March 13, 2020

Hey IFAs, Do we really understand our business ?

Gajendra Kothari

MD & CEO, Etica Wealth Management Pvt Ltd

Hey IFAs, Do we really understand our business ?

What kind of stupid question is this- would be the first reaction from many of my IFA friends. The older they are in the system, the more annoyed would be their response. This question came in my mind when I saw a huge amount of negativity with regard to our profession on various WhatsApp groups for IFAs. Many IFAs would almost always complain about everything including the regulators, AMCs, markets, Government and few don’t even spare their clients. It seems that many of them would have entered this profession by chance and not by choice and that’s why they seem to think that they are always at the receiving end.

I came to this business by choice though I had the option to join my own well-run family-owned business. I didn’t join my family business because the only thing I could make in that business was money and this idea was not exciting to me. When I learnt about the Financial Advisory business, I couldn’t believe that it had all the ingredients I was looking for. One has complete independence, low capital requirements, opportunity to learn every day, create wealth along with the client and finally the biggest satisfaction of genuinely making a difference in people’s lives.

It would have become our daily sermon to give “Gyaan” to our clients everyday regarding the power of compounding, particularly in equities. We cajole them to invest for long term (10, 15, 20 years or even beyond) to enjoy the fruits of compounding and that it is 8th wonder of the world, greatest force on earth, etc.

But do we realise that our business is also a compounding machine? While we may preach to our clients to think of long term, as advisors and asset managers (AMCs) do we ourselves really think long term? It seems most advisors are also so short-sighted and always seem to be grappling with near term issues that their long-term vision gets blurred completely. As Bill Gates says, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten”. If one is convinced about the long-term growth story of India and the huge investing population that needs to be tapped, every problem will look like David vs the opportunities Goliath presents.

I would take a simple mathematical analogy that if an above average IFA is able to grow his AUM by 30% year on year which is not at all difficult (20% net sales growth and 10% market driven growth) in a country of our size then an IFA starting with an AUM of Rs 1 Crore can easily reach  a mammoth Rs 2,620 Crores over the next 30 years considering someone starts at the age of 30 and retires at 60.

But I could see only a handful of IFAs who would have achieved this feat whereas most IFAs even after being in this business for good 15, 20, 25 years are struggling to go beyond Rs 100 Crores’ AUM. It seems either they are quite content with their achievement or somehow not able to grapple with change (not moving to online platforms, sticking to only regular plans, not moving to goal based investing).

The same analogy goes for AMCs as well. If AMCs would have stuck to their basics and kept the communication simple and not come with too many unwanted innovations, the industry would not have been at just 2-3% penetration levels. Perhaps somewhere both distributors and manufacturers for our own short-term vested interest would have missed the bigger picture thereby failing to harness the power of compounding this business presents.

The only message I would like to leave to Current and NextGen Advisors is never under-estimate the power of compounding in our business because if we fail to understand compounding ourselves do you believe to make your clients understand this?