One of the earliest investment advisers to register with SEBI, Kavitha Menon chats with Morningstar’s Ravi Samalad on the challenges RIAs face. She feels RIAs will be regarded with the same respect and trust that one regards other professionals like doctors and lawyers.
You were among the first RIAs to register with SEBI. What made you become RIA?
I started my career as an investment adviser in 2001 with a private sector bank and later joined the wealth management team of PPFAS which has now become an asset management firm.
I was also doing fee based financial planning since 2003 for PPFAS. While we acted as distributors for several products, we also offered a host of planning and free advisory services to HNI clients. I always thought that these services should be chargeable and that our clients would not mind paying fee in return. I had shared this idea with the late Parag Parikh. While he appreciated the idea, PPFAs was at that point transitioning into a full-fledged AMC and we were unable to execute the same.
In Jan 2013, I took the plunge as an independent wealth manager with a focus on fee-based advisory services. In Feb 2013, SEBI came out with RIA regulations as if they were waiting just for me to start.
How do you convince clients to pay advisory fee?
I think advisers need to convince clients about value before we even get into fees. If one can put across the value proposition in a tangible manner, then the question of charging fee is moot.
So far, only 1,000 RIAs are registered with SEBI. What are the reasons for low acceptance of this model?
It is a tougher model as compared to distribution. The level of competencies, knowledge and soft skills required is far higher. Products are not just restricted to mutual funds and insurance which is where most advisers have established their comfort zone.
You have to be connected with your clients, their needs and their lives in a manner that the distribution business does not require. Value needs to be offered continuously and is not transaction based.
The systems and people skills required are different. For an RIA offering pure advisory services (no execution - direct plans or otherwise) to scale up, it’s tough to add new clients without incurring significant costs in hiring and training competent staff.
Compliance levels are high and Indian advisers find the amount of disclosures intimidating.
Do you think it is sustainable for fee-only RIAs to sustain their business solely based on fees?
There is a dire need for good advisers in our country. I am sure fee-based advisers will not only survive but flourish.
Are investors able to differentiate between RIAs and distributors? How do you communicate your value add?
Investors are intelligent people! Of course, they understand the difference. While it is true that many are unaware of the regulations, they definitely understand and appreciate advice that is independent and free from biases caused by a commission/product sales structure. This is by the way the first value add. Secondly, RIAs bring in an element of planning based on the client’s unique requirements. Thirdly, they provide overall wealth management expertise with excellent product knowledge. Fourthly, they are regulated and hence accountable for the advice provided. All the above are distinguishable and tangible benefits of hiring an RIA.
In its last concept paper, SEBI has proposed that RIAs cannot provide execution services through a subsidiary. What are your views? Do you think a pure advisory model will succeed in India?
As mentioned earlier, for a country of savers, we don’t have enough good advisers. I am not for any action that dilutes the spirit of the RIA regulation. Keeping distribution services separate from advisory services is needed. How else will conflict of interest be tackled? Providing distribution services by one or the other means will only serve to dilute the sanctity of RIA rules. Several known names in the RIA community have successfully transitioned from distribution to full-fledged pure fee advisory models and they are flourishing. Others have continued with their distribution business as they find it a sustainable model. Currently, I believe there is space for both models to co-exist. But an adviser must choose one or the other.
Needless to say, the RIA field is not a place to make quick big bucks. It’s a profession that takes years to build. I am very optimistic about the prospects of RIA model. I think RIAs will be regarded with the same respect and trust that one regards other professionals like doctors and lawyers. Likewise, RIAs will also command good bargaining power and will be able to charge fees as per their expertise and experience.
