The current stage of the IFA channel in the country is very nascent. We have had the luxury of manufacturers paying hefty commissions hence the IFA’s and all other distributors have not evolved as they have in other mature markets. If we were to look at advanced markets we can get a good understanding of where we are heading and learn and adapt to build our business.

Majority of IFAs in India can broadly be classified into following 2 categories:

Single Tied Agents (STA)

Single tied advisers are our typical Insurance agents who have a contractual obligation to one product provider and can only advise on the products of that company. Single tied advisers are not the client’s agent.

Multi-tied Advisers (MTA)

Firms of multi-tied advisers, they might have contractual obligations to a limited range of product providers but in India they are similar to Mutual Fund Agents who operate in an open architecture environment. A subset of MTA is Dual Product sellers who offer a combination of Mutual Funds and Life Insurance. Partly tied and partly dealing with an open architecture environment like Mutual Funds

The above IFAs earn revenues by way of commission paid by the manufacturer. Over 95%  of the IFAs in the industry are in the above categories and this is the model that is most challenged as we are seeing commissions coming tumbling down due to regulation and in the future due to market pressure.

How does an IFA migrate to the next level of charging a fee?

There are many prominent advisors/planners in India who have established their practise with the principle of charging for advice and are thriving. But ask the majority of advisors in the above 2 categories and they are apprehensive to even think about asking their clients for a fee. Why? The existence of advisors who charge shows that if you give the right proposition and value addition and do the right thing for the client the client will pay. So the premise that clients don’t pay is wrong.

For an IFA who is in one of the above 2 categories has to transition over time to becoming a paid for advisors. If you look at mature markets again we have a category of IFAs called:

Whole of market advisers (WoMA)

Whole of market advisers share all the characteristics of an IFA except they are not required by law to provide clients with the option to pay for their services entirely by fee. Whole of market advisers are not contractually tied to product providers and they can advise on products across the market (hence the term ‘whole of market’). They operate on a commission basis. Whole of market advisers act as the agents of their clients.

This is a perfect transition business model for our IFAs who are STA/MTA to adopt.  The benefit in doing so is clearly:

• To generate additional revenue by cross selling more products to customers by addressing the Individual customer’s needs across the wealth cycle.
• Increase product penetration. It is 5 times costlier to acquire a new client then sell to an existing client
• Ride the economic cycles effectively
• Large Product suite – to be truly client centric the IFA should be able to offer multiple product solutions throughout client’s life cycle.
• Multiple partner tie-ups– offers products from multiple manufacturers in each product category
• Investment in Technology. This is critical from a client’s perspective and also to be able to compete with established distributors like Banks, NBFC’s etc.

 

For becoming a WoMA the IFA has to make fundamental enhancements to the business model which can be adopted immediately by addressing issues such as:

The products the WoMA can deal in can be as vast as under and across the wealth cycle of Creation (Loans), Enhancement (Investments) & Preservation (Insurance/Wills):

Wealth Creation	Wealth Enhancement	Wealth Preservation
Home Loans	Equities/ Derivatives	Life Insurance
Loans against property	Mutual Funds	General Insurance
Commercial Loans	Bonds / Fixed Deposits	Small Savings
Auto Loans	PMS	Basic Financial Planning
Education Loan	Art / REITs	Trusts
Loans against Shares/Gold/MF	Real Estate Properties	Wills

 

To transition from WoMA to a truly successful & paid for Independent Financial Advisor, the only ingredient that needs to be added by the IFA will be Knowledge. This could be acquired by enrolling for a degree/certification, getting trained on specific modules and regularly reading about markets/international developments.

Fee Based & Successful IFA

A true IFA has no contractual ties to the product providers (such as life insurance, Mutual Fund companies) whose products they advise on. IFAs act as the agents of their clients and their independence enables them to research products from across the whole market. IFAs are the only advisers who provide the option to pay for advice entirely by fee, rather than taking any commission that the product provider will pay. If they earn commission they set it off while billing fee to clients.

How does STA/MTA convert to WoMA/IFA?

IFAs can adopt multiple ways of reaching the end game; the options available for a STA/MTA are;

1. Become a Referral Arrangement – IFAs can refer business to other competent partners whom they choose for products and services they feel they have a gap, such as research, financial planning, stock broking, lending, commodities, insurance etc. IFAs can choose the partners, change partners and clearly it helps retain one’s independent status but increases coordination with multiple partners.
2. Create an Informal Group – The IFAs can get together informally as a group/association which can help bargain better commissions from product providers with limited binding on each other. Ring fences revenues but does not take the business to the next level.
3. Become a Company – IFA can invest in building the corporate entity, become a regional /national distributor, invest in branding, people, products, reach, resources etc. This calls for greater commitment and deep pockets.
4. Partner an Integrated Platform – This is the ideal way forward till one can transition to being a company as per point 3. IFA will need to analyse the multiple players and options that are available in the market and chose the best suited for their model. It is easy to just merge the business with a larger player to get benefit of better revenue, better products and better support. But one needs to understand the negatives to such a deal. Choose a platform partner who will also give you

 

• Freedom to build your business in your name
• Opportunities to earn more by cross selling multiple products and increasing product penetration.
• Provide support across Operations, Marketing and Training

The Future is bright

IFAs have to transition from being representative of the manufacturer to being representative of the client. Regulatory changes are creating a paradigm shift in the industry. IFAs need to recognise this and put a strategy in action to move with the times.

 

Authored by,

Raj Mahadev

MD

Moneytouch Retail Financial Services (P) Ltd

Mumbai

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