At the Network FP Conference held in Mumbai, Nilesh Shah, Managing Director, Kotak Mutual Fund, talked about why Independent Financial Advisers (IFAs) are losing market share in mutual fund industry and what they can do to participate in the growth of the industry.
Despite the ups and downs, the mutual fund industry continues to grow. But what about advisers? The market share of IFAs in equity funds has dropped from 34% a few years back to around 31% now. Similarly, IFAs have lost three percent market share in debt funds (from 16% to 13%). Incrementally, banks and national distributors are outpacing the growth of IFAs.
Although the assets under management of IFAs have grown in the past five years, the pace of growth is decelerating collectively, with a few exceptions.
The PMS industry manages Rs 18 trillion while the alternative investments manages roughly three trillion rupees. The data on IFAs participation in PMS and alternatives in not available. Will IFAs be owning even one third of PMS or alternative assets market share? Unlikely.
Even the best performing IFAs have not witnessed a substantial profit growth. Let’s look at the growth of a listed distribution house. Fee income has grown two times in the last three years. I don’t think IFAs would have witnessed such kind of growth.
I gathered that digital platforms like ET Money, Paytm, Groww and others account for one third of new investor addition in the industry last year. I could not verify this information though. The digital platforms could be taking away IFAs customers too. Players like Airtel Payment Bank has not ventured into mutual fund distribution yet. Imagine if some telecom player starts a feature similar to Alipay on their platform. They are capable of growing the mutual fund investor base in India from two crore to 20 crore. Undoubtedly, the mutual fund industry is poised for growth. But whether IFAs will be able to grow and participate in this growth is doubtful.
There are certain limitations when IFAs operate in individual capacity:
- IFAs are too focused on assets side. In addition to providing investment recommendation, they can help clients take home loans, auto loans, personal loans, help them get working capital, do estate planning, and more.
- Most IFAs only operate from one geography. This is because they provide personal touch. They are not a brand where someone else can represent them.
- Not many IFAs can afford to spend money on building their proprietary technology system for their business. Thus, they are slow in adopting technology.
- Not all IFAs can monetise their business by selling it at good valuation. Imagine working for 20-25 years and not getting gratuity!
If IFAs are unable to overcome these challenges, they may not be able to grow fast.
Can IFAs create an entity called United IFA India Ltd? Here are some benefits of working under one brand:
- This uniform entity can deal in multiple products like insurance, real estate, AIFs, PMS, loans, broking, taxation, estate planning, bonds, etc.
- It can provide both online and offline services, which can help you expand geographically.
- It will help IFAs transition from product-based relationship from selling mutual funds to service based relationship. Doctor, chartered accountants, and lawyers have long term relations with clients. One doesn’t change his/her CA because someone else is offering the same service at a discount. On the other hand, an investor might change her distributor because someone else is providing advice free of cost.
- It will help IFAs sell more products per client. The company can offer an array of services like insurance, broking, annuity, estate planning, income tax filing and much more. Warren Buffet invested in a bank known as Wells Fargo. This bank did extremely well in U.S., even during the financial crisis of 2008 because it has customer loyalty. It sells multiple products to customers. Once a client has bought multiple products from the bank, it becomes difficult for client to migrate to another bank.
- Today, when SEBI or any other regulator drafts new regulations for the industry, IFAs are not invited to seek their feedback. But once your size is big, regulators have to consider your opinion about forming new regulations.
- Today, the largest private sector bank is trying to reinvent itself as a fintech firm. So technology disruption is coming. Do you want to participate in it or come under it? If you stay individual chances are you will get under it. Collectively, you will be able to build bespoke technology.
- Today, you get business from word of mouth. There are very few walk-in customers. Tomorrow, when you have a brand, you will have a pull and customers will come to you.
- An incorporated entity will help you monetise your years of hard work. It will have a good valuation as opposed to operating your individual firm.
- It will help you attract and retain talent.
- There will be lower costs due to economies of scale. Today, all IFAs have their own back office. If all of them come together, your expense will not grow exponentially but will in fact come down significantly.
- Monetisation can happen via private equity investment or IPO. IIFL Wealth is an example. At some point, wealth managers will come out with IPOs.
Downside of working as one brand:
- Owners to managers.
- Will bring accountability.
- Loss of freedom.
If you overcome these things, the future will be bright. The gains will be more than the pain.
What do you need to create this uniform entity? Vision. Mission. Commitment. Some IFAs have already begun this journey.
Today, you have three choices – Black and Yellow Taxi, Cool Cab, UBER/OLA. Kaali Peeli Taxi has very good history but uncertain future. You can choose what you want to be.
If you don’t change you will still be successful. If you come together, you will have a prosperous future. You will be able to participate in the growth of the mutual fund industry equally.