In the third article in this series on distribution, Mr. Rajan Mehta, Executive Director, Benchmark AMC shows how IFAs need to overcome their fear and make their services more tangible to their clients in order to be able to charge a fee to their clients
Many investment advisors get butterflies in their stomach when they have to discuss fees with their clients. Their fear is that clients will stop transacting with them if they appear to be ‘greedy’. However there are a few confident advisors who have ventured into this hitherto unknown territory.
I genuinely feel that this fear is real and not imaginary. Indian investors in general are value conscious and it is difficult to convince them to pay large amounts of fees for something called “investment advice.” This intangible service is not deemed to be of any value. Instead, it is seen as a free add-on service with execution service which has some commission built into it. This fear is driving many of them to further the argument that absence of front-end commissions will stunt growth of the industry severely and they live in fervent hope that some day front-end load will be restored.
Let us accept reality. We have training wheels on a bicycle - as an aid during learning phase. They give confidence and reduce injury. But once the balance is achieved, they have to be removed. If they are retained after learning bicycle, they cause obstruction and can even be dangerous.
Front-end commission, when it is paid by the product provider, resembles training wheels on a bicycle. Since industry has matured, those ‘bicycle wheels’ are a hindrance for many advisors who want to be client centric rather than product centric. This straight jacketed pricing system was stifling the fee based advisory service. It also motivated some unscrupulous advisors to churn unnecessarily and also push unsuitable products with higher commission which tarnished the reputation of the entire profession.
It is perfectly justifiable for product providers to be enthusiastic about helping investment advisors to further develop the market. It should be done by extending educational, training and general marketing support without linking it to the quantum of business.
It may be an inconvenient reality but let us face it - to develop long term sustainable business, fear of charging fees has to be won over. Let us understand the source of this fear. The main source of this fear is the advisor’s lack of belief in his own capacity to deliver the value. It also happens to be the main source of client rejection.
Also, many of the advisors feel that they are in the business of giving return to clients. This is an incorrect understanding as returns are mainly provided by the market. The 2008 meltdown has punctured the self-esteem of many advisors and led to hesitation in demanding fees for delivering returns.
One of the ways to overcome is make advice and service more tangible. The first step is to shift entire business into a client centric model. Most advisors have a blended model today some degree of customer centricity and product centricity going together. Unless and until the conflict is resolved, it will keep on creating an internal tug of war, which creates friction and decelerates growth.
Most of advice and services can be converted into tangible products. Below are some examples.
Risk assessment Service : There could be a detailed interview with the client and based on client’s situation, risk assessment can be done to evaluate clients risk bearing capacity in terms of maximum loss, liquidity etc.
Preparation of financial goal statement: It is observed very often that investors have no clues about their financial goals i.e. what is the reason for making investments? An advisor or planner can help them to state these objectives clearly.
Portfolio construction: Diversified portfolios can be scientifically constructed based on risk assessment and financial goals. Investment methods such as Systematic Investment Plans (SIP) / Value Averaging Plans (VIP) are an aid in disciplined and goal oriented investment approach.
Periodic portfolio review service: The advisor can monitor portfolio and recommend rebalancing it whenever required at the lowest cost and in a tax efficient manner.
Estate planning: The advisor can help client to plan or open joint accounts, nominations, and entities like HUFs, trust and wills.
Other ancillary services: Services like consolidated statement, tax return preparation etc can be also be offered.
There is also great need for services like document management for storing important documents like property papers, insurance policies, bank and demit statements, various agreements etc. Such service providers are available to large entities; however, these facilities are yet not available to small firms and individuals. Investors would welcome some of the services mentioned above; sadly a product-centric, transaction oriented industry has not been able to provide the same.
Any advisor who fulfills these demands will surely have long term sticky assets under management. The basic idea is to deliver such holistic service effectively.
If all advisors make an attempt, surely success will be achieved to transform the profession just like the old panchtantra tale of the hunter and flock of birds. Individually it was tough but when all the birds started flapping their wings together, they were able to lift the net and fly away.
