August 1, 2009 would always be remembered as a significant date for the Indian asset management business. The regulation brought in by SEBI is a game changer. It is not whether the change is good or bad, but the fact is that it is a significant change and is here to stay.
Let us understand the impact of the removal of entry load on an intermediary’s business. First of all, obviously, the margins have come down. Wait, this is a broad generalisation. It may not be true for all. It all depends on one’s business model. If the business was built largely around upfront commission from selling equity funds, one has been dealt a blow. However, if the business was more balanced with decent weight given to debt funds and the focus of the business was aligned to long-term needs of the investors, the impact is bearable.
Hence, does it imply an intermediary should shift focus away from equity funds towards debt funds? Well, that is a typical response. We have seen numerous occasions when investors have shifted their asset allocation from equity to fixed income after the equity markets have crashed. Should an advisor take the same approach?
The answer is to check and review one’s book of business. Was the business balanced or was it skewed more towards equity funds or more particularly NFOs? Anyway, if we look at the investors’ total portfolio, most are still heavily invested in fixed income products. Given that, is there a need to align your book of business with that of the investor?
Aligning the book of business with the investor’s portfolio serves two purposes: one, your interests, and not just the book, are aligned with that of the investor and two, you have a greater chance of winning the client’s loyalty, and of course, a larger share of one’s wallet.
How does one achieve that? As most successful businesses know, this can happen if the business focuses on the needs of the customer. I used to joke with my IFA friends, “Whenever someone tells me they only do need-based advisory, I wonder whose need they are talking about.” If it is the client’s needs, perfect; else, the future is bleak.
Let us now look at this alignment business that we talked about. What value does an investment advisor offer to a client? As I understand, there are three parts of value: advice, service and transaction facilitation.
Generally, it starts with advice, and then the transaction is done to be followed by service. However, advice is often bundled with service. It is advice and service that the client wants most. At the same time, transaction facilitation is also important. However, in terms of value provided, advice ranks first followed by service and transaction. However, smooth the transaction and regular the portfolio reports and other associated services, bad advice could be the single most powerful contributor to the investor’s nightmares.
What is this advice? The advice is nothing but understanding the needs of the investor and offering an investment plan to serve these needs. It involves a few steps: identification of needs, articulation of these needs, and conversion of the same into action points and regular review of the progress after the plan is implemented.
This is where if one generalises the needs of most investors, it is evident that equity mutual funds alone are not sufficient for any investor. How can we, then, miss out on the other parts of the portfolio?
Focus on your clients and you will have a secure future.
The author is owner of Karmayog Knowledge Academy. He can be reached at [amit@karmayog-knowledge.com].
