Meeting more investors and more IFAs and many more trainers…that is what I did in the past 2 weeks of India darshan…

So let me take off from what Jason Zewig, Buffett, and Vanguard have been saying…

  1. Mutual funds are prohibitively expensive, and the fund industry knows that.
  2. The regulator should have just concentrated on reducing TER – especially for the bigger funds, if not for all.
  3. The industry knows that, but has its own compulsions.
  4. The Regulator should allow Vanguard and its ilk to sell mutual funds in India by just establishing a sales office.
  5. The only money that the foreign funds are now missing is the Indian’s investment money.
  6. The absence of Vanguard is HURTING ONLY THE retail Indian investors – the funds are anyway investing in India.

Now in this background, let us examine why an IFAs job is difficult – it is because the IFA thinks that his job is:

  1. Fund selection
  2. Asset allocation
  3. Market timing

There is absolutely nothing to suggest that there will be any fund manager who will be able to create alpha over a 20/30 year period in say a large cap fund – GOING FORWARD. As fund sizes keep increasing fund managers will do more and more of closet indexing. So if a Hdfc Top 200 or a Franklin India Bluechip does a closet indexing, why should there be a fund manager cost at all? Why not just a good ETF at 0.20%p.a.? or if Vanguard comes into India at 0.02%?

Well Valueresearch, Morningstar, and their ilk will all close down if everybody did Indexing, and many IFA will wonder what value they can add. Honestly, fund picking is not a skill – it is more luck -and an Ifa who boasts about this, is on a slippery wicket. 2 or 3 years from now when his performance slips, his client will want to take his backside. If there are 435 large cap funds, believe me, there are only about 10 differentiated portfolios. So if the first fund has given 23% return in a client portfolio and the 24th fund has given 20.5% – would it have really mattered which fund your IFA chose for you? NO.

Come to asset allocation: it is a very disciplined approach to investing, PROVIDED, the IFA knows how to do it scientifically and the client agrees to the discipline. Now the IFA has to know how much to invest in largecap, midcap, microcap, Value, Growth, momentum, – believe me I do not think any such person exists. Not even the fund managers who earn (yes yes in India) about 2 Million US$), CAN DO THIS. So to expect your friendly neighborhood IFA or your bank RM to be able to do this is FOOLISH. It is a task that nobody has been able to perform well. Then there are IFAs who will swear by small cap vs midcap vs large cap funds. I am not a sucker for this kinda asset allocation. Look at the returns in the US market – when the US was a developing economy (sexy word – EMERGING MARKET) it gave more or less the same returns that it gave in the latest decade. So this too falls by the wayside. Overall in the long run – hold your breath – 80% of the returns came because the dividends got reinvested. So if wealth has to be created, dividends are important – and it is far more important to be in the GROWTH option – so that you are not wondering what to do with the dividends received. None of us can. Not even your IIT, IIM cousin. In fact he is worse.

I have met a few IFA who think that their value add is because they tell their client when to buy and what to buy. So they will take their client to a pharma fund, a banking fund, a balanced fund, an ELSS…and showcase their research and the efficacy of timing. Believe me, it cannot be more hilarious than this. Funds are not a timing product at all – except the focused funds. If you want to take an exposure to a particular industry, a Pharma etf or an automobile etf may make sense, but surely market timing is not an IFA forte.

SO WHAT SHOULD AN IFA REALLY DO?

IN the financial well-being of a client an IFA has an amazingly simple, but extremely critical role (which a Robo just cannot do, nor can a blog like mine, nor a FB group, or….can ever do) – teach the power of compounding and the need to stay invested over long periods of time.  There is enormous value in being an emotional disciplinarian for your clients, the Headmistress who tells them to sit down, be quiet and hang on for the next bull market. Making them stay the course is THE BIGGEST FAVOR that you are doing your client – and this can come only by you and your client learning VIPASANA or some other form of meditation. In my mind this is a huge, huge public service, and ALL IFAs need a GOLD MEDAL for doing this.  Making sure they have realistic expectations is even more important; most investors don’t realize that money will double in 6 years at a 12% NOMINAL return. Tell them money compounded over a long period makes wealth. Maybe they will not understand immediately. Give examples, use excel, explain giving stories, because it is vital that THEY understand. Maybe if they did, they’d stop reaching for yield.

But I’m here to tell you how you can go even further.

  • You must give your clients the full protection they need in a world that is hostile to the accumulation and preservation of wealth.
  • The Tax structure is an enemy.
  • The dividend payout is an enemy.
  • Not writing a will is an enemy.
  • Not writing down the goals is an enemy.
  • All too many brokers and planners are enemies.
  • TEN HOT FUNDS TO BUY NOW article is an enemy.
  • Star rating and Gold rating is an enemy.
  • Sensation seeking supari press is often an enemy.
  • And mostly, even the mutual fund industry can be an enemy.
  • Big unmoderated groups are an enemy.
  • Websites and blogs are an enemy – if you do not know why they exist.

So an IFA should teach indexing, have the client written down goals, reduce taxation, postpone income realisation, hand hold during dull and boring periods, and protect the client from the above enemies.

 

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  1. Very well said Subra. I could not agree more. However, most IFAs don’t have such a rapport with their client, to be able to stop them from reacting in a downturn.

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