Here we discuss issues, concerns, business strategies IFA's should focus in the future.
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AMC's should nurture the IFA's
Inspired by BCG CAMs report
Of the 100,000 IFAs registered with Association of Mutual Funds in India (AMFI) nearly 80 percent of IFAs sell other financial products in addition to mutual funds—like life insurance, small savings, and general insurance. Many are also dormant and inactive as well.
IFAs dominate in smaller cities and retail segments and as a distributor type have gained share over the past few years. If one disaggregates more, it is clear that large IFAs are gaining share rapidly at the expense of the small IFAs and other distributors.
Recent regulatory changes have caught most IFAs unprepared, and they are now looking to enhance their capabilities so as to be able to offer better advice and service.
As of March end IFA’s have a 29% share which makes it one of the larger distributors for the industry and a channel that needs to be managed effectively
IFAs are hurting with recent regulatory changes especially after the removal of entry load on all schemes and introduction of transparency in payment of the commissions. While all distributor categories have been affected, the IFAs seem to have been impacted most negatively. They are looking to enhance their capabilities.
IFAs, especially medium and small IFAs, are struggling. The many meetings I have had with IFAs, they clearly want to wait to decide on the future course of action as they feel things will settle down. The reality is that the dust is not going to settle in a hurry. The only thing that is going to be constant for the next few years is Change. Being in denial or procrastinating will not help, one needs to adjust business models now and move ahead.
The report states that now the IFAs are awakening to the need for change and improvement and prepare for the future. They are looking to enhance their capabilities on four key dimensions
1. Business build, which covers improving selling capabilities to convert leads into business and business into relationships, as well as improving preparation for meetings.
2. Improved advisory, which includes developing the ability to truly understand client needs and to offer advice on portfolio allocation and ongoing portfolio management.
3. Ease of operations, which is about leveraging technology and tools to make the administrative elements easier so that the IFAs can spend more time on business building and sales activities, as well as to help reduce costs.
4. Improved client services, which is again about leveraging technology and tools to offer better services to clients— for example, offering clients an online account, offering ongoing rebalancing support, providing regular performance updates, among other services.
To build the above capabilities IFAs have 3 options by which they can build the capabilities:
1. Referral or Informal group - IFA can refer business to other competent partners or create an informal group. They can refer products and services they feel they have a gap and get benefits of negotiating as a group. This will not give the technology edge, but surely provide multiple product and services and at the time retain one’s independent status but increases coordination with multiple partners.
2. Corporatise - IFA can invest in building a corporate entity, become a regional /national distributor, invest in branding, Technology, people, products, reach, resources etc. This calls for greater commitment and deep pockets and gives the full independence in the way the business will be runs and over time gives scale and its benefits.
3. 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. It is easy to just merge the business with a larger player to get benefit of better revenue, better products, and better support. But IFA needs to understand the negatives to such a deal. Choose a platform partner who gives you in addition
- Freedom to build your business in your name
- Does not come with strings attached of AUM transfer, fee sharing on primary lines of product, restricted partner list.
- Should create opportunities to earn more by cross selling multiple products and increasing product penetration.
- Provide support across Operations, Marketing and Training
The IFAs have to choose wisely what they need to do to build their business. Small/ Medium IFAs are being nudged out of the business which may not hurt the industry in the short term; the key challenge will be felt in the long run as they provide the pool for the successful IFAs of the future.
We know 80% Advisors are selling multiple products hence Industry/AMC supporting them with the right support for building their business in a holistic manner will build loyalty. Industry/AMC can play a crucial part in transitioning the IFAs to the next level of business. AMC/Industry should support IFA's to choose the right business model for future growth. Many AMCs have already started advising the IFAs in this direction. Developing the channel with a value proposition that is sustainable is critical and for that Industry has to think beyond Mutual Funds and think of empowering the IFAs to be truly holistic in their solution.
A smart strategy to adopt as it addresses quite a few issues:
• builds a value proposition for the IFAs
• gets the AMCs product going with the IFAs
• Empowers the IFA to face the growing needs of their clients
• Create a support mechanism for smaller IFAs
• Develop a plan to get ‘retail’ long–term money
It will be interesting to observe how AMCs, industry bodies like AMFI rally around these needs and support and equip them for the future.
Moneytouch Retail Financial Services (P) Ltd
Moneytouch has launched the 1st integrated platform with offline support for IFAs in India
For details contact feedback@touchbase.co.in
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Roadmap for Independent Financial Advisors (IFA’s)
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, Direct Sales team in the retail asset side and 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, though overseas they might have contractual obligations to a limited range of product providers but in India there are similar to Mutual Fund Agents who operate in an open architecture environment. This is also applicable to the many Direct Selling agencies that operate in the Retail Asset side of the business. They only advise on the products offered by those companies they have a contract/agreement with. 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
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:
- Large Product suite – to be truly client centric the IFA should be able to offer multiple product solutions for the client actors the clients life cycle
- Multiple partner tie-ups
- Investment in Technology. This is critical from a clients perspective and also to be able to compete with established distributors like Banks, NBFC’s etc.
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):
-Home Loans
-Loans against property
-Commercial Prop. Loans
-Business Loans
-Personal Loans
-Auto Loans
-Gold Loans
-Education Loan
-Loans against Shares
-Loans against MFs
-Equities/ Derivatives
-Demat
-Mutual Funds
-Bonds
-Fixed Deposits
-PMS
-Art
-REITs
-Real Estate Properties
-Life Insurance
-General Insurance
-Small Savings
-Basic Financial Planning
-Trusts/Wills
To transition from WoMA to a true to name paid for Independent Financial Advisers, 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.
Paid for Advisor- IFAs have 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 a fee they deduct it from the fee they earn from the client.
How does STA/MTA convert to WoMA/IFA? IFAs can adopt multiple ways of reaching the end game; I have already mentioned it earlier in my article and I reiterate here. The option’s 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 gives you in addition
• Freedom to build your business in your name
• Does not come with strings attached of AUM transfer, fee sharing on primary lines of product, restricted partner list.
• Should create 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.
The STA--> MTA--> WoMA--> IFA transition is the ideal roadmap for the IFA to adopt in these trying and challenging times. If adopted, it will help IFA’s to thrive and become even more prominent in the world of financial service distribution.
Moneytouch Retail Financial Services (P) Ltd
Moneytouch has launched the 1st integrated platform with offline support for IFAs in India
For details contact feedback@touchbase.co.in
