November 4, 2014

Are you on the right direction?

Sadique Neelgund

Are you on the right direction?

The financial advisory space is filled with illusions, confusions and uncertainties. Some created by high expectations & ignorance of financial consumers, some created by product manufacturers who have to meet their business objectives, some created by regulators with their ambiguous, complex and overlapping regulations.

And finally some created by the financial planners / advisors themselves who have to adapt and fit into the overall environment created by above parties while pursuing their personal & professional needs & aspirations.

Every party has their own story to prove what they are doing is right and justify their actions. And why not… each one has a different agenda, purpose and has to act for survival and growth.  This kind of a business environment is found in many other sectors in India and not just ours. And it looks like this is how it’s going be for a long time to come.

There is popular saying which goes like “Stop worrying about things you cannot control” which according to me also means Think and act about things you can control. As a Financial Planner / Advisor, what’s in your control is the direction you choose for your advisory practice and the actions you take to stay on the chosen track. And not really worry much about what others are doing… not that it’s not going affect you… but just because you can hardly do anything much to change them.

There have been different interpretations of “SEBI Investment Advisor Regulations 2013” by various quarters. One of the major interpretations is that AMFI Registered ARN Holders can continue to charge fees and also make a financial plan which is incidental to giving advice on mutual funds. This is actually a big relief for many advisors who can continue doing what they have been doing under the ambit of AMFI (which soon is planning to float a SRO) which will regulate the MF distributors.

Another major interpretation is that advisors who would like to be in both advisory and distribution can do it under two different legal identities following arms length principle. Since a clear definition of ‘armslength’ & ‘incidental’ is not given in the regulations… this will be a matter of wait and watch where some of the early adopters will take the plunge, apply for registration, get approval / rejection and set a precedence for others to follow or wait for SEBI to come out with clarifications.

While all the confusions will continue to persist in the environment for some time to come… I would strongly recommend you to choose your direction for future and get REAL client-centric. That’s what clients expect from an advisor, that’s what regulators want from an advisor and that’s what you should actually be doing! It’s very hard when somebody else tells you to change but it’s easy when you decide to change yourself. So change before it is forced! Get this direction right irrespective of whether you choose to register under ‘SEBI Investment Advisor Regulations 2013’ or not.

Network FP since its launch in 2011 has been advocating through its various online forums and onground events for adopting a client-centric advisory approach which is best done through embracing financial planning process in your advisory practice. Below are a set of parameters / directions which you should get right for survival, growth & success of your advisory practice in the future. Most importantly they are in your client’s best interest – which is the ultimate test to check if your direction is right or wrong.

1. From Agent to Advisor

Whatever fancy designation you may be writing on your visiting card or whatever degrees / certifications / licences you may be holding… who are you representing to whom defines whether you are an agent or an advisor. If you are representing product manufacturer and talking on their behalf to the client… then you are an ‘agent’. However if you are representing clients and talking on their behalf to the product manufacturers & rest of the world, then you are truly acting as ‘advisor’.

Read the lines again if you haven’t understood this… in practical terms what this actually means is when you are advising your clients – what is the real motivation behind your advice and which side weights higher, ‘sale of a product’ or ‘fulfilling a client requirement’ defines who you are.

Regulators worldwide after the 2008 global financial crises have been tweaking the regulations to make sure the financial intermediaries act in client’s interest rather than in their self interest which is largely driven by incentive & commission structure drawn by financial product manufacturers.

2. From Salesman to Consultant

Most financial advisors have started the career by selling life insurance or mutual funds or small savings. Infact the whole advisory business has been built by product manufacturers who have just one major agenda – maximum sales or in our language – maximum ‘Assets under Management’ (nothing wrong about it… every business has the right to maximize their profits). Hence when the agents and distributors are recruited… the training largely revolves around largely two aspects – sales skills and product knowledge. “Understanding Clients” was incidental to the sales process.

I am not saying selling is wrong. But selling in financial services has often led to mis-selling due to high targets and skewed incentive structures. And the stakes are high… financial product is not a FMCG, accessory or consumer durable product. A wrong product can do a lot of damage to client’s personal & financial life.

The consumers don’t understand the products and given the nature of financial products neither they are inclined to put time & efforts to understand them. Under such circumstances… what they require is a competent consultant whom they can trust to take decisions. A consultant approach to sale of a product is definitely different from a salesman’s approach.

A consultant would understand the client’s requirements and situation and then search the universe of financial products and recommend the one that best suits the client need. Whereas a salesman would go to the client with a set of products and see if client is somehow convinced to buy/invest in something or even sometimes creates an illusion of situations under which client feels the need to buy the product.

3. From Business to Profession

I would prefer to categorize advisors into 3 categories, first – Who think of financial advisory strictly as a “profession”, second – who think they are in the “business of profession” (who want to expand/grow their practice) and third – who think of financial advisory strictly as a “business”.  In the absence of clear practice models and recognition from regulators & consumers and since the profession is in early evolutionary phase, there will be lot of experimentation and confusion.

But think about it from a client’s angle. Whom does she want to deal with? Simply put clients want & need “professionals” not “businessmen” to manage their money.

The simple difference between a professional and businessman is that – for a professional clients interest comes before AUM, Premiums, revenues and profits and for the later it might be vice versa. Yes… an IFA has both the roles to play… which is okay, but a true advisor has to draw a line between both the roles and give priority of being a professional.

4. From Returns to Goals

There is too much of halla gulla on returns aspect. When we learn portfolio management, investment managements, alpha, beta, standard deviation etc… getting superior returns in markets looks so very easy theoretically. And then combine that with so many right calls the advisors get when the markets are bullish.

The hell breaks loose when the markets are in the bearish phase or when the markets don’t seem to go anywhere in 5 long years. And combine the market volatility with behavioural finance biases of clients who invest with greed and liquidate with fear. Infact I think we are not in the business of investment management but in the business of managing clients’ behaviour & their money attitude.

So if you are promising client high alpha and super returns and justifying your fees… you are running a sprint and a marathon.

Fulfilling goals of client is realistic and to a large extent controllable – budget, save, invest systematically and keep monitoring it. Strategy wise it is such a no brainer. But making clients set goals, save & invest regularly in a practical scenario is a challenge and that is where our role as a financial planner comes in.

5. From Products to Solutions

Financial advisors were brought into the advisory practice by the product manufacturers to sell their products. They needed an army of salesmen and advisors who needed a career at some point in time.

But many consumers have lost faith in financial products due to mis-selling and continue to invest in fixed deposits, real estate & gold. People no longer need product pitchers… they are fed up with salesmen attacking from all sides. But they still go with product sellers…. because they do not have an option… clients like to be approached with solutions to their problems / needs.

The solution to every problem is not a mutual fund or a life insurance policy. It can many a times be a simple fixed deposit, helping clients create and park a contingency fund and with some clients… it can be actually telling them enough of earning & saving… just let yourself loose and enjoy life with your family and live your life.

But this transition in advisory model and thought process can only happen when the advisors are compensated adequately for their time and efforts by the clients. And hence one needs to start charging fees.

6. From Limited to Comprehensive

During my previous assignment as a financial planner, clients many a times approached me for specific goals but I have always ended up doing a comprehensive plan. It is good for the clients and good for us. We need to aim for 100% of wallet share or simply put – be able to advice on 100% of the Networth statement & Cashflow Statement.

If the client is not giving 100% of the wallet… there is something lacking … trust, knowledge, bandwidth, infrastructure…. something…. identify and start filling the gap. It is not written anywhere that everything has to be done by you. You can always refer it to somebody… you can outsource it… but the point is client has to approach you with any of her money related problem / need / want…. not somebody else.

There will be many things that will come in between your current limited offerings and comprehensive offerings both in terms of advisory & products. Consider having tie-ups and outsourcing some of the pieces like tax, wills, general insurance, loans etc. But try to create a one-stop shop for both advice and products for your clients. Good for both.

7. From Ad-hoc advice to Financial Planning

Financial Planning is a process… period. Planners have positioned it as a service and a product for easier buy in from clients. Instead of making this process the hero… planners and clients have made “Financial Plan” the hero… which incidentally is only one part of the financial planning process.

So when I say transition to financial planning… I am not saying every client of yours should be given that 30-40 pagewala colourful ‘Financial Plan’. I just mean each client must definitely go through that financial planning process. Now this process can be a largely popular six step process or a derivation of it which is customized to your practice and branded for novelty.

Advisors are used to giving ad-hoc advice because clients are used to asking for ad-hoc advice. It takes a lot of client education and patience to switch to this format. Clients don’t have patience but if you as an advisor are convinced about following a certain process which you think is good for both of you… you want to give it a serious try. And yes following process costs time and efforts… so you will have charge a fee for the process.

8. From People to Process

‘Efficiency’ will be name of the game going forward. We have limited time & resources. A process driven advisory practice is more efficient, more profitable, more scalable and of course more compliant to regulations.

Financial Planning process is just one of the examples. An advisory practice can have n number of processes which together make a great system under which a practice thrives. In the ISO Standards circle there is a great way to define “what is a process driven organization”? ‘Document what you do and do what you document’.

As simple as it may seem… it is not. Efficiency increases drastically when you put things in black & white. Documentation has to happen at 4 levels: Creating Systems > Developing Standard Operating Procedures > Having Formats / Templates > Maintaining records which are generated. Put these things in order instead of just depending on your staff or yourself to remember everything.

9. From Manual to Technology

Technology will change the way financial advice is given and is being consumed. Technology has a great potential to impact all the areas of advisory… Advisors now have technologies and softwares for CRM, financial planning, portfolio management, money organizing, product research and transaction platforms.

With literally majority of your prospective clients having an active online presence, digital marketing using social media, emailing, website, SEO, online advertisements etc is now a must and may be more cost efficient and effective.

Advisors can use many of the online applications like mailing solutions, virtual meeting apps, online document storage, productivity enhancement apps etc. The list is endless and possibilities to make your practice more efficient, more effective and more profitable are endless too.

Embracing technology is a pain, its takes a lot to overcome the inertia to explore, learn and adopt. But once you get a hang of how things work and set it up for first time… you will feel like “what the heck was I doing all this time?”!

10. From Commissions to Fees

Now to do all the above nine things, advisors will have to invest in infrastructure & knowledge and spend more time & efforts with each client. In the most idealistic scenario the advisor should completely be compensated by the client in whose interest the advisor is working. Charging fee to clients instead of earning commissions from products sold has many benefits and the major one being removal of ‘conflict of interest’. When the client pays you for your time, efforts and knowledge… you are properly incentivised to act in her best interest.

Moreover we have been seeing commissions being squeezed across the financial products which have been led by transparency, technology and consumer knowledge. I am told by senior financial advisors earlier brokerage charged by a stock broker used to be as high as 6 percent!

Mutual funds entry load was removed and trails are under pressure and direct plans have been introduced. Life insurance regulator reluctantly but due to pressure from external parties has been bringing down the cap on upfront and trails. If your practice model is completely dependent on product commissions, you might just be dismissing the writing on the wall.

Having a fee only model is far from practical scenario due to various reasons… the clients’ readiness to pay fees, commissions coming from financial products, low efficiency levels of advisors, knowledge base required to command fees etc. But, it will be a wise decision to consciously start or focus on building a strong fee-based advisory practice.


With ongoing regulatory changes, technology changes, consumer activism, new breed of financial planners coming in, new advisory models being experimented, the next 2-3 years are going to be real tuff and it will be ‘survival of the fittest’. But those who survive will be in for a real treat… financial advisory will never go out of the business… as long as there is limited supply of money to human beings, have needs/goals/dreams and they are either busy or lazy to manage it themselves… there will be need for professional financial advisors.

Yes… advisors who do not cope up to the change will go out of business. Survival is so important to growth… and even growth is so important to survival. I think both go hand in hand… people who think of survival only… the changing environment makes them obsolete.

So start making changes to your current practice structures and make sure your direction is right. Current regulations will change, more regulations will come… but regulations will be or cannot be anti consumers. So as long as your practice is REAL client centric… you have got a very good chance of survival, growth and success. Network FP wishes you all the very best!



Authored by,

Sadique Neelgund

Network FP Knowledge solution Pvt Ltd.

One response to “Are you on the right direction?”

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