), are replaced by the new seniors and super senior citizens. They would be the ones doing everything online and would detest the off-line mode. This would mean a straight a opportunity loss for an IFA.
Alternatively, consider a situation where a senior citizen, who is a client of an IFA, refers to IFA his son as a prospective client. Now, there is a much higher probability that the son would be more comfortable with online single transaction and reporting platform, as he would not have time to do it manually.
Also, doing manually increases the risk of service delivery fallout. Imagine runner not being able to reach CAMS or KARVY to place the transaction before the cut-off time.
Adopting a technology means spending on the IT infrastructure. But, this expenditure is worth investing as it enables an IFA to have the necessary outreach to those clients whom he was not able to cater to in the past. This will enable him to have the economies of scale, and will make it easier for him to do business and with better service quality.
Lack of Knowledge:
Gone are the days when Indian financial industry had vanilla traditional investment options like corporate deposits, Non-Convertible Debentures, mutual funds and broking accounts. Now, as the investor profile has evolved where he looks forward to private equity, PMS, managed futures and other structured products; he expects an IFA to be updated on the market dynamics and developments in the respective product space.
Being knowledgeable enables an IFA to increase his product-line, and hence the bottom-line. This increased cash flow enables him to have a necessary cash available to scale up the business.
Investor expects an intelligent conversation with his IFA. This solidifies the trust that the client already has of his client.
There is no denying fact that the financial market, with wealth services in particular, will have a challenging time ahead. Those firms who will be able to adapt the change will survive while the non-serious contenders will be shredded away. This has been seen in UK, US and Asian markets in the past when the industry undergoes the transition.
The silver-lining is the that in India IFAs have understood the mood of the regulatory body and what it expects from IFAs; and that IFAs are also taking the right step in the said direction.
© Cogent Advisory
