Why does it make sense for distributors, (particularly those new to MF distribution) to work with platforms like iFast instead of working independently?
Distributors generally use a transaction platform like BSE, NSE and couple of business software to scale up their advisory business. However, if they opt to become a sub broker with a national distributor, they will get everything in one place. Moreover, platforms like iFAST take care of all the compliances, risk profiling, suitability of schemes for each client, provide inter AMC switch and record every transaction. We also offer global research reports, which is a goldmine of knowledge. In addition, a new distributor can get better brokerage if he opts to work with a national distributor and at iFAST, we are transparent with our brokerage rates of all AMCs.
For RIAs, today, one of the biggest challenges is to recover a fee, especially in a down market. Therefore, we offer a complete fee based model where they need not worry about recovering fees from clients. We have a mechanism where we are able to recover fees through MF holdings of clients. Our latest fee recovery rate is 94%, which is by far higher than any other platform.
You mentioned fee recovery through MF holdings. Please tell us how it works.
Firstly, fees can be charged and recovered from total AUM of MF, ETFs, fixed income and equities holdings. The fee is calculated and accrued on a daily basis. It is recovered quarterly and outstanding fee is recovered monthly to ensure high recovery rate and minimal outstanding fees. An invoice is generated every quarter and clients can deposit money online or cheque from their registered bank account into their cash accounts where there is an audit trail. When there is no monies in the cash account, MF holdings are redeemed to pay for the fees. Money never flows out of the system unless there is a complete withdrawal by the client.
iFAST has both b2b and b2c businesses in India. However, your company has not focussed much on b2c business. What are the reasons for this?
B2C in India is a very competitive space with many start-ups funded by venture capitalists and focused on client acquisition over long term sustainability. Over the last few years, we have seen emergence of large players like Paytm Money and ET Money. These online distributors are offering execution services in direct plans free of cost. However, globally, such a model has not proven to be viable in the long term because of the high cost of client acquisition. Some of these companies eventually change their business model to b2b to provide solutions for advisers for better margins.
In Asia, SEBI is leading the way in driving transparency and the fiduciary standard on advisers as India is the only country to offer direct plan. Globally, only the UK has a similar share class like direct plan called the clean share class and super clean share class after the ban on commissions. We strongly believe that most investors need handholding by advisors and we continue to focus on our b2b model.
In Singapore, iFAST is the largest platform for independent financial advisers. Why this success has not been replicated in India?
In Singapore, obtaining a financial adviser license is difficult as only a company with the capital requirements and directors with the requisite experience and meet the fit and proper criteria can apply for the license. No individual can apply for the license. The compliance burden is on the advisory companies to ensure that the individual advisers under their license meet the regulatory standards. Investors also cannot invest directly with AMC but only through licensed institutional distributors and advisory companies. AMCs do not employ a large sales force and keep a very lean team to deal only with financial institutions and platforms. Platforms therefore play a critical role in connecting IFA companies, AMCs and the investors. There is no option like direct plan.
In India, distributors and IFAs can deal directly with the AMCs and many still prefer to do so because they do not want to “lose their identity”. There is currently also no clarity on distribution and advisory after the last 3 consultation papers on the proposed changes. This has made many distributors hold back on getting the RIA license and prefer to stick to the distribution model as there is less compliance burden. Secondly, for the smooth operational execution of the fee-based model, India does not offer the omnibus model like in Singapore, Hong Kong and Malaysia. Thirdly, there is no regulatory arbitrage in Singapore as there is only one regulator for financial services providers like banks, insurance companies and investment companies. When the TER changes kicked in that resulted in lower MF commissions, many distributors simply switch to PMS and ULIPS for better commissions.
However, things are changing with the commissions coming down and greater investor awareness of direct plans, therefore more distributors are planning to move to the advisory model to be in control of their revenue and future-proof their businessAdvisers cannot execute active portfolio management and asset allocation strategies smoothly in a scalable manner for many clients without using a platform. As the only platform advocating for the fee-based model for the last 10 years, we are confident that we would become leader in fee-based advisory model through RIA channel in future. In fact, we have started training professionals who want to become RIAs.
Currently, we have AUA of Rs.2800 crore in mutual funds. Of this, Rs.1700crore is with RIAs and Rs.1100 crore has come from distributors.
What is your dependence on MF business? Do you plan to reduce your dependency on MF business? Please share your reasons
I think mutual funds will always be the core part of the investor’s portfolio. In fact, all over the world, MF is the best way to invest when you have somebody doing financial planning for you.
Are you looking forward to introducing any other product on your platform? What about PMS and AIF products?
Currently, we have a host of products including bonds and fixed income. So, I don’t think we need to include more products in the near future. Moreover, we have space for global investments as well where we have a separate arrangement with our Singapore platform.
We do not have expertise in PMS. But that doesn't mean we won’t enter this market; we will do it someday.
Margins of most distributors have been under pressure due to recent regulatory changes. In such a scenario, how can distributors ensure that their income remains intact?
Honestly, if an advisor truly wants to survive in this business, he has to become a CFO of his clients. By being a CFO, I mean an advisor can no longer survive just by selling mutual funds; instead, he has to add value to clients by offering services like asset allocation, rebalancing and look at the entire spectrum of financial planning including estate planning. He must be able to execute asset allocation strategies and rebalance the client’s portfolios on a regular basis to help the client achieve his long term goals. When the adviser’s remuneration model is aligned with the investor’s interest to grow the AUM regardless of the products or asset class, he will rebalance and make the calls to get out of equities when it is overvalued without the fear of losing his income as equity MFs pay the highest commissions. He can even move to passive strategy by moving large cap MF into large cap passive index fund with a much lower TER. It is difficult to provide similar value added service like asset allocation and rebalancing without a platform.
What is more lucrative for distributors at this moment, commission model or fee model?
I think the fee model in the long term will be more lucrative. Fee based model gives power of pricing i.e. you can control the pricing and revenue. Investors are also clear of the fees charged and can decide the level of service required. In the commission model, pricing is dependent on external factors like regulatory norms and we all know that commission rates and TER are only going down further in future.
