Should Mutual Fund Distributors become SEBI Registered Investment Advisors?

Should Mutual Fund Distributors become SEBI Registered Investment Advisors?

Published: May 25, 2019 at 9:32 am

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“What is your honest advice to friends in the MF distributor community? Do you suggest that it might be better for us to turn into fee-only financial planners or SEBI registered investment advisers?” This is a question asked on Youtube and think the best person to answer it is, Swapnil Kendhe, who successfully transitioned from distributor to fee-only RIA.  As regular readers would be aware (many work with him), Swapnil is part of my list of fee-only financial planners

Swapnil’s website is Vivektaru. You can read more about his journey here: Swapnil Kendhe’s successful transition into a SEBI RIA His approach to risk and returns are similar to mine and I love the fact that he pushes himself constantly to become better as you see from his articles:

Swapnil has a balanced view of the financial advisory situation in India and will not offer overzealous advice to anyone. Therefore he is well suited to answer if mutual fund distributors should become SEBI Registered Investment Advisors? If you are a distributor with this question then do consider the points mentioned in the article carefully. Also, consider sharing this with your distributor community. The intention of this article is not to claim one model is better than the other.  Practical problems and limitations in both models are discussed so that distributors will a similar question can consider all aspects.

Should Mutual Fund Distributors become SEBI Registered Investment Advisors?

Should Mutual Fund Distributors become SEBI Registered Investment Advisors?The increasing popularity of direct plans and falling commission is making mutual fund distributors vulnerable in India. SEBI’s push for fee-only advice is adding to the uncertainty. Many distributors are therefore thinking about becoming RIA (registered investment adviser) and moving to the fee-only financial planning model.

I have written this article to help friends in the MF distributor community to decide whether to become a fee-only financial planner or not.

What is Financial Planning?

John Sestina in his book ‘Fee-Only Financial Planning’ defines financial planning as

The scheduled allocation of a client’s resources using the appropriate tools and investment vehicles to best achieve client’s financial goals and objectives.

Financial planning requires gathering thorough and accurate information about a client’s financial and life situation, and comprehensively appraising it. The client’s assets, savings, and investments are then aligned to achieve his/her financial goals and objectives. The emphasis is not on optimizing return but on avoidance of serious mistakes or losses. A simple process or rules for clients to follow are created so that clients can manage their investments on their own.

The basics of sound money management and time-tested practicalities of passive investing (Passive investing as defined by Benjamin Graham in his book ‘The Intelligent Investor’) are used in financial planning. These basics and practicalities do not change with the change in the size of assets. Financial planning, therefore, doesn’t necessarily become complicated with the increase in client’s assets. Financial planning of a client having assets of over 10 crores can still be simple and no different from a client having 1 crore of assets. Therefore, a fixed fee is a more appropriate revenue model for financial planners.

If there are higher time expenses on part of the adviser in some cases, he can charge a higher fee. Similarly, the fee can be reduced if the fixed fee is too high for the client’s assets.

Does the Fee-Only financial planning model work in India?

When SEBI came up with Investment Adviser Regulation in 2013 that segregated commission selling from investment advice, the fee-only financial planning model was untested in India. Many people in the adviser community believed that this model won’t work because people don’t pay a fee for advice in India.

Only a handful of advisers opted to work on the clean fee-only model (I am referring to the fixed fee-only financial planning model here and not hybrid or percentage of AUM model). But contrary to the popular opinion within the adviser community, this model worked beautifully for some of these advisers. We now have enough examples of successful fee-only financial planners to infer that investors pay the fee for unbiased financial advice even in India, and fee-only financial planning model works. 

Requisites for the fee-only financial planning model to work for an adviser
The dynamics of the fee-only financial planning model are different from that of mutual fund distribution. While a decent selling skill is good enough for an MF distributor to gather AUM and build SIP book, fee-only financial planning demands a lot more than good selling skill. The following are the requisites for the fee-only financial planning model to work for an adviser.

  1. High competence as an adviser and confidence in one’s own competence.A highly competent adviser can work on any model and do well financially. MF distributors are products of a system that offers little incentive for advisers to improve their knowledge and competence. Therefore many may find transitioning as a fee-only financial planner tough. This is the harsh unfortunate outcome of a system that has little incentive for advisers to improve their knowledge and competence.
  2. Conviction in a fee-only financial planning model and determination to make it work.The fee-only model can test the patience of even highly competent advisers before it works for them. Only those advisers would survive the initial lean period, who not only are highly competent but also have a high conviction in the fee-only model itself. Advisers who come to this model half-convinced and put halfhearted effort are likely to fail.
  3. A decent writing skill.If a fee-only planner wants to target online business, he/she must have the ability to write quality content to display his/her competence online. Not being able to write well could be a serious handicap for a fee-only financial planner. 

Challenges in the fee-only financial planning model

A fee-only financial planner gets paid only when he/she does work for the client and does it well. An unsatisfied client doesn’t renew the engagement and doesn’t pay the fee. This is unlike MF distribution where the distributor continues to receive the commission if the client’s investments are under his/her ARN.

Clients may not renew the engagement even when they are satisfied with the planner’s advice if they think that they can now manage their investments on their own. Planners should not see it as a problem. The primary job of a financial planner is that of a teacher. A financial planner must educate his/her clients about the basics of money management and help them become capable DIY (Do It Yourself) investors. If the client fires the planner after becoming a capable DIY investor, the planner should consider it as a job well done. As a financial planner, I much prefer this situation because it allows me to assist more and more people in setting up their financial houses in order. 

This is where the conflict of interest enters the fee-only financial planning model. Most retail investors believe that their financial planner must continuously look at the market, anticipate short-term market behavior, tactically change the asset allocation, check fund performances and change funds regularly. Financial planners could do all these things to justify their fees and to increase client’s dependence on them so that they continue to get the retention fee. But none of this is necessary for financial planning. The simple approach of fixing allocation of each asset class in the portfolio, using simple products like Index funds/Multicap funds for equity allocation, keeping interest rate and credit risk in debt side of the portfolio low, maintaining asset allocation closer to target allocation with regular rebalancing and keeping costs low is all that is required.

A good financial planner is highly likely to make no changes to the client’s portfolio at the time of review. He/she is also likely to repeat the same basics of personal finance and investing every time client talks with him/her. Many clients think why they should pay the retention fee to the planner when all planner does is repeat the same things. But this repetition helps clients stay disciplined and minimize financial mistakes.

The client retention ratio for fee-only financial planners is never 100%. Therefore, fee-only planners need a steady flow of new business to compensate for the loss of retention fee. This requires online visibility and strong referrals. Referrals work better for a planner who does the job at hand well and delivers a higher value for the fee he/she charges. The size of the pie for fee-only financial planners is increasing in India and there is limited competition. A worthy fee-only planner may not find it difficult to get a steady flow of new business once he/she establishes himself/herself.

There is a limit on how much income a fee-only planner can earn because he/she rents out his/her time. If you care more about your own revenue than what is in the best interest of your clients, continue with MF distribution; because fee-only financial planning is unlikely to offer higher potential for income. Come here only if you are convinced that fee-only advice accompanied by investment in commission-free products is a better option for your clients and you want to offer it to them.

The fear of losing AUM to direct plan is not a good enough reason to think about fee-only financial planning model.

Should I take the plunge?

Fee-only financial planning is more difficult to execute than MF distribution. More advisers will fail here than succeed; especially those who come to it before building adequate competence and conviction in a fee-only advisory. But if you have confidence in your competence and ready to withstand the initial lean period of business revenue, go for it.

Fee-only financial planning is intellectually and emotionally more fulfilling than the commission-based model. You learn and grow more in one year as a fee-only planner than five years of working as an MF distributor. You can have more pride in the work you do. This model also earns you far more respect and admiration from clients than MF distribution.

The fee-only financial planning model is definitely riskier, but MF distribution may no longer be as safe. These are still early days for fee-only financial planning in India. It would be useful for a planner to establish himself/herself today because the competition will be more in the future.

If you wish to work with Swapnil Kendhe, you can contact him via his website, Vivektaru. If you have any questions about becoming a SEBI RIA, then I would suggest first reading this: How to become a Registered Investment Adviser (RIA) in India and then contact Swapnil for guidance.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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1 Comment

  1. Sir,

    Appreciate your efforts to persuade the MFD community to move to RIA, fee-only model. While the argument for the latter is well taken. Your painting the entire MFD community with a single brush has to be taken with a pinch of salt. While one may argue that many MFDs may not be doing more than filling forms, submitting to AMCs etc you cannot say that the entire MFD community exists sans any kind of interest in clients’ financial planning. I am a MFD (pursuing CFP now) and suggest schemes of funds only once the financial planning is done. I don’t charge any fee for financial planning, however upfront disclose the brokerage so that they are aware and not back bitten by others on this aspect.

    One of the reasons the regulator probably is unable to make up its mind as to whether mandatorily move the existing MFDs to a RIA model is because they like anybody have no clue of the impact. If at all in the near term it will be anything but chaos.

    India is as heterogenous as it can get in terms of client profile. There is a huge segment in India who are getting to know the concept of goal-based financial planning. The stress on either MFD or RIA should be on financial planning and not so much about how much either of them are making. There are already limits on how much a MFD can make (TER is getting compresses by the ‘day’, almost literally) with no such regulatory guideline (on the fees they can charge) for RIA.

    So while the RIA model is here to stay and grow the pace may be painfully slow. Until like you argue, there is a regulatory push to this effect thereby hastening the process of cross-over.

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