The mutual fund industry will never be the same again! Let’s face it and this is not an exaggeration. 1 August 2009, the date from which the Securities and Exchange Board of India’s (Sebi) ban on entry loads became effective, is a date that is going to be etched in the memories of the mutual fund professional for a really long time.
But beyond the very loud and often cacophonous noises on the repercussions of the move, there is a quiet revolution taking place that augurs well for the future of the industry. The revolution is so quiet that it has not been noticed, leave alone celebrated, which it deserves to be.
We carried out an extensive survey of 622 independent financial advisers (IFAs) across Mumbai and Delhi. Before I get into the key conclusions, it would be appropriate to share the context in which the survey was carried out.
The survey was carried out to understand the professionalism and commitment levels of IFAs against the backdrop of the Sebi ban on entry loads in mutual funds.
While they are not resourceful compared with banks and large distributors, IFAs provide depth and reach in distribution of financial products across the country today. Focusing on the retail investor, they represent the ground zero of the Indian retail financial services landscape. Their views and opinions matter because they, the “last mile” in retail financial services, can make or break a brand, a product category or even an industry.
Conclusion 1: The Indian IFAs are far more mature than what they are credited to be.
In spite of the pain of seeing an abrupt cut in their earnings, IFAs got the signal that the measure was meant to convey. This is borne out by the research finding that the ban has prompted 31% IFAs to try charging fees to their clients. Significantly, 79% of those who tried were successful. So, one out of four IFAs has already made the transition from being “compensated-only-by-asset management companies” to being “compensated-by-clients”.
Conclusion 2: IFAs recognize the need to become more process-oriented rather than transaction-oriented.
In the survey questionnaire, we had deliberately given them a wide range of choices, camouflaging the language suitably in order to understand their values and approach towards their business. When asked “what is required to be a successful distributor?” the top two responses were:
—Ability to identify client needs and match it with products.
—Knowledge about investments and financial planning.
Significantly, the last choice out of eleven choices was—Ability to push as many products as possible on clients.
IFAs have clearly realized that it is easier to acquire client assets and sell more products by using a process-oriented approach that looks at the client’s entire picture.
Conclusion 3: It is a big challenge for most IFAs today to maintain mutual fund business at the pre-ban level.
Only 6% said business has gone up. As many as 23% of IFAs said business remains at the same level.
Conclusion 4: IFAs recognize the need to adopt more professional practices, but need help on how to go about it.
One of the findings was that IFAs felt the need to strengthen relationship with clients but have no clarity about how to do it. Most client interaction is unplanned and not systematic (over 50% IFAs said they meet the client only when there is a need).
As a result, most IFAs are not able to harness the power of their existing relationships because they are not able to build deeper relationships. Following a systematic approach to relationship involving basics such as following a pre-set schedule for meeting clients on an ongoing basis or updating clients on their investments is not yet a part of their routine. The need for this is even more pressing as they have a large dependence on their existing clients.
Similarly, IFAs need to expand their “catchment areas” and be aggressive marketeers. Today, most don’t undertake any marketing activity. Very few have their own marketing material, newsletter or website.
Conclusion 5: IFAs remain optimistic about the future of the mutual fund industry.
When asked about the impact of the ban on entry load on the future of the mutual fund industry, 57% believe that the Sebi ban on entry loads will have a positive (37%) or no (20%) impact on the future of mutual fund industry.
Doomsday prophecies about the imminent demise of the industry were a little overdone. Even though the effect of the ban had been adverse for the earnings of IFAs in the short term, IFAs continue to be optimistic about the future of the industry.
Summing up, distribution is often held to be the weak link in the chain of financial services. The ground reality is that they realize the mantra for success is “doing what’s best for the client” in an ethical and professional manner. And that is worth a toast!
Prem Khatri is founder and CEO of Cafemutual.
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