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WF : How did the 4 of you decide to come together to form Omega Financial in late 2010, and why did you pick financial advisory as your business, considering that volumes and margins in the distribution business had shrunk considerably by then?
Ziauddin : The four of us went to school together, then went to college together. We even took up our first job together - in Sharekhan. Then we moved together to Motilal Oswal as relationship managers, and grew to become business development managers. We observed that even seasoned business development managers in our market in Bhilai, were only able to explain product features - they were unable to explain concepts to investors. We started our firm in Nov 2010, because we were convinced that there is lot of scope for good quality financial advisors in Bhilai. Between 4 of us, we were serving a client base of over 1000 clients whom we had built a relationship with from our Motilal Oswal and Sharekhan stints. These relationships became a starting point for us, when we set up our own firm.
Yes, volumes and margins were down, but we have to also understand that competition was also much lower. Out of 250 plus IFAs in Bhilai, only 40 were active when we set up our firm. Out of these, we could count hardly 10 who had a proper office and some infrastructure to serve clients properly. Our competition was really only 5% of the IFA community in Bhilai. And, the one thing we understood very clearly is that in this business, if you adopt a truly professional approach, there is no competition.
WF : In what ways did you try to set up your firm differently from competition? How is your approach different from most of the others in Bhilai?
Ziauddin : The basic issue we recognised is that investor awareness about equity and equity related instruments is very low in Bhilai. Hardly 2% of the population is aware and invests in equity oriented avenues. The big opportunity is that if 2% can become 4%, that means doubling the market. The potential is huge. But the challenge is lack of awareness, lack of understanding of financial concepts. Our main differentiation is that from the beginning, we never adopted a product oriented approach - we focussed only on concept selling, on making customers understand financial concepts. We never went about saying this is the best equity fund, this is the best balanced fund, this fund has the following great track record etc. We keep focussing on what is the concept within which a client wants to invest. Once a client understands the concept, he will be very comfortable with making his investments.
WF : What are these concepts and how do you help clients understand them?
Ziauddin : Lets take the simplest one. There is this Kotak Bank ad which says "Chouke se behtar chakka" - or "Six is better than 4". The tagline also says that you can now get 15,000 interest instead of 10,000. Now, when clients understand the line "get 15,000 instead of 10,000", we use this understanding to introduce the proposition of liquid funds. Get 20,000 instead of 10,000. If 6 is better than 4, 8 is even better. That's what you get from liquid funds.
One example we give to all our clients is this : think of when you go on a train journey. You find at every station these sellers who exhibit many small interesting things - torches, toys, keychains etc. Something catches your fancy, you ask the vendor how much it costs. He says 20 rupees and you go ahead and buy it. Now, the thing to note here is that you actually didn't need it - you simply bought it because it appeared attractive. Now think of some of your bigger purchases. Are you buying a 400 litre fridge only because your neighbour bought one? Or a 32 inch TV because another neighbour bought one? Should you not stop and reflect that maybe there are 7 people staying in the neighbour's house, so they need a 400 litre fridge, but your's is a smaller family - do you really need a large fridge?
Once we get them thinking about how they make such purchase decisions - either because something merely looked attractive, or because a neighbour bought something similar, we bring them to the subject of how they make investment decisions. Do you invest in a product only because your friend recommended it? Do you invest only because you saw an attractive advertisement? Do you stop to consider whether you need it? Are you buying an investment product because you want it or because you need it?
In this manner, we bring up the concept of a needs based approach. We tell all our clients that we would first like to understand what their needs are, and accordingly we can showcase a concept that suits their needs. Products come much later - first we have to ensure that the concept we are recommending is fully understood by the clients as a potential solution for their needs. Clients need to first understand what is the relevance of a goal based approach, only then will they be willing to share these important details which form the basis of preparing financial plans and offering goal based solutions. The key is that the investor must first understand the concept and buy into it. Then, the process can follow.
Another aspect we discuss with clients is time horizon for equity investments. Without offering any of our inputs on ideal time horizon for equity investments, we ask this question : suppose you have a lot of confidence in your friend and give him some money to invest in a new business, how much time will you be willing to hold on to that investment? Most customers say that if they are investing in a business, they will look at a 5-10 year period at least. We take the conversation forward from there and help them understand that investing in an equity fund is nothing but investing in a set of businesses. You must have similar time frame to get the best out of this investment as well.
There is one thing that we have clearly understood. Clients do not invest because they are confident about markets. They invest based on the conviction of the advisor and the trust they have in the advisor.
On the subject of concepts, there's a wonderful story that an AMC RM told me, which I think will be useful to all my IFA friends. One of our big challenges as IFAs is that most investors have associated the term NAV to mean fluctuation. Mutual fund = product with something called NAV, and NAV means value going up and down. There ends the interest of most investors in mutual funds. How then do you get investors to give you and your products a fair trial? This story might help all of us get some clues.
There was a tea stall owner who toiled hard and managed to get his younger brother well educated. Despite all his efforts, his tea stall continued to do very average business, certainly below his own expectations. When the younger brother came back after higher studies and decided to join his brother in this modest tea stall business, the older brother was naturally unhappy, as he thought the younger brother should use his education to make a brighter future for himself in some other line of business. The younger brother was firm and said that he would make the same business a success, but by doing a few things differently. This tea stall was near a major bus stop which saw a lot of commuters going from one town to another. The younger brother bought a few colourful tables and chairs, set them up in front of his tea stall and supplied free water. Many tired and thirsty travellers came and sat down on the chairs and drank the water. While resting there, they started getting a whiff of aromatic tea, since the younger brother decided to add ginger - "adrak wali chai". This aroma enticed them and many of them started ordering tea. Business picked up briskly, and the younger brother scaled up the business far beyond what his elder brother ever thought was possible.
In our business as IFAs, we have to adopt a similar strategy. We have to first focus on starting a relationship with a client and build his confidence in us. We have to first have people willing to talk to us, willing to hear us. This is best achieved with liquid funds and debt funds. This is best achieved for example with a simple statement like what Kotak Bank says : 6 is better than 4, and we add to this saying that 8 is even better. Once the relationship is there, once clients are talking to us, then we can start introducing concepts like long term SIPs etc and get them to begin investing in equity funds. We have to change our approach just like the younger brother in the tea stall did so successfully.
WF : What is the size of your business now, in terms of client base, SIPs and AuM?
Ziauddin : We have been in business for around 2 and half years now, and in this period, we have built up a client base of over 700 clients. Ours is a pure retail client base - we don't have a single corporate customer. We have over 1900 live SIPs right now, and that continues to be our biggest focus area. In terms of AuM, we are around Rs.13 crores right now.
WF : Building a base of over 1900 live SIPs in 2 years, in a market like Bhilai, is truly commendable. What are the factors that have helped you create this kind of momentum in SIPs in a relatively small market like Bhilai?
Ziauddin : When we started our business, the concept of SIPs was not popular at all in Bhilai. Whatever money went into equity funds was lumpsums that went from time to time. Investors would put in 50,000 or 100,000 that was accumulated in their accounts as a one time investment into some fund or the other. We completely stayed away from that kind of approach, and spent a lot of time and effort educating investors about the benefits of investing in equity funds through SIPs, explaining the benefits of rupee cost averaging, explaining the benefits of long term wealth creation through SIPs.
Investor confidence in equity markets has been shaken. But, what we keep showing our investors is that even though markets have remained more or less flat over the last 4 years, SIPs in good diversified equity funds have generated a CAGR of upwards of 10%, and that too tax free. Helping investors understand how SIPs benefit from volatility in a range bound market has helped us restore their confidence in equities, even though the overall market sentiment remains weak.
It is only this very sharp focus in educating investors that has resulted in the kind of SIP numbers that we have achieved so far.
WF : What is your vision for Omega Financial - where do you see yourselves 5 years from now?
Ziauddin : Actually, we have very clear plans and targets for every year! In our first year, our focus was only to build a good base, to build a good reputation in the market, to make ourselves known in the market - which would help us build volumes in the subsequent years. We didn't have a number target for the first year. We closed the 1st year with an AuM of 2.5 crores and 650 SIPs. For the second year, we set ourselves a target of 10 cr AuM and 2000 SIPs. We fell a little short of that, but are currently above that level in AuM and a little short in terms of SIPs.
When we set up our firm, we created annual plans for each of the first 5 years. By the end of 5 years - which means 3 years from now, we have taken a target of 7000+ SIPs from over 2000 clients. We are targeting an AuM of Rs. 100 crores.
WF : That's truly fantastic. You seem to be on the right path for meeting your SIP target. How do you propose to meet the AuM target - don't you need to also attract some HNI money to reach the 100 cr mark?
Ziauddin : Yes, we are working on that aspect as well. To attract HNI money, we are focussing on retirement income as the key segment. The biggest company in Bhilai is Bhilai Steel Plant - a division of SAIL - which employs over 30,000 people. Executives who retire from BSP receive retirement benefits of between 50 - 70 lakhs each. We have created unique retirement plans for them, which is receiving a good response. We started this initiative only 6 months ago, but have already signed up 24 clients in this segment.
In this segment again, our focus is to first ensure that clients understand the concept behind our solutions. When they are completely aligned with the concept, they buy into the solutions with a lot more confidence.
Lets take a typical example of a retiring executive who has 50 lakhs to invest and needs 35,000 rupees a month as his pension / monthly income. The first thing that we tell him is that to achieve this, he doesn't need any financial planner, and that he can comfortably put it away in a bank deposit, which will yield him the required income. This gets them to start listening, because this is the first frame of mind that they are in anyway. Then we go on to add that the real issue will be 10 years down the road. The same 35,000 rupees, with inflation at 6% will go up to 67.500 rupees 10 years from now. Now, in order to get 67,500 rupees every month, he will need his portfolio to yield him 14.5% net of tax. No financial planner can at that stage offer you a solution to that problem.
So, the first task is to help the client understand that while there is indeed seemingly no problem today, unless you tackle tomorrow's problem now, you will never be able to face tomorrow's problem when tomorrow comes.
Then the next task is to enumerate the key features that must be considered in any product bought at this stage in their life. And these are safety, taxation and liquidity. Safety is absolutely paramount as they have no other source of income. Taxation is very important because their investments are reasonably large and tax will become a consideration. Most fixed income instruments suffer from being tax inefficient - this is where mutual funds score well. And the third aspect is liquidity - which is very important for senior citizens. We showcase how mutual funds score well on all these parameters and why mutual funds should form an integral part of their retirement income solution.
Once clients understand this, we clearly bifurcate the portfolio into 2 parts : the first part is invested in a manner that provides the required monthly cash flow over the next 5 years. The second part is treated as a pure investment - from which there are no cash flow requirements - and which therefore can be invested prudently in a manner that you give them sufficient time to build wealth.
By clearly segregating the income portfolio from the growth portfolio, we are also helping clients have reasonable expectations from each portfolio. Clients are happy with this approach, which gives us the confidence that we can quickly scale up our AuM from this segment of clients.
WF : It is truly refreshing and reassuring to see this kind of focus on education and right selling in a small city like Bhilai, from young advisors like yourselves. I am sure your efforts will already be helping to enhance the quality of advice in your city and I would hope that many more IFAs from across the country, in however small cities and towns they operate in, take a leaf out of your efforts and resolve to emulate your path to success. All the best for achieving your targets of 100 cr AuM, 2000 clients and 7000 SIPs in the next 3 years!
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