August 8, 2016
Focus on STPs. Not just SIPs.
Brijesh Dalmia
Founder, Dalmia Advisory Services Pvt Ltd
Focus on STPs. Not just SIPs.
I find the following reasons why advisors promote equity.
- As an asset class, equity has historically offered high returns.
- It somewhat offers higher commissions / fee as compared to debt.
- It is a bit difficult to sell debt funds given other debt options available with clients.
- Debt is dull, equity is exciting.
- Equity helps increase AUM faster since mark to market is expected to be better than debt.
- Everyone around is talking about equity and promoting equity. So advisors think it is the right thing to do.
- SIP is a wonderful product to take exposure in equity.
- Lastly, advisors are highly obsessed about increasing client’s returns though clients are mostly indifferent to high returns vs average returns.
Risks of going overboard on equity
- Skewed asset allocation of clients towards equity.
- Downside risk is pretty high. During bad times, client’s behaviour can overrule advisors conviction.
- Advisors are always bullish on equity. Advice can be compromised because of self bias.
- AUM of advisors can drop significantly in bad times.
- SIP builds AUM in the long term. Advisors burn out and leave profession.
Advantage of selling STPs
- The base of STP is debt funds. Typically, an investor’s investment in debt is higher than equity.
- In the short term STPs can build reasonable AUM which can help an advisor sustain.
- It helps maintain asset allocation mix. SIP being in equity, STPs being in debt.
- STP AUM is more stable for an advisor and can run longer.
Even when advisors sell STPs, they intend to transfer funds into equity faster. While this can be a strategy to stagger investing into equity rather than lump sum, the real purpose of this article is to promote capital appreciation transfer to equity on a monthly / quarterly interval. It has a lot of benefits including comfort of clients that their principal is mostly safe in a debt fund. It works pretty well with clients. The concern of short term capital gain tax and exit loads is too little an issue considering the advantages of STP.Selling Rs.25,000/- worth of fresh SIPs every month can generate an AUM of around 25crores in 10 years at an average return of 12% pa. However, with the help of STPs an advisor can reach this figure faster.
If you see industry AUM, over 70% is in debt. If you see large advisors AUM, typically it is over 50% in debt. The message is clear. Sell more debt to increase AUM and get higher share of client’s wallet. STPs can help an advisor do it.
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