The single main reason is the psychological barrier that an IFA has towards changing the business model.
Gone are the days when the financial products in India were simple, markets buoyant and competition almost non-existing among financial advisors/ agents and other distributors.
However, the past decade has brought a revolutionary change to the whole financial market in India. Here is a short list of the significant changes:
- Due to Interconnection with the global financial markets, Indian markets are no longer immune from the global turmoil;
- Products are getting complex
- There is severe competition in the market;
- New regulations have defined the investment advisory, management and distribution business.
However the single most important change that gave a 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, continued their distribution business.
With SEBI guidelines to regulate the financial advisory and distribution business in place, the cost of compliance and consequently the cost of doing business 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 wherewithal to comply and adapt to the changing regulations at a much faster pace than smaller distributors and hence will survive the business.
What options does a small IFA or a boutique advisory firm have? The answer lies in the quick scaling up of business. But it has been observed that majority of IFAs struggle to scale up. But for this to happen, they should adapt with the changing market. This is particularly true for distributors who have been in the business for the past 15 years or more - 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 constrain IFAs from scaling up.
Breaking the psychological barrier:
The single main reason is the psychological barrier that an IFA has towards realizing the urgent need of changing the business model 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Outdated business model: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, it’s evident from the direction of regulations that the commission margin will continue to go on shrinking year after year. 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 IFA to meet, not only its ongoing expenses but also make a decent profit. This also does away with the potential conflict of interest in product selling.
Implementation of a fee based model requires a lot of thought and if executed well can ensure the success of the IFA's business.
Offering product not service:
Does today’s client 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 their destination'. That means, their product-line is essentially 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 product sellers our focus remains on the product to be sold rather than the actual need and requirement of the client. When we consider ourselves as service providers in the wealth management space, we ensure that we have the necessary product-line 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 the customer.
This brings customer one step closer to his IFA.
Immune to technology:
Majority of IFAs 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 clients need a time-saving 'one click' service, i.e. a holistic online service.
Also, doing manually increases the risk of service delivery failure. Imagine the 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 investment is worth making 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 investment options like corporate deposits, non-convertible debentures, mutual funds and broking accounts. Now, as the investor profile has evolved, 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 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 management in particular, will have a challenging time ahead. Those firms who are able to adapt the change will survive while the non-serious contenders will wither away. This has been seen in UK, US and Asian markets in the past whenever the industry has undergone a 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 right direction.
(c) Cogent Advisory
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.