Amidst changing client expectations, emergence of online investing platforms and free flow of information from a variety of sources, the job of an adviser is not merely managing money. They have to set the right expectation among clients, constantly educate them and adapt their business models keeping with evolving trends. Amit Bivalkar, Dhruv Mehta, Harsh Gahlaut and Suresh Sadagopan share how they are navigating their business in a panel discussion moderated by Dhaval Kapadia at the Morningstar Investment Confernce 2019 in Mumbai. Here are edited excerpts:
Are clients seeking financial planning or is it something the adviser has to educate them about?
Suresh Sadagopan: Usually, clients don’t come to us for getting a financial plan. They want us to help them reach their financial goals. We offer advice only after understanding client’s goals and their financial position. Its not just about recommending products. Products are end result of the unique solution we offer to each client. We follow a process.
The level of financial literacy differs among different clients. Some clients who are well off think they will be able to reach their goals by investing in certain products. The reality is not that. As advisers, we need to understand what they wish to achieve by these goals and the priority of goals. We spend 60 hours with each client to understand and build a financial plan.
Morningstar research shows that ‘reaching financial goals’ is the most important thing investors look for while working with an adviser. On the other hand, advisers don’t see that as the most sought after skill clients are looking for in an adviser. Have you felt there is a disconnect?
Dhruv Mehta: Goals differ across client segments. For instance, high net worth clients don’t feel the need to have a financial plan. They have enough money to meet all their goals - marriage, education, lifestyle, holiday. It is about investors mindset and what they expect. HNIs generally look for optimum risk-adjusted return on their corpus. So that also requires planning. But it might not be a financial plan.
A written financial plan for HNI segment may not be important. What you require is an investment policy statement. They are concerned about where the money will be invested, what are the risks, allocation to different asset classes, etc. Mass affluent segment are the ones who know about their goals. At the other end of the spectrum, retail clients who do SIP of Rs 500 – 1,000 per month have no idea about their goals. They just know that they have to save money.
Amit Bivalkar: Clients focus on returns. Rather, they should focus on time. If you focus on the time, it is a simple example, at 12% if you have Rs 78 lakh today from a HNI, and if you invest in a fund which or an index delivers 12% annually, in 35 years you are at Rs 50 crores. So, do you require a financial plan for this? If you are 35 years with a kid, by the time he/she grows to 35, he/she will have Rs 50 crores.
Is regulatory uncertainty stopping mutual fund distributors to become financial planners?
Amit Bivalkar: If you look at the due diligence questionnaire which mutual fund distributors have to fill up every year, one thing is sure that the regulator wants us to do risk profiling. We can sell products based on the risk profile of clients. So, that involves doing financial planning. Technology is an enabler. The involvement of an adviser to do personal financial planning is inevitable.
Harsh, you offer do-it-yourself (DIY) hybrid investing platform where financial advisers also help clients. Do clients come to your platform for reaching goals?
Harsh Gahlaut: I feel there are certain strengths and weaknesses of being online and offline. Today, the question of online/offline has become irrelevant, because everybody is online to some degree. There's nothing really offline. All transactions are online.
Pure DIY has two strengths - reach and convenience. A pure offline model brings in two important aspects, which are trust and relationship. Ultimately, technology is enabler. Technology has to help you dispense better quality advice, communicate in a more efficient manner and to understand a client better. In the end, it is all about how client perceives you. We are providing a service and tangibility or fungibility of service is a big problem.
How do you manage investors emotions given that robos have no human interface, especially when markets are volatile?
Harsh Gahlaut: I believe clients who have long term goals and know about markets will stick to their investments irrespective of the gyrations of the markets.
That said, today, information is commoditized. The information is flowing from all sources and creating panic and greed among investors. Technology plays its role but the human aspect of setting the right expectations and handholding cannot be replaced by technology.
So, how do you really go about convincing clients to focus on goals rather than returns?
Dhruv Mehta: Whatever planning advisers do investors tend to give a lot of attention on return and risk. But actually, it is the time, which determines the return and the risk that you take. The longer the time period, the decision to invest in equity is simpler.
We need to make investors aware about the possibilities of negative returns during their 10-20-30 year investment horizon. For instance, every three years, the market can fall by 20%. We have to explain this repeatedly by taking them through the history of markets. This will help investors stick to their goals. There is a famous saying that the downside is temporary, and the upside is permanent. We have to be a perpetual optimist. Today, everybody is talking about the slowdown. What’s your view for the next 10-20 years? Will the slowdown continue?
They don't buy a financial plan; they buy your conviction. The client buys you. That's the relationship that you have to get into. A plan is a piece of paper. And if you have the conviction, the client will stick on.
Have faith in your clients. You have to make your clients see one market cycle. The first cycle is difficult. Once they get comfortable with downturn, they don’t panic. If you succeed in navigating a few bear cycles successfully, she will be your client for life.
How can advisers build this conviction purely looking at the past returns?
Harsh Gahlaut: This is where the human intervention becomes very important. Communication is the key. Our client segment is first-time investors. They are not very discerning in terms of knowledge. You have to handhold them and constantly engage in a conversation. We have to set the expectation that markets don’t give consistently high returns. You have to drill this message constantly.
How are you tackling the debt fund crisis with your clients?
Suresh Sadagopan: Expectation setting is extremely important. We don’t onboard prospects who are purely chasing returns. Our wavelength has to match.
Clients have to meet their life goals, irrespective of how the market is doing. Asset allocation takes care of this volatility. Advisers have to build a robust plan which will help clients achieve their goals, irrespective of how market performs. That is the best thing that can happen to a client.
Amit Bivalkar: We follow "the owner of the hotel eats here" philosophy. The directors of our company invest in the scheme we recommend. So, whenever you are looking at your portfolio, you're automatically reviewing all portfolios. If I'm eating at my own hotel, I think the client gets more confidence with us.
Dhaval Kapadia: Is it time for advisers to outsource investment advisory/management activities?
Dhruv Mehta: In India, we have multiple channels. You have banks, distributors and Registered Investment Advisers (RIAs). In my initial days as an adviser, I was able to manage everting on my own. You don't need a large team if you keep things simple. Investing is simple. But following the principles of investing is difficult. Asset allocation drives returns, not products.
When I started my career, one of my first clients in my second meeting put me across one of the multinational wealth managers. What I realized is that wealth manager was talking of a team of 150 research analyst spread across 20 countries and finally, the advice he gave was not very different from what I as an individual made a recommendation to the client. It comes to basics. Having knowledge and skill is a requisite.
If you put in the effort, to understand markets and products, you can succeed. If you want to scale up, you have to develop a team to take care of marketing, technology and research.
As an individual I realized that I have some strengths. I'm not good in everything. And therefore, I team up with somebody. Today, we are seeing that trend in industry. A lot of people coming together, Sapient is one example. They are four IFAs who have come together under one brand. They bring complementary skills. So, either you merge with somebody or if you don't have all the strengths, you need to either hire talent or you need to outsource.
Amit Bivalkar: I would like to share a classic example. In 2000, there was a software company by the name of Krishna Software, and the stock price moved from Rs 1 to Rs 130. And after the bubble burst, stock price came down from Rs 130 to Rs 0.25. This was an outsourced research report based on what many people bought. And then when it went to Rs 0.25, a lot of people started asking what this company was. And then somebody went into Ludhiana and found out that this was never a software company; this was a company which was manufacturing vest. Only the name was soft wear, W-E-A-R and not W-A-R-E. So, I have my doubts on outsourced research.
How do you convince clients to pay fees when markets fall?
Suresh Sadagopan: You have to set the right expectations. All advisers have the same challenge. We don’t guarantee returns. We are people who can be trusted. We are fiduciaries. We have client’s best interest at heart. If you are not with us, you're probably going to be in a worse off place. If you are getting 4% return with us, without us probably you will be at minus 4.
Return is not everything, outcome is everything. For short-term goals, we have client money in cash for up to three years. So, we ensure that whatever outcomes they want in terms of meeting the goals, we ensure that they are all met, and we keep monitoring all that. So we have a fairly close relationship with our clients.
That said, it is not that clients very happily pay when the returns are 1%-2%. But if you ask me, have I not been able to collect fees? The answer is no. I mean, I've been able to collect every single rupee. I don't have any bad debts. And I've also told my clients that if you want to exit, you can exit at any point. There is a trust that has been built over time. And they know that if they go outside, they're probably going to be in a worse off place as compared to what they are today.
How can advisers grow their business at a time when margins are falling?
Amit Bivalkar: Grow your debt book. 90% of IFAs have 90% of their AUM in equity and of that 90% equity, 60% is small and mid-cap. That's where the challenge comes when you want to grow. We have built a huge debt book. We only transfer the appreciation from debt funds into equities.
Advisers are concerned about the debt book itself…
Amit Bivalkar: Media has overhyped it. Around 72% of the industry AUM in debt is direct. So, only 28% is with advisers out of which 16% is with banks, out of which 12% you have. Only 39 advisers who hold 9% out of it. So, the guys sitting here are only 3% of the total debt book.
Dhruv Mehta: When margins are falling, you have to increase volumes. I don't think it's challenging because the market is huge. The awareness about mutual funds in India is still low. There is a huge market out there. You need to strategize.
India is among the lowest cost market for advice for financial products. Active funds dominate in India. If you were to consider both the active cost of fund management as well as the embedded cost of advice and commission, India has amongst the lowest cost structure. So, you have a wonderful product. You can do complete financial planning with mutual funds. You don't need any other product. There is a huge market at the bottom of the pyramid, at the mass affluent, and at the HNI segment. If you are working with 100 clients, your margins have dropped by 20%. You need another 20 new clients to offset the falling margins.
But you can go from 100 to 200 to 1,000. Technology will help you scale up. I believe a mix of offline and online is required. The market is open for all models.
