Advisory business does not pay!
I met a well to do Financial Advisor, or rather should I say almost Ex-Financial advisor. He is in the business of mutual fund distribution, given up life insurance and general insurance distribution, does not entertain clients any more for direct equity, and does financial hand-holding for SMEs.
He tried his hand at fee based financial planning, but was not very happy with the experience, so has gone into a semi-retirement mode. I spoke to him, and though it was not exactly an interview some of the things he said hit home.
Vats – let us call him by that very name has an economic background which allows him to choose whether to be in the financial advisory business, has a good qualification and adds value to the family business too. I thought some of the advisers who read this blog might benefit…so here is what he said:
– Too many people think my time is free and do not like to pay: this has been my experience too, so I can empathise. People call seek advice, and then decide to do what they want to do, but for Vats that is time spent. He spoke about a GM in a consumer durable company – married to a VP in a finance company. They spent an hour with him, spoke about the fees, made the changes and left. Then did not pay. Simple.
– ‘I will pay you if I use your advise client’: this is so funny. It is like going to a hotel and saying ‘I did not like the food, so I will not pay you’ or worse seeing a movie and saying ‘I did not like it’. And it is a cruel world – how the hell will the adviser know whether the advise is being used? He does not have an E-access to all your savings bank accounts, damn it!!
‘Subra, how do I charge for advise like making sure that the client does NOT invest Rs. 50 Lakhs in a hair brained scheme?’…I know that there is only downside. If the investment does well, the client will call up and say ‘see you told me not to invest’ however if somebody loses money, I may not even know…LOL
Vats also (like me) has a very small area of understanding – equities and a little bit o debt’. So largely our advise (fee paid or other wise) is restricted to equities and / or equity mutual funds. This means Vats too does not (cannot is also right) tell you what to do with your gold, real estate, other metals, trading in equities, etc. This is a caveat which he says up front, but people still ask him all these questions….
Well he had other things also…..I do not remember them all…
Sreekant
The first and primary role of an advisor is to ensure that clients do not make mistakes with their money decisions. But unfortunately this important role doesn’t receive the kind of appreciation that it deserves because the client doesn’t realize the consequences of the mistakes that he would’ve committed without the advisor’s guidance.
Unfortunately all advisors are painted with the same broad brush and considered worthless or dispensable. Makes me wonder who actually loses – the advisor because he loses a few hundred or thousand rupees of his fees or the client who loses lakhs because of his wrong decisions. True, identifying a competent & honest advisor is difficult for the client.
Muthu
We all know advisors read your blog. What about regulators?!
We ‘live’ the ground reality you’re sharing, but what about those who may not have clue as to what exactly happen on the ground and say that the pure advisory is the way forward.
An idea way ahead of its time may only be counterproductive.
bharat shah
yes sir! it seems tough business for honest people. we know one such firm is promising return of fee within 30/60 days , if not satisfied, and really returning!
Jayant
Most Indians are so much used to “Insurance agents masquerading as Financial advisers” over the years. It takes blogs such as these to educate people and move to paid financial advisers. Until then, this agent business (free advisers) will continue, we like it or not!
subra
btw Jayant how should the bloggers be paid?
Jayant
Hello Subra sir,
Bloggers should be paid by advertisement. More hits the blog gets, more advertisements the blog gets.
subra
no if all are intelligent readers, they do not click on the ads…and all ad revenue ANNUALLY justifies about 4-5 days work – in terms of money. So it cannot be money from ads alone – it is just too insignificant
BombayBoy
Agree with Jayant. Most Indians (networth < 1 crore) exposure to advisory goes only as far as their local insurance/taxplanning agents during their 80cc ritual investment.
There's also a new crop of freshly-minted 6-12months coursed execMBA, Finance only "wealth mgrs" from fancy banks whose sole purpose is to separate you from yr savings/FD money lying in accts in their banks (you see they know exactly how much you're worth) and put it in wealth mgmt schemes promoted by the very same bank. (conflict of interest too much!).
So naturally most Indians have their antennas up when it comes to financial advice. Unfortunately sir, you and people like Mr. Vats are a few good apples mixed remaining 95% bad apples.
I think the solution for the genuine guys like you is :
– to accept business mostly from referrals.
– for walk-in/phone-in type customers, charge them a modest 1-2k fee for an introductory KYC-type meeting (~1-2hr?). This fee also acts as a signal to yr prospects that you value your time and advise, and they will also arrive with proper data/bkground in hand and it tells them that nothing in future will be free.
Here the goal from your end is not to extract max value of yr consultancy (on a per hr basis) and the dishonest prospects also cannot finagle all advice in such a short time. This is just an opportunity for both parties to understand if a proper paid-consultancy is worth to pursue. To be fair to the new clients, incase they decide not to continue the relationship they should also not be bound by a long-term fee commitment which they cannot afford.
Does that sound right and fair to both parties?
Also, can you tell us how do you charge your clients? Is it only the AUM that you handle, or % per investment or some other method?
BombayBoy
Regarding wealth mgrs from banks, here’s what happened to Sanjeev Agarwal, Jt-CEO BigBazaar :
http://agrawalsanjeev.blogspot.com/2011/09/who-customer-what-service.html
My bank decided to change my wealth management team for reasons best known to them. One day a trainee lands up at my home to “help” me. He has no homework done as to who I was and details of my relationship. No briefing from the previous wealth manager or his boss. On speaking to his boss, he apologised and promised to meet me up. For over 2 months, no sign of his wanting to meet me.
If this happens to HNI like BigBazaar CEO, imagine what havoc these ‘wealth-mgmt’ teams create at your run of the mill mom-n-pop accounts.
Sanjay
I agree with Subra sir. Bloggers are the ones which usually opens up the unholy things happening in the financial world. I started reading in financial articles because of recession of 2008.
That being said, financial education is not a medical science. I have said it before as well. You don’t have to spend too much of life time to know the asset classes available and risks in each asset class and risks in each product available in each asset class. Any 10th year student can calculate the charges in ULIP. The important point is to “read terms” and “calculate”.
I agree that each individual case is different and hence we cannot use same formula everywhere. But the spending patterns in same generation is almost the same. For example, now young generation is paying hell a lot for real estate under assumption that their salary will keep increasing with every passing year.
I have come across this blog through an article in financial newspaper in India – Mint. I read a lot of interesting thoughtful articles in Mint and I don’t mind spending for the newspaper. So if the information is worth it then people won’t mind micropayments or monthly subscription.
So Subra, if you really want to make money out of your knowledge you can ask for monthly subscription to your website (just like The Economist). 🙂
subra
Monthly subscription will work only for very, very reputed brilliant sites like wsj, forbes and economist.
Bombay Boy : i charge for lectures, and training. Mutual funds I really do not see why people need an adviser – if they are intelligent to restrict themselves to 3-4-5 fund schemes.
Take a term, simple.
to me Financial Planning seems to be an exercise in hot air except for clients with a lot of complications. IMHO.
Dhawal Sharma
A patient goes to the doctor, doctor diagnose him, advice him some medication which the patient goes out and buy from the chemist..END OF THE TRANSACTION..PERIOD..If the patient is not cured within next few days, can he say that he has been MIS-SOLD or wrongly adviced?? and everybody knows why do a doctor always advise patient to go to a particular DIAGNOSTIC CENTER for tests and write such peculiar medicines which are avilable at certain specific CHEMIST??
what do you have to say about this SUBRA sir?? A layman investor, as SEBI is now trying to put, will pay an X amount first to the FINANCIAL ADVISOR as the FEES and then when he will purchase the product from the DISTRIBUTOR or SELLER, he will be paying Y amount as COMMISSION to them..As of now he is paying X amount and after this formula, he will be paying X+Y amount..Does it make sense?? to me, NO..
Me being an INSURANCE/MEDICLAIM/MUTUAL FUND advisor takes the entire responsiblity as of now for whatever investment the client has made on my say. From now on, Mr ADVISOR will wash off his hand saying, “I just adviced you, not sold you anything” and Mr DISTRIBUTOR will say that, “I sold you what you have asked from me.” to me, it would be a FUNNY situation as the client will not be able to hold responsible anybody for his investment..
Most of the CFPs over here would agree with the INDUSTRY DATA that average age of a SIP in indian mutual fund industry is 18 to 20 months..Nobody is willing to run his investment the entire course of 10 to 12 years..So how would i be benefit from COMMISSION anyway?? Should’nt there be a penalty on the INVESTOR as to breaking up the investment prematurely?? Wrong thinking this on my part, i believe..But that is how it works here. Client is not ready to pay me anything (are you kidding?? paying you for advice?? i know Mr Gupta in neighbourhood who pass back 50% of the commission) and then whatever commission i am getting is not FOOLPROOF, because i dont know when Mr A will stop his investment in any SIP??
so whats the way out for me…
Muthu
If you think investing in mutual funds does not need advisor; please have a look at the portfolio of many DIY. Not only that the schemes selected are based on latest top rankings and they keep churning the portfolio themselves. They ride on the theme or sector which is the current momentum but do not get out of time. Reliance Diversified Power, Sundaram Capex are some examples.
More than scheme selection, advice is required for behaviour. One gentleman who came to me recently sold of all his equity and moved to liquid in the end of 2008. He again reentered the market some time last year and seeing losses again is contemplating whether to move liquid again I’ve seen many DIY + plus people who are advised by bank; not making money despite being invested in the 2003-2007 bull market.
I’ve seen some DIYs becoming our clients’ atleast for 2 reasons – they need a sounding board + they see a need to have some one who would moderate their impulses which would lead them to trouble.
In my opinion, one doesn’t need an advisor for MF if he invests only in plain vanilla index funds (not even sectoral indices).
Disclosure: Please keep in mind that I earn commissions out of mutual funds offered to clients.
subra
Muthu for every bad portfolio by a DIY investor, I can show you 2 created by advisors and 3 created by Wealth Managers.
Interacting with mutual funds convinces me that there is nobody who can create a good portfolio. Period. If you do not know how much MANAGERIAL time the fund house is going to each scheme, selecting a scheme makes no sense.
Hdfc will concentrate on Top 200, Equity, Prudence…if you know in advance some new scheme which they want to promote, YOU WILL NOT KNOW it in advance.
Hence I hate children plans, pension plans, etc. which are not getting enough corpus. So….back to my original suggestion. QED.
subra
Dhawal,
if an MBBS degree could be got by writing a 45 minutes exam, believe me, doctors would have the same level of respect as mutual fund or insurance distributors.
respect, sadly has to be earned. ALAS, Fund houses, insurance companies, banks and distributors have done NOTHING so far in that direction.
Muthu
Agreed that a bad portfolio is not only the prerogative of DIY, an advisor is also equally capable!
But if you’re firmly convinced that a good portfolio cannot be created, then there is nothing further to discuss. It is like concluding markets are always efficient. Such belief helps- others!
Not everyone may have access to key people in fund houses like you may have. Still I don’t think that is necessary for creating a good portfolio.
As you are talking about HDFC; if they are concentrating on only 3 schemes managed by Prashant Jain, please take a look at some of the funds managed by Chirag Setalvad, Vinay Kulkarni etc. They are consistent performers beating both benchmarks and also doing well among the peer group. Lack of good corpus compared to the funds mentioned by you is not deterring the performance of these funds.
Even if the children plans get good corpus, I may still not prefer the same. Goals for one’s child can be planned with existing equity, debt or hybrid products itself. There is nothing special about these special products.
krish
One of my friend operating a franchise since last one year in mall. It is a high end and luxirious brand product. His upfront capital to set up and run the franchise is enormous. He spent huge money on ultra modern interiors and monthly rental is also no cheap as it is a mall. He says hardly there are any footfalls during weekdays and even during weekends couple of customers visit and mostly it is window shopping. Your friend’s status is much better. He is losing time but not money.
Shankar
Subra,
I am sure that the advisory markets will mature and advisers will get their due recognition soon.
I believe that an adviser should be paid separately, or at least should get the benefit for his advice/work. I have found an excellent adviser who in fact advised me not to invest in ULIPs. I try to make sure he gets financially benefited. For example, I try to club together my MF subscriptions, so he does not have to waste effort while visiting us. I have offered to pay him a small fee, but he refused!
Also, investing in MFs is not a simple task…I once filled a form with the account number as the folio number..It took me a year to correct the error.
Now, whenever somebody asks for an adviser this man’s name pops in my mind as an automated reflex. But sadly, though I have referred him to close to 20 people, nobody has invested with him.
Suresh
Our deep rooted desire is always to get ‘something for nothing’, eventually after many trial and error, we realise that the 95% advisor market gets something and we get nothing. How ever if we wished to pay for good advise we would get something valuable. Pay peanuts and get…