19th June 2012

PramodSaraf has always been unconventional (See our previous Advisor Speak article featuring Pramod - "Winning is about doing things differently"). Here's another extremely unconventional thing that he's recently done : he quit from his position in his own firm and has started out again from zero ! Startled? We've heard of employees quitting jobs. But why would a successful IFA- who is counted among the biggest in Madhya Pradesh - quit his own firm and start out again - in the same business? Read on as Pramod explains what he's done and why. Read on to understand Pramod's fantastic and truly visionary move - it sure will force you to sit up and think hard.....

How can we resolve conflict of interest?

I, like many of my IFA friends, have been grappling with this distributor vs advisor positioning for some time now. In my heart, I had very clearly made the shift to an advisor some time ago. That's why I got myself a CFP certification. That's why I am now a candidate for CFA Program Level 1. My approach is one of an advisor. But, you can't really run away from what SEBI keeps on asking us : how can you be an unbiased advisor if your income comes from being a distributor? You also have a pending regulation that SEBI wants to bring to life, which will clearly demarcate advice vs distribution. Business models will have to be radically modified, if and when that regulation comes in. More importantly than SEBI, when investors - your clients and prospective clients - wonder how somebody can be a fee-based advisor offering unbiased guidance when most of his revenue is coming from commissions, it surely is time to think hard about finding a solution to this conflict of interest. Whether the conflict of interest is real or is only perceived - the fact is that if you are able to resolve it, you have a better chance of success.

I made a bold decision in April

After giving this much thought, I made a big shift. Effective April 2012, I quit from my position as head of my distribution company - Swan Finance. I brought in our Bhopal branch head into our head office in Indore and gave him responsibility of day-to-day operations of my distribution company. Along with that, I gave him a stake in the company, to align and protect mutual interests. Over April and May, I got him fully involved in all decision making for the company.

I have started out from scratch - as a pure fee based advisor. I do not work for Swan Finance any longer though I own it. I have gone back to cold calling in order to get new clients who will sign up for a pure fee based service. Clients take my advice for a fee and are free to choose how they want to get their investments executed. I let them know that I have a distribution company which will be happy to help them with the execution of their transactions - but there is no obligation to go only to Swan Finance. I am loving getting back into the field for cold calling on prospects. I am not going to any of our existing clients at Swan Finance with this pure fee based proposition - that business continues as before. This is a brand new business that I have started, with all new clients. In the first 6 weeks until mid-May, I have made a small start - I have signed up 15 new clients. My current model is very simple - I charge a flat annual fee of Rs. 5000 per client for offering my financial planning advice. I have a very modest target in mind for my first year - to sign up 100 clients by Mar 13 and thus book a fee income of Rs. 500,000. Once I reach that milestone, and after evaluating the journey in the first year, I will then decide on the various service models and fee structures - ranging from Rs. 5000 to maybe Rs. 50,000 per year - depending on the range of services offered. But, right now, its one step at a time.

I asked my team to give me 1 month leave

In mid-May, I made another bold move. I asked my staff and my clients for a 1 month leave. Normally, my staff was used to asking me for leave. They were taken aback to find me asking them for leave. I explained that I wanted study leave to prepare for my CFA exams. They understood that getting this certification will help me and the business - and granted me leave. That was the acid test for me - to completely stay away from office for 1 month and see whether it is actually functioning independently. I sat at home and studied, while the business was run smoothly by my team. That experience has given me the confidence that I am on the right track.

Its important to give your clients the choice

I am now fully focussed on achieving my first milestone - 100 fee-paying clients to establish the viability of this business model. I am doing what I really like doing, I am getting paid for it, and my existing business is running as before. I am now able to confidently tell my fee paying clients that there is indeed no conflict of interest - they are free to choose Swan Finance or any other distributor for execution. So far, when given this choice, most of them have opted for my own distribution firm - which is wonderful for me. In fact, some of these clients were convinced about my unbiased advice proposal only when I offered to continue with their existing distributor for execution and service, and to use me only as a pure advisor. I have also had cases where even when the client was ready to transfer the portfolio to Swan Finance, I asked them to do a quality check on the existing distributor and remain with them, if the distributor was indeed offering good service.

The first test of a good advisor comes when you review a prospective client's portfolio. As a good advisor, giving advice to do nothing is also valuable advice - whether it means continue holding all existing schemes, whether it means not investing now and remaining liquid even if there is some surplus, if that is our view. Our ability to give this kind of genuine advice is what investors will test us on - that is what establishes a true unbiased nature of advice.

The important thing for me is that I am giving them a choice on which distributor to choose and they are making the decision. Once this model stabilises - and I am confident it will - I am ready for whatever new advisory regulation SEBI may ask us to follow. More importantly, my clients are happy - and that's what finally matters.