8 tips to build a retail practice

Always wanted to establish a retail business? Here are eight ways to lay the foundation for building a robust retail practice.
By Ravi Samalad |  27-01-17 | 
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About the Author
Ravi Samalad is Assistant Manager - Editoral for Morningstar.in.

Building a retail practice can be rewarding. In a country like India which has a high household savings rate and favorable demographics, the opportunities are immense. In this article, we will delve on the benefits of having a retail focus and how IFAs can build a robust retail business.

Benefits of retail

One of the main advantages of a retail model is that these assets are sticky. Of the Rs. 2.15 lakh crore which stayed invested for over two years as on December 2016 in equity funds, 65% comprise retail assets. This is because advisers have done a commendable job of popularizing SIPs among retail investors. The rising inflows and investor accounts corroborates this trend. In December 2016, the total SIP accounts or folios have crossed the 1 crore mark while monthly average inflows through SIPs in equity funds have more than doubled from Rs. 1,400 crore in 2014 to reach almost Rs. 4,000 crore. Interestingly, this is now beginning to help our markets absorb the shocks of FII outflows.

Traditionally, advisers have been recommending equity funds to retail investors. This is evident by the predominant share of retail assets in equity funds. AMFI data shows that retail investors hold 52% or Rs. 2.42 lakh crore of the total Rs. 4.69 lakh crore industry’s equity assets. Not surprisingly, 96% or 3.76 crore of total 3.90 crore equity folios are held by retail investors.

Besides, retail flows are consistent. “Corporates and HNIs tend to take tactical calls. IFAs catering to corporates can see huge fluctuation in assets under advisory (AUA) and revenues.  This is not the case with retail investors who tend to invest systematically to achieve long term goals.  Thus, retail gives you some stability,” observes Ritesh Sheth of Tejas Consultancy.

Further, advisers don’t need to fear the thought of retail clients shifting to direct plans. Unlike corporates and HNIs, many retail investors have continued their relationship with advisers. Only about 8% of retail investors chose to invest directly. On the other hand, HNIs showed a higher appetite for direct - 16% of HNI assets are in direct plans. The shift is more widespread among corporates. 65 % of liquid/money market scheme assets where institutional investors dominate, were direct. (Source: AMFI)

Here are a few ways to build a retail practice:

  • Self-confidence

According to Vinod Jain of Jain Investments, advisers need to have confidence in themselves. The first 1000 days are the most difficult during which an IFA needs to stay afloat. Jain says that retail assets pay off in the long run and advisers need to realize that they need to have a long term focus.

  • Patience

Establishing a retail business can take decades. Advisers who have tasted success have built their retail business brick by brick. Despite the regulatory headwinds, they have stayed focused on building their retail book. For instance, some advisers invested in their business post entry load ban to sustain themselves. Krushna Finance LLP, an advisory firm founded by Sanjay Khatri, is a shining example of a successful retail practice. With a team size of over 40, Khatri advises over Rs. 700 crore retail assets. Started in 1994, he caters to 33,000 retail clients with over 10,000 live SIPs.

  • Reaching out

Since retail model entails meeting many prospects, it is best to meet them in groups through investor awareness programs (IAP). Many advisers are conducing IAPs to reach out to retail investors and are seeing a reasonable client conversion rate.

  • Client education

Advisers need to spend a lot of time educating their clients. Not all investors, especially the first-time MF investors, understand the virtues of spending time in the market. Thus, advisers need to guide clients to stay invested when the tide turns against them.

  • Speaking their language

Since not all retail investors are familiar with investment jargon, advisers would do well to tailor their communication as per client’s profile. Sheth who manages assets worth Rs. 179 crore (predominantly retail), says that he segments his clientele based on profession and age group in order to customize his communication strategy. “I have auto rickshaw drivers as my clients. They don’t understand investments. Hence, I have simplified my communication for them so that they can grasp what I wish to convey.”

  • Infrastructure

Serving retail clients can be an expensive affair. From prospecting to after sales services, they require handholding at all stages. Thus, advisers need to invest in hiring and training staff. Then comes infrastructure, which would entail renting an office (depending on the number of clients and business model). Unlike HNIs, retail investors may show up at adviser’s office to resolve their smallest query without appointment. Advisers need to be equipped to handle them.

  • Technology

To cut costs, advisers are adopting technology. From client CRM to transaction execution, they are investing in technology to build scale. For instance, a growing number of advisers are using stock exchange platforms to facilitate seamless transactions on the go. IFAs focused on retail can explore this option.

Platforms can be ideal for startup IFAs. Platforms which provide transaction facilitation, research and back office support can cut down aspiring IFAs costs significantly. Armed with a laptop, they can focus on growing their business, leaving the back-office support to platforms. IFAs have to share a percentage of their commissions (usually 20-30%) for the services received from platforms.

  •  Sub-broking

If you have the technology, infrastructure and capital you can consider building a retail base through an army of sub-brokers. Jain has replicated a successful sub-broking model popularly known as broker-dealer agreement in US here in India. Jain appoints aspiring IFAs and offers them financial support of Rs. 30,000 monthly till they achieve an AUM of Rs. 7-10 crore to sustain. Jain does not recover this investment after they become financially independent. After the sub-brokers/partners AUA crosses this threshold, they are offered a percentage of commissions (50-70%) on the business generated by them. Further, partners can use his office infrastructure just as any other employee of his firm. With this model, Jain has built an AUA of Rs. 585 crore in mutual funds.

 Share with us how you have made a connect with retail investors.  

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