Many investment advisers get butterflies in their stomach when they have to discuss fees with their clients. They fear clients may stop transacting with them if they appear to be greedy. However, there are a few confident advisers who have ventured into this hitherto unknown territory.
I genuinely feel that this fear is real and not imaginary. Indian investors, in general, are value conscious and it is difficult to convince them to pay a large sum for something called “investment advice”—which is not tangible, unlike medical, legal and other professional advice. They assume it to be free along with execution service, which has some commission built into it. This fear is driving many advisers to further the argument that absence of front-end commissions will stunt the growth of the industry and they live in fervent hope that some day front-end load will be restored to its former glory.
Let us accept the reality. We have training wheels on a bicycle—as an aid during learning phase. They give confidence and reduce injury. But once the balance is achieved, they have to be removed. If they are retained after learning how to ride a bicycle, they cause obstruction and can even be dangerous.
Front-end commissions, when it is paid by the product provider, resemble training wheels on a bicycle. Since the industry has matured, those bicycle wheels are a hindrance for many advisers who want to evolve a client-centric rather than product-centric business model. This straitjacketed pricing system was stifling fee-based advisory service. It also motivated some unscrupulous advisers to churn unnecessarily and also push unsuitable products with higher commission and in the process tarnished the reputation of the profession.
It is justified for product providers to be enthusiastic about helping investment advisers to further develop the market. It should be done by extending educational, training and general marketing support without linking it to the quantum of business. It may be an inconvenient reality, but to develop a long-term sustainable business environment, fear of charging fees has to go. Let us understand the source of this fear. The main source of this fear is the advisers’ lack of belief in their own capability to deliver value. It also happens to be the main source of client rejection.
Also many of the advisers feel that they are in the business of giving return to clients. This is an incorrect understanding as returns are mainly provided by the market. The 2008 meltdown has punctured the self-esteem of many advisers and they started hesitating in demanding fee for delivering returns.
One way to overcome this fear is by making advice and service more tangible. The first step is to shift the entire business into a client-centric model. Most advisers have blended model today where they have some degree of customer-centricity, but there is also product-centricity. Unless and until the conflict is resolved, it will keep on creating an internal tug of war, which creates friction and decelerates growth.
Most advices and services can be converted into tangible products. Below are some examples.
Risk assessment service : There could be a detailed interview with the client and based on client’s situation, risk assessment can be done to evaluate clients risk bearing capacity in terms of maximum loss, liquidity etc.
Preparation of financial goal statement: It is often observed that investors have no clue about their financial goals, i.e what is the reason they are investing? An adviser or a planner can help them state objectives clearly.
Portfolio construction: Diversified portfolios can be scientifically constructed based on risk assessment and financial goals. Investment methods such as systematic investment plans or value averaging plans are an aid in disciplined and goal-oriented investment approach.
Periodic portfolio review service: The adviser can monitor a portfolio and recommend rebalancing it whenever required at the lowest cost and in a tax-efficient manner.
Estate planning: Advisers can help clients to plan joint accounts, nominations, and wills.
Other ancillary services: Services such as consolidated statement, tax return preparation can also be offered. There is also a need for services such as document management for storing important documents such as property papers, insurance policies, bank and demat statements or various agreements. Such service providers are available to large entities; however these facilities are yet not available to small firms and individuals. Investors would welcome some of these services; sadly a product-centric, transaction-oriented industry has not been able to provide the same.
Any adviser who fulfils these demands will surely have long-term sticky assets under management. The basic idea is to deliver such holistic service effectively. If advisers put in effort, success in transforming the profession can be achieved.
Rajan Mehta is executive director, Benchmark Asset Management Co. Pvt. Ltd.
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