D Muthukrishnan completed his Post Graduation in Commerce and Company Secretaryship in Chennai. Muthu, as he is fondly known among his peers, took up a job at a stock broking firm empaneled with Madras Stock Exchange where he handled accounts and delivery. This was his first brush with equity markets, though he was not punching trades. The broking firm wound up with the entry of National Stock Exchange. During his three-year stint, Muthu completed his MBA (Finance) from Institute for Financial Management and Research, or, IFMR.
With an MBA under his belt, he started hunting for his next job. Muthu discovered that the business process outsourcing space, or BPO, was booming in India. He took up a job at a BPO, where he spent a decade of his career. While he did well for himself, the hectic nature of the job and the graveyard shift started taking a toll on his health.
He decided to take a pause and reflect. Muthu mulled the idea of starting on his own as he didn’t have any debt to repay and was financially independent. In fact, he had built a net worth equivalent of ten years of expense during his ten-year stint with BPO by investing in mutual funds. “I used to invest in mutual funds when I was working BPO and closely followed the developments in personal finance. Many of my friends and colleagues used to take my advice on their finances. I thought becoming a financial adviser would be a good option. I thought I would be able to offer good advice to people as compared to other institutional players in the market which led me to take the plunge,” recalls Muthu. Meantime, Muthu’s wife Ramya continued with her job at HCL as a Project Manager.
Muthu started his practice in January 2007 and completed his Certified Financial Planner, or, CFP, certification in the same year. Just as he was just trying to find his feet, the markets witnessed a meltdown in 2008. Muthu says this was a blessing in disguise as not many distributors were willing to meet prospects at that time. “The culture of systematic investing had not caught on when I entered this space. Many distributors were selling new fund offers and I was advocating systematic investments. Investors liked this concept. I used to share my own experience of investing in mutual funds through SIPs and convinced clients to stay invested in bear markets,” says Muthu.
Client education
To differentiate from others, Muthu started thinking of ways to engage and educate clients. He started sharing personal finance articles published in media with his opinion to his database through mails. Besides emails, Muthu started sending nuggets of investment wisdom through text messages six days a week to his clients. “These things were unique at that time. Communicating with clients regularly was uncommon. Clients appreciated this,” recalls Muthu. As his business established, his wife Ramya joined him in 2012.
As the adoption of social media increased, Muthu started using WhatsApp and Twitter to spread his wisdom. He became active on Twitter from 2014. The micro blogging site has given him a wider fan following and recognition, which is evident by his over 30,800 follower base. Impressed by his timely and inspiring tweets, people started enquiring about his services and were keen to engage him as their adviser. But he prefers to take clients only through referrals.
Further, Muthu got many enquiries from his blogs, some of them became his clients while others would just chat about the economy and markets, without taking the relationship further. To filter such prospects, Muthu started charging an initial consultation fee of Rs 1,000 to Rs 3,000 for the first interaction from 2009 onwards. He would talk to prospects only if they would deposit this fee in his account. This helped him acquire prospects who were serious about putting their financial lives on track. In his first interaction, which usually lasts for two hours, Muthu tries to glean as much information about people’s aspirations and goals as possible which helps him provide bespoke solutions. Once market regulator SEBI came up with RIA regulations, Muthu stopped charging this fee.
Expectation management
While Muthu is optimistic about the long-term potential of equities, he makes it a point to tone down the return expectations during his client interactions. He sensitizes clients that the returns generated by funds, especially large caps, in the past two decades are unlikely to sustain going ahead. “I convey that if you hold your investments for a decade, there is a likelihood of earning 15% return, without any assurance. You need to know which funds to avoid. My value add is not fund selection. Rather, it is to make them stay the course. As a thumb rule, I generally avoid recommending closed-end funds, new fund offers and sector/thematic funds,” says Muthu.
He only recommends multi-cap and mid-cap funds. He feels small and micro-cap funds make the pain more intense for investors when there’s a sharp correction in markets. “Small cap funds can plunge by 70-75%. Investors may not be able to withstand such kind of fall in a mutual fund product. Mutli-cap funds tend to be less volatile as compared to small cap funds. I try to minimize volatility, though I can’t completely avoid it,” explains Muthu.
His clients appreciate that they would not have stayed invested to meet their goals without his timely behavioral coaching. He writes three articles a month, especially when markets are volatile as clients look for reassurance when markets tank. His articles have helped his clients understand the nuances of investing very well and they generally don’t panic when markets turn topsy-turvy.
The way ahead
Muthu has a sizeable clientele with assets under advisory of Rs 300 crore in mutual funds. When asked about his future plans, he says that he will scale up only to the extent which will allow him to maintain his direct contact with clients. “I don’t want to appoint ten relationship managers and have Rs 3,000 crore assets under advisory. That way, you lose the personal touch with clients,” believes Muthu.
Advisory versus distribution
Muthu is not worried even if the regulator does away with commission model entirely. He says that he will chose to work with clients who value his services by paying him a fee.
Muthu feels that the current model of distributors earning based on AUM may change going forward and they should be prepared for it. “John Bogle, founder of Vanguard, has recently said that advisory cost should be equal to index cost, which is 10-20 basis point. I feel that the day will come to India because active fund’s ability to generate alpha will start shrinking. Distributors can’t decide their price now. If someone asks me to fix my price it would not me more than 0.50% per annum. The penetration of mutual funds was low fifteen years back. Now, the size of mutual funds is becoming larger. In future, they will become the market. When you become the market, you cannot beat the market. Funds will not be able to charge higher expenses if they are unable to generate alpha. But we don’t know when that time will come,” foresees Muthu.
Family time
Looking back, Muthu is happy that he chose this career path as it gives him enough time to spend time with family, friends, read books, write blogs and more importantly, spend time with his seven-year-old son Vedanth.