Building a thriving advisory business is not very complex, but I would not pretend that the task at hand is a simple one. Had it been simple, we would have found plenty of them around us! Thank God, they don’t exist… and it offers us a reasonable chance to fill up this vacuum.
So, what is this model all about? Let me explain this through a case study.
Case Study
Vaibhav is an IFA, who has been distributing mutual funds for the last 10 years. He has created a base of around 300+ strong clients. But, lately markets are down and his business volumes are shrinking with no fresh investments. Regular withdrawal from AUM is not helping him either.
As we analyse Vaibhav’s business model, we note the following disturbing patterns.
- His main emphasis was on chasing new business.
- He never thought of maintaining a proper client record.
- He never bothered to understand his client’s specific needs and the suitability of the product offered to them.
- There was no communication with his client once the business is closed.
All these have created a disconnect between him and his clients and he is steadily losing them to other distributors who offer better service.
Corrective action plan
Vaibhav decided to become more organised. He shifted his model from ‘client chasing’ to ‘client mentoring’. He started offering value-added services like need-based asset allocation, retirement planning, tax planning and risk management to his clients. He invested more time and energy in relationship management and knowledge building. He started outsourcing a few services to qualified professionals, while he looked at the client interface.
This generated better client satisfaction, and soon he saw clients opting for value-added services. Initially they came from his present client base; however as the word spread about his services, referrals started buliding up. Most of his new clients now do not go to any other financial advisor, but come to him with their entire portfolio and seek guidance on various financial decisions. So his business is neither seasonal nor dependent on the markets.
Creating a win–win situation
Exhibit (1) below will showcase the revenue generation ability of the model I just described. There are a few assumptions in the whole model:
- At 35, the number of clients is only 25. The client base is growing every year—but the maximum number comes to 200 only. (See col 2)
- Each client brings in fresh investments every year. For the 1st year it is Rs 5 lakh and then growing at a rate of 5% pa. (See col 3)
- Clients are not withdrawing money. They are only making switches among asset classes.
- Each client is paying a fee of 1% pa only on gross AUM. (See col 7)
- Gross AUM consists of fresh investments + returns generated from investments. (See col 6)
- Returns over the next 25 years is taken as 12% p.a. only (See col 5)
Conclusion
The total fee works out to a whopping Rs 117.98 crore! If you think this is a piece of fancy imagination, think again. This is the model adopted around the world. And if we do not wake up to this new reality, we will cease to exist in real time.
(Malhar Majumder, CFPCM, is Director, Gliese Consulting Pvt. Ltd, a fee-based financial planning company)
