Category Archives: Intermediaries Corner

The Advisory Business is still Evolving

Abhay Aima, Group head at HDFC Bank on the evolving landscape of wealth management for UHNIs and what it takes to make a good advisor

by Lisa Pallavi Barbora, 28/9/15, Mint

The value an advisor adds is plugging the gap of time, which a client doesn’t have, to focus on money management


Abhay Aima’s business card lists out four business segments that he is the head of. This shows his depth of experience. Yet his business card descriptions aren’t what define him. He is actually uncomfortable using more than one part of his long designation. Aima, group head, equities and private banking group, third-party products, NRI (non-resident Indian) and international consumer business, HDFC Bank Ltd, spoke to Mint about the evolving landscape of wealth management for ultra-high-net-worth individuals (UHNIs) and also what it takes to make a good advisor. Edited excerpts:

How open are UHNIs towards bankers and advisors giving them money management inputs?

The business of advisory has evolved over a period of time. In earlier days, the concept wasn’t there. As our economy has changed, so has the concept of managing money. Traditionally, money was with business families, which was a difficult segment to crack—the best thing for them to do was take the profits and reinvest in their businesses. The failure rates for Indian businesses were also low. Essentially, personal wealth rarely got impacted. Moreover, surplus simply went towards gold and real estate.

That has changed drastically. Businesses started failing. Secondly, money got made by the salaried class as well, whether through ESoPs (employee stock option plans) or through larger take-home salaries. On the other hand, traditional business setups saw the next generation taking over the reins and their outlook and approach was different.

Both these developments led to a rise in people looking for professional money managers. The salaried class provided a good opportunity as they represented first generation wealth, didn’t have time on their hands to manage money and understood the need for a professional.

The landscape of the advisory business is still changing. Asset allocation, for example, was an alien concept, so was the systematic investment plan. Up until a few years ago, it was more about shall I enter the equity market or shall I exit; it was never about understanding the allocation to equity at various points in time.

Do clients actually follow and stick to an asset allocation?

Traditionally, if you had a safe business, then why should one need an asset allocation? The other thing was that property and gold prices never went down. And the stock market was called satta bazaar (gambling den). There was no concept of asset allocation. The reality, though, is different now.

Gold prices are falling, people have burned their fingers in property and those who have stayed with equity for long have made money. Now, it is much easier to implement as wealth has moved to the salaried and next-generation entrepreneur; yet, there is a mindset which has been built over years and that needs to change.

Among UHNIs, there is access to information across products and an understanding of asset behaviour. Now, the focus is shifting from specific products to overall portfolio structure and money management. Being part of a bank, how does this affect you?

Earlier, both the advisor and the investor were happy with just products. Conceptually, it has taken time for wealth advisors to understand that low-hanging fruit isn’t always the answer. It is tempting to look at the immediate commission earned on a product rather than keeping the profile of the investor and the risk appetite in mind. You will make money immediately but it doesn’t pay over the long term. Ideally, what happens is that when an advisor approaches an UHNI, no matter how well established the organization he represents or the person’s skill, the client will not trust the advisor on Day 1. If you are very convincing and come with great credentials, at best you can get 20% of the investor’s wallet share. Over three-four years or so, if you manage to do a good job, then one may get 70-80% of the wallet share. This means you can’t be focused on short-term earnings and have to focus on the client’s interest. Only then does it become an easy ride. The moment a wealth advisor realizes this dynamic, it works. But it requires effort to get that first 20%. This is something that advisers still need to understand.

How does one private bank distinguish from another given that the overall product basket is accessible to all?

Ideally, what we just spoke about is that the focus needs to be on not looking at short-term earnings and aligning your needs with the client’s. That is easier said than done. Secondly, a distinguishing factor is how much you take the temptation away from the relationship manager. If you are able to centralize product recommendations and keep it independent of sales, then there is value. Advisors with a sales focus will always try to sell what is easier and has a high commission.

Transparency and trust is critical; how much return you are able to generate comes later. If the wealth manager could maximize returns for everyone, then she would be doing it for herself rather than others. We tell our advisors that the client has probably done better than them, otherwise she would be coming to us rather than us seeking her out.

The value an advisor adds is plugging the gap of time—which a client doesn’t have—to focus on personal wealth management.

Service levels are also a differentiator. If these are taken care of, even if a client has made a loss, they won’t walk away if you have been honest and diligent.


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Three levels of trust when choosing an adviser

In Would you pay for financial advice? I had mentioned how two specific surveys reveal that investors are not averse to paying for advice, but lay tremendous importance on trust.

Larissa Fernand, 5/11/2014


Last year, the CFA Institute & Edelman Investor Trust Study polled investors 1,604 retail and 500 institutional investors across the U.S., U.K., Hong Kong, Canada and Australia. When asked what was most important when making a decision to hire an investment manager, 52% cited either “trusted to act in my best interest” or “commitment to ethical conduct” as the most vital parameters.

The ability to achieve high returns was most important to just 17%, while the least rated was the amount/structure of fees (7%).

This year, Morningstar U.K. conducted a similar survey. More than half the respondents cited “trust” as the primary factor when choosing an adviser. Cost came third on the list followed by past investment returns.

These surveys throw some important light on the investor-adviser relationship. While all along many have been of the opinion that investors are reluctant to pay for advice, the truth is that the bulk of investors are not averse to it. They are actually open to paying for advice, if they can trust the person who is responsible for that advice. After all, it is daunting to trust your money and financial future with a stranger.

According to Margaret Franklin, a CFA based in Toronto and vice-chair of the CFA Institute board of governors, trust is an indispensable quality in anyone we depend on to help us conduct the most important parts of our lives. She expressed her views on Morningstar Canada’s website, an excerpt of which is reproduced below.

There are no two ways about it: the degree to which you can trust an adviser will make or break the relationship. All successful relationships between an adviser and an investor will feature three levels of trust.

First, consider the adviser’s competence. You should obviously look for an adviser who is experienced and knowledgeable and who can help you make difficult financial decisions. But how can you separate the wheat from the chaff? First, it is important to ensure alignment between the education and credentials of your adviser, and your goals and preferences. You want to ensure commitment and competence in the areas of investing that are important to you.

A second level of trust is related to the adviser’s ethical conduct and reputation. Some clients may look favourably on advisers who are associated with well-known companies, whether local, regional or national. Others will look for strong connections to the community, whether through a shared social, religious or educational background. Most commonly, clients will ask friends and associates for referrals.

A third level is the empathy and maturity shown by the adviser. Sometimes called "relationship competence," this is a critical part of the relationship. It is founded on the trust that you can share personal information with your adviser and have confidence that he or she will handle the information appropriately. It helps to share a set of values and compatible personal styles.

We are not undermining the other factors, such as the asset-allocation strategy and selection of investments, and how these will help achieve their investment objectives. But the latter fall into place only if the relationship between the investor and the adviser is built on a solid foundation of trust.


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Choosing an advisor set to become simpler

Abhishek Anand, Mint, 29/9/2011


Sebi’s draft guidelines on regulation of financial advisors emphasise quality and transparency

Seeking a drug from a chemist may be easy but you can’t be sure whether it will cure the disease you took it for or would not react because of other body symptoms. That’s why it’s better to visit the doctor even if it takes a little more of your effort and time since the doctor will look at your overall health before prescribing any medicine. The same holds true when it comes to a broker and an financial advisor. While a broker may not think twice before selling you an insurance policy or a mutual fund, irrespective of your needs, a financial advisor would look at your overall financial health before recommending a scheme.

Choosing between an agent and an advisor may be tricky for investors since no guidelines regarding their qualification or eligibility are in place yet; few investors are proactive enough to run a background check on the agent or advisor. But the investors’ task is set to becomes easier with the capital market regulator, the Securities and Exchange Board of India (Sebi), coming up with draft guidelines on regulation of financial advisors.

What’s more, the quality of advice may also change with the draft guidelines proposing introduction of certain practices. The regulator has invited public comments on the draft guidelines by 31 October.

What’s been proposed?

Minimum qualification: Sebi has proposed a minimum qualification without which an individual cannot work as a financial advisor.

Sebi has proposed that an individual needs to be either a chartered accountant, an MBA in finance or needs to hold similar qualification or should have at least 10 years of relevant experience in the field. In addition, individuals would be required to have a certification from Sebi-approved organisations such as National Institute of Securities Markets.

In case of advisory services from banks, at least two key personnel of the bank would be required to have relevant experience and necessary certification.

Self regulation: In order to put a check on the activities of financial advisors, the regulator has proposed setting up of a centralized self regulatory organization (SRO), which would frame rules for advisors and monitor their activities.

Individuals in the advisory business would have to register themselves with the SRO and would have to comply with its rules and regulations.

Besides individuals, even portfolio managers who only provide investment advice would be required to register with the SRO. In fact, most institutions meting our advice on financial instruments such as banks would have to register with the SRO.

Emphasis on independent advisors: An individual would be termed an investment advisor if he provides investment advice directly or indirectly for a consideration from the investor and not as a representative of a particular company.

Higher transparency: An advisor would have to inform investors upfront whether he is working as an agent for a particular company or as an independent advisor.

Sebi has also proposed that investment advisors should do adequate risk profiling of each client before recommending a service. They would have to maintain records of such risk profiling and investment advice for at least five years. In case the advice is provided verbally, an audio record of the same needs to be saved.

As of now since advisors do not need to maintain any record as of now, investors are hardly in a position to produce proof of any fraudulent practices.

“Agents generally recommend products of companies that pay higher commission, irrespective of the need of the customers. If new guidelines are implemented, people would be able to distinguish agents and advisors which may reduce mis-selling,” says Kartik Jhaveri, founder and director, Transcend Consulting India Pvt. Ltd, a Mumbai-based financial planning firm.

Who is not covered?

Advocates and chartered accountants, who provide advice in their respective professions, are also out of the ambit.

It also excludes newspapers and the broadcast media. Additionally, stock brokers and sub-brokers, who provides investment advice without charging any fees, and any person offering only insurance broking under the regulations of the Insurance Regulatory and Development Authority will not be covered under the proposed investment advisor regulation. In addition to simplifying your quest for correct advice, the draft guidelines may encourage agents to upgrade their skills. This, too, would benefit you since the quality of advice in general would improve. Higher transparency would of course help.


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Make MFs convenient if you want small town participation

A K Narayan, AK Narayan Associates, Chennai


A K Narayan is a unique advisor : besides being one of Chennai’s leading IFAs, he also wears three other hats – president of an active investors association, an active member of an IFA association and a member of SEBI’s committee on investor protection.

Narayan shares his insights into what really needs to be done for mutual funds to achieve the kind of penetration into tier II and III cities that they have been talking about, but not really achieving all these years….

WF: Can you tell us about your background, what led you into the financial advisory profession and how the journey has been so far?

Narayan: Actually my relationship with the capital markets dates back to 1982/1983, during the days when I was in the corporate world. I was interested in the capital market especially the stock market as I thought that by investing carefully, one could make a decent return. In fact I used to invest in a small way in those days itself on a regular basis like our current day systematic investment plan. Since stock broking as a profession did not appeal to me, the alternative was to be in the advisory profession.

WF: In the corporate world, were you with a financial services company?

Narayan: No, I started my career with Mahindra and Mahindra, then I moved into a general management position with a leading valve manufacturer.

Two things helped me in this decision to move to the advisory profession: my interest in the stock market and the fact that I had already built up a good corpus of my own since 1982-83 which gave me a little more confidence than a normal person in quitting the corporate world. I started out my advisory business in 2003.

WF: Perfect timing ! You caught the bull market in its infancy….

Narayan: Yes, of course. I was very fortunate to associate with the markets in 2003, because when things started looking up in 2004, I was already in business.

WF: What is your current business model?

Narayan: Since I started my career in an advisory role, I decided that going 100% into the retail market would be very tough and therefore concentrated on a few trusts and HNIs. Since I am an accountant myself and had tie-ups with a few chartered accountants, referrals from HNIs used to come to me. Once my client base grew, some retail investors too came in. The current AUM is around 70 crores predominantly in trusts and HNIs. And whenever I go abroad to address training programme in Muscat, Dubai or Singapore, I come into contact with people who later became clients. So, I also have NRI clients.

WF: You have a rare distinction of leading an investor association as well as an advisory association – as President of the Tamil Nadu Investors Association and a leading member of IFA Galaxy. You are also on SEBI’s committee on investor protection and participate regularly in SEBI committee meetings. Given your 360 degree perspective on all the regulatory changes that we have seen in the last 2 years, what are some of the good and not-so-good things that have happened in your view? What is the unfinished agenda that needs to be tackled?

Narayan: In 1982-83 when I came to Chennai, I found awareness about the capital/stock market was lacking and formed an investors association to help people interested in this area. I have had a keen interest in investor education and awareness since those days.

The regulation change is a big blow to all IFAs and other intermediaries who are distributing and advising clients. SEBI definitely wants to protect the interests of the investor first. So they are not going to reverse the decision taken. The main issue is that when a man has cash and comes to you for investment advice, you have to spend some time educating him on the different available products and what would be the right product for him for which you would expect to be reasonably compensated. Unfortunately the fee-based model has not picked up all that much and it will be a long time before that happens.

My only perspective here is that having come into this profession, I see no point in giving it up. If volumes can be improved gradually, things will even out over maybe three or five years. But to see the green side, I feel that we must survive the next one or two years.

WF: Do you think that the changes over the last two years have actually benefitted investors? Are investors aware of these benefits?

Narayan: We have to look at this from various angles. Take the abolition of the entry load. Offering upfront commissions of 5% and 6%, 6.5% was clearly excessive and must have created a dent in the investor community affecting them on a big scale. Complaints then must have gone to the regulatory authorities who decided to overhaul the whole mechanism. That’s how the abolition of the entry load came about. They could probably have brought it down to 1.25% or 1% and then abolished it gradually over a period of three years to avoid this kind of an impact. But I am certain the investor stands to gain now because this is one of the most cost effective and transparent products available which could be an excellent investment if the advisor does a good job.

WF: Do you think variable entry load is a good solution?

Narayan: The two-cheque system is definitely not working. Hopefully, a single-cheque system with the variable load built into the application form itself may be the answer. SEBI should still put a small cap there so that people don’t go overboard with charging while IFAs are also reasonably compensated. Checks and balances have to be built in to protect both the investors and the IFAs.

WF: Do you support this move on 100-rupee transaction fee that the SEBI committee seems to be considering?

Narayan: No, I don’t know how this idea has come about. A variable entry load is a better solution.

WF: Coming back to your own business, as an impacted advisor, what are the changes you made post August 2009 to improve the viability of the whole proposition?

Narayan: We are now more focused towards the HNI clients and the clients who are interested in long-term investment. People read about the entry load but do not understand the implications. We explain to them that, much like an annual maintenance contract, we too maintain their portfolios for which they have to pay us money over a period of time. A few clients have agreed. That’s one of the first changes. Second is we are more transparent about everything and tell them that we are not getting anything which has made a few clients come around to paying. Third, earlier people used to walk in wanting to redeem something which you have invested through a broker. Now, we tell them that such things cost money and charge maybe 100 or 150 rupees per redemption. We have started charging for service requests now.

WF: Given that a lot of advisors have chosen to exit mutual fund distribution, do the few people who remain committed to this business see any significant growth in terms of "marooned" customers looking for a new advisor?

Narayan: Yes. Distributors are far fewer now and investors are also looking for stable people with continuous business. The next one or two years will be a testing period and those who are able to survive during this period will definitely grow much larger in proportion.

WF: What needs to be done to improve volumes, to get more investors to buy mutual funds? It appears that the only sustainable solution is to look for volume growth to compensate for margin loss.

Narayan: This business of distribution takes place in a big way in metros and to a lesser extent in the smaller cities. When I go to some smaller town, say, where there are a lot of college professors and school teachers, they are not able to participate in the majority of the SIPs because banks are not cooperative and don’t have a clearing system which hampers the growth of the industry. What SEBI and RBI should do first is to make cheques payable at par available at least in all municipal towns and cities. Second, there is no uniformity either in the application form or in the procedures followed. This is especially true for a number of service requests like transmission, bank mandate change etc. There is no uniformity and people are put to a lot of trouble. The regulator should standardize the procedures and perhaps also attempt to give a single account statement from CAMS, KARVY, Templeton, in one sheet of paper. You have to make the experience of mutual fund investing a convenient one for people in small towns – only then can you expect them to participate in mutual funds.

Once convenience is taken care of, then comes education. I spend a lot of my time in educating investors from across Tamil Nadu. But, if I get a sales enquiry from an investor in a small town like Pudukottai, I refrain from following it up because I know it will be too much of a hassle to get the investor to invest and then service him, given the banking and fund transactions infrastructure in that small town. We will be wasting our time in education initiatives in small towns unless we can first ensure that we are offering a convenient way for investors to buy and sell mutual funds in their respective towns.

WF: A very valid point indeed. In fact there are many aspects that you have touched upon where you don’t need regulatory input – whether it is common processes and forms or points of acceptance of R&T agents. Clearly, a lot of homework for the industry to complete, before it can realistically have ambitions to achieve significantly higher levels of retail penetration.


*We at VRIDHI are happy to share this article with the readers. Mr.A.K.Narayan is the current president of the association in which our CEO Mr.Vivek Karwa is also very active as a management committee member.

Brokers facing tough times

Brokers facing tough time as investors keep off equity

Economic Times, 16/6/2011

India Infoline had rattled the brokerage industry with five-paisa commission, and record compensation for talent from CLSA which took its market value to Rs 10,200 crore during the bull run. Now, it is valued at Rs 2,460. That reflects the state of the broking industry.

Brokerages indulged in expanding mindlessly to reap the benefits of a growing India and paying astronomical salary to even beginners just to keep the business going. That’s returning to haunt and many are on the verge of laying off people, and some small ones and sub-brokers have shuttered.

There are some such as Barclays and Jefferies which are still hunting for talent, and there are those who have hired talent but are unable to squeeze profits out of them. "Times are tough for the broking industry as of now,” said Nirmal Jain , managing director at India Infoline.

"Broking is a cyclical business… business volumes, profits and such other operational metrics in broking are all linked to overall market conditions." India is the worst performing major market in Asia and many like Citigroup are underweight on India as inflation and high interest rate threaten to dent economic growth.

Trading volumes have slumped to a daily average of Rs 9,000 crore on the National Stock Exchange, from Rs 22,000 crore two years ago. On the Bombay Stock Exchange, turnover is down to Rs 2,600 crore from Rs 7,000 crore. The losses from initial public offerings, lack of economic reforms and soaring cost of funds have deterred traders from being active.

Brokerages in their eagerness to boost volumes cut commissions while costs have been rising, both for real estate and talent. "Retail investors are not showing any interest in equities; new investors are not coming in anymore," said Ashu Madan, chief operating officer of Religare Securities.

"This year is going to be a challenging year for sure." Motilal Oswal Financial Services’ net profit declined 53% in the January-March quarter over the December 2010 quarter. India Infoline’s net profit was down 30%, for Edelweiss Capital earnings fell 31% and Geojit BNP Financial Services’ tumbled 76%.

"The input costs like people and infrastructure are rising, and the overall revenue pool is not keeping pace, putting pressure on the industry,” said Anup Bagchi, managing director and chief executive at ICICI Securities . Motilal Oswal Securities , one of India’s largest stock brokers, has asked 100 employees to leave. These include staff from dealing, back office support staff and some relationship managers.


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