May 15, 2017

Direct Plans are Good for Intermediaries

Renu Maheshwari

SEBI Registered Investment Adviser

Direct Plans are Good for Intermediaries

SEBI’s RIA regulations of 2013 brought about a major change in the way intermediaries operate and practice. Along with RIA regulations came a dictate for AMCs – maintain two NAVs for each scheme. One with an inbuilt cost of commissions and another without the commission component.

The regulatory change appeared to be a big blow to the existing intermediary industry and especially to individual and small corporate IFAs. But is it so? We at Finscholarz believe that the advent of direct plans will not scourge the industry but is an impetus for metamorphosis.

Lot has been spoken about how the ‘direct plans’ are better for investors and a lot has been discussed how these plans will devour a flourishing industry (though a small one) of IFAs. If they are good for investors, how can they not be good for advisors? This small article will focus on that – HOW DIRECT PLANS ARE GOOD FOR INTERMEDIARIES

While the intermediaries continue to provide the execution services as in the past, the new regulations open a new field for the intermediaries to enter, especially for the small/medium IFAs running ‘mom and pop’ shops. Amongst the numerous positives that I see in the Direct model, I am listing a few for everyone’s perusal.

Fiduciary Relationship

Technically intermediary means the connector of manufacturer and consumer. In investment banking, it is the manufacturer of the product (AMCs) and the retail investors. An intermediary can either be on AMC’s (Sell) side or investors’ (Buy) side. The difference between buy side and sell side has been unambiguous in investment banking industry which involved corporate bodies. Retail /small investors did not have the option of hiring these services.

Until financial planning came to India all intermediaries were working on the sell side with no other option. With direct plans, intermediary now have the choice of working on the buy side or sell side.

With the advent of financial planning, the same intermediaries added another service to their bouquet; which is and should be a buy side function. This brings in an inherent conflict – working on the buy and sell side at the same time. To whom does the intermediary owe it allegiance to? Financial intermediaries the world over have been doing that. Sell-side requires basic knowledge of finance but excellent selling skills, whereas buy-side requires the high level of domain knowledge and reasonable selling skills.

The future belongs to buy side intermediary because sell side will be easily replaced with the technology. Make your pick and be the change!

Client Stickiness

The IFA industry is a small community of individual or small corporate bodies, making us small players in the market. But we compete with big banks and financial institutions in this space. What is the factor that brings clients to us rather than the big banks, where they have been banking for years, where there is continuity of services, where there are perks for being a client (privileged services, credit cards, loan facility, investors’ meet to name a few)? I have a UHNI client who keeps investing through his bank to enjoy the big bashes that his bank organizes for their privileged customers.

A client comes to small boutique service providers like us because of trust. There is no better way to build on it than to be transparent and upfront. If a distributor upgrades himself/herself to planner and analyst, it is highly improbable that the client will go to another service provider. He/she will be motivated to keep the whole portfolio with one advisor, hence increasing revenue per client.

It is very difficult for a client to move to Robo-advisory (cannot handle any complication of portfolio/goals) or financial institutions or banks (lack of transparency and fiduciary relationship)

Blue Ocean Strategy

This is an interesting data point (except RIA number, rest of the data is a couple of years’ old). In India, there are:

20 lakhs + life insurance agents

80000+ mutual fund distributors

5,000 + insurance service branches

10,000+ brokerages service branches

25000+ Bank branches

AND all of them are working on the sell side. There are only 500 + SEBI registered investment advisors in the country, who are supposed to work on the buy side. Sell side is the bloody red ocean fighting over a shrinking business where as buy side is the blue ocean, waiting to be tapped.

Why compete in a bloody red ocean where rivals are fighting over a shrinking market pool? Create blue oceans of untapped marketplaces and emerge as a leader. I believe we are all fortunate to be in the industry at this juncture. It is easy to make a mark and create a space for ourselves before the crowd catches up.

Future Ready

In this new internet era, the fear is not of losing the job to more qualified or capable worker (everyone can acquire the skills if they want to), rather losing it to the robots. All mechanical and repetitive jobs will be replaced by the machine.  Distribution to the retail customer also falls in the same category. One job that online platforms can do well and at a very low cost!

Direct Plans have made it feasible for advisors to place themselves on the buyer’s side rather seller’s side, with no loss of revenue to the intermediary or increase in cost to the investor. This is a unique opportunity for the existing players to place themselves ahead of the curve in the new era, with some upgrading of skills and more openness of thought process.

The fear of direct plans implies that investor is paying out of ignorance and will not pay once he realizes that ‘he is paying’. In this age and era, it is not too long that the customer will realize that.  As a business owner – it seems to be the riskiest business to be in, where future revenues are not secure!

The most common observation about Indian investors is that they are risk averse and do not invest in equity. For a country which has moved from being a feudalistic society to socialist democracy to capitalist democracy in last 75 years (last 3 generations alone), it is naive to expect an automatic change in behavior. The change will happen when the advice comes from trusted ‘advisor’, with the fiduciary relationship, with no conflict of interest. 50% of our clients are first-time market investors. If you sell, you are not working on ‘buy’ side. The sell side professional – call it by any name will be a SELLER – which will always put the buyer on guard and hence the distrust. Through the vagaries of the market whom will the investor trust – a distributor or the consultant with fiduciary obligations? Take your call!

Direct plans will not scourge the industry but will expedite its metamorphosis into real advisory from mere distribution!