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MF News What it takes to be RIA

What it takes to be RIA

How do you make the transition from being a distributor to a RIA? Read on.
Padmaja Choudhury Jun 16, 2017

With SEBI pushing for advisory business, many IFAs plan to register with SEBI as RIA.

However, most of these IFAs are still confused if they should shift their business model from commission based to fee based. This is evident from the fact that only 385 have registered as individual RIAs even after three years.

While a few advisers say that it is not viable to have a fee-only model, others feel that there are compliance issues.

Mumbai-based RIA, Gaurav Mashruwala of Cutting Edge said, “IFAs should register themselves not because they fear SEBI but they should do it because they are responsible citizens and believe in the law.”  

We spoke to a few distributors who have become RIAs to understand how they made up their mind to shift their business model to a fee based one.

Prepare for it: Aspiring RIAs should keep in mind that the fee-based service is different from the distribution model and they will have to give some time to themselves for transition.

One of the best way to get comfortable with shift in business model is having an emergency corpus. It may take some time for the practice to kick off. IFAs should have an emergency fund so that they are able to take care of themselves and their family if the remuneration is not sufficient.

Kalpesh Ashar, founder of Fullcircle Financial Planners and Advisors says that it is better to make a contingency fund to cover their costs for six to 12 months.          

In addition, advisors should prepare themselves to get more transparent. “Fee-only advisory business is broader than distribution. Advisors should keep in mind that they have to justify their recommendations and disclose all conflict of interests,” says Kavitha Menon, a SEBI registered investment advisor.

Communicate to your clients: Kalpesh says that the change in business model should not come as a surprise to your clients.

“Communicating the change is a difficult task and should be handled delicately. IFAs should first ask their cleints whether they are comfortable paying fees. If clients are not willing to pay, advisors should refer them to other distributors. This helps in building trust among advisors,” says Kalpesh.

Kavitha says that advisors should be able to explain to their clients on why they want to charge fee for advisory services. “Asking for a fee from clients who have been associated with you for decades is the biggest challenge. IFAs who are planning to make the shift should create a valid proposition on why they are charging a fee. They should list down points to convince their clients that fee-based model is the right way to do financial planning,” says Kavitha.

Business setup: Generating enough revenue from fee-based advisory in the initial days may not be sustainable and hence advisors need to be careful while deciding business plan.

Advisors can register themselves as an individual RIA or as a corporate RIA. “Depending on long term goals, IFAs should determine their organisational structure. In my view, while a person who wants to start a fresh can go for individual license, distributors having existing clients can go for an LLP or corporate license. This will help them sustain from the trail commission,” says Shalini Dhawan, Co-founder of Plan Ahead Wealth.

Delhi-based RIA Amit Kukreja, of amitkukreja.com says, “Advisors should not take such a key decision in haste as fee based model takes time to grow. I believe IFAs planning to become RIAs should float a separate distribution arm so that their business does not get affected due to shift in revenue model.” 

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