27th June 2011

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.