Gamechangers: Dealing with direct

Chennai's ace advisor offers rich insights to small IFAs

A K Narayan, Chennai

3rd December 2015

In a nutshell

A K Narayan, President of IFA Galaxy, shares his personal experiences on dealing with direct plans as well as how he counsels several small IFAs from across Tamil Nadu who regularly meet him and seek his insights on how to deal with competition from direct plans. His advice to small IFAs comes from a clear insight into what retail investors really want when investing in capital markets. An earlier generation of investors had a different set of needs which IFAs satisfied through a robust service proposition. Today's investor has a completely different set of needs, arising out of different circumstances. Read on to understand Narayan's rich insights into how investor needs have evolved, how the earlier IFA model is now outdated in this context, and how IFAs must change their game to win not just against competition, but make their business models regulation proof.

Direct started in a small way 5 years ago with entry load waiver on direct applications, and then became a much larger proposition 3 years ago, when the pricing difference in annual expenses came into force. Let me share my views on dealing with direct in two parts: (1) My experience as an advisor in dealing with direct and (2) My views on how small IFAs should deal with direct

My experience as an advisor in dealing with direct

1. Irreversible phenomenon: First, I have accepted that this is an irreversible phenomenon, just like abolishing of entry loads was. There is an investor benefit in these plans, and they have been introduced as a measure of investor protection, to give investors an option. This is not going to go away. So, the way to deal with direct is not to think of what more letters to write to which regulator or ministry, asking for their removal, but to look within and see how I can compete effectively.

2. Corporate debt investments will remain direct: I have clients across the spectrum - corporates, trusts, HNIs, retail investors. What I have seen is that for corporate clients who invest largely in debt and liquid funds, there is a clear benefit in direct plans and their treasurers/CFOs can take investment decisions in this segment, without the need to too much advice. This segment has migrated to direct plans for their lower risk short and medium term treasury needs, and there is nothing meaningful we can do about this.

3. All equity investors - big or small - need handholding: The same corporate investors however do look at equity differently. When some of them consider equity for long term investments, they are happy to take advice and invest through us. The reason for this is simple: they value inputs from a market participant on higher risk avenues, and they greatly value such inputs in times of heightened market volatility. Take last August for example, when we saw a sell-off: we go so many calls - from corporate investors, HNIs, retail investors - everybody called to understand what is happening and get inputs on what is a sensible thing for them to do. My realization is very simple: whether you are a large investor or a small investor, when market volatility hits your portfolio, you reach out for reassurance from an experienced and knowledgeable person, and that is where an advisor comes in. We don't in any way reduce the impact of volatility in their portfolio - but we give them the confidence to ride through volatility. Investors value this for sure.

4. Retail investors look for good advice, not cheaper products: As far as retail investors is concerned, in my experience, perhaps only 1 or 2 investors switched to direct plans. Majority of them are aware of direct plans, but have chosen to continue with us. To start with, the operational issues of managing your own portfolio and all the paperwork that goes with it, is a daunting task for most. Retail investors do not have anybody to fall back on to help them with administering their portfolio, and therefore find it convenient to avail the services of a distributor. Then there is the issue of dealing with market volatility, which I mentioned earlier - retail investors, just like bigger investors, also need handholding and reassurance, to help them stay on course with their investment plans. I am not suggesting that no investor has had a conversation with us on direct plans. There are clients who broach the subject, particularly when they read about direct plans in newspapers. But, when I explain to them what they get when they invest through us and what they will therefore have to do on their own, if they go direct, they understand both propositions better, and almost invariably have chosen to continue with us. Retail investors, unlike corporate investors, do not distinguish between debt and equity investments. They have no problem continuing with us for their entire portfolio, with the full knowledge that direct plans are an option available to them.

My views on how small IFAs should deal with direct

In my capacity within IFA Galaxy, I meet a number of advisors from different cities and towns. Whenever I am asked by some of them on how to deal with competition from direct plans, or when they get worried about their businesses, here is what I typically tell them:

1. Rapidly growing market opportunity: We must first understand that investing in capital market instruments has now become a necessity and not an option for most middle class Indians. As it is, gold and property - which retail investors are very familiar with - are no longer looking attractive. This trend will only increase as interest rates decline and fixed deposits become less attractive The market opportunity for us is therefore large, and growing rapidly.

2. Huge need for advice: Most middle class families prefer advice from a trusted source when investing in capital markets. It is not an area of familiarity for them, many of them have burned their fingers in past stock market crashes. There is a keen desire to get it right this time, by taking a more sensible approach towards investing their hard earned money in capital markets.

3. Operational convenience of online platforms is not a big threat: I hear a lot of talk that operational convenience from online platforms will propel investors to go direct. I don't agree with this view. Convenience is useful, no doubt. But advice is more valuable for a middle class investor who is now investing in capital markets, either for the first time, or returning to the market after a long time, with an unpleasant experience of a previous attempt years ago of buying hot stocks that finally burnt his fingers. What will well happen - and I am seeing this already - is that when online platforms introduce a higher element of convenience, clients don't switch - they demand this convenience from us. We have to measure up to clients' rising expectations on convenience. But convenience alone is not a threat.

4. Shift your proposition from service to advice: Keeping these 3 points in view, my message to IFAs who serve retail clients is this: our previous business model was built around offering "service" to investors. The focus was offering operational convenience in a world filled with so much paper that investors got confused. That business model is now outdated. Service is rapidly getting commoditized, service is being rendered by technology, and new levels of convenience is now available to investors. Today's IFA business model has to be built on advice. It has to be built on the insight that there are millions of middle class families who are taking hesitating steps into capital markets, and who are eagerly looking for a trusted, knowledgeable friend to guide them in this unfamiliar territory. Our business model has to cater to this need. If you continue to keep "servicing" as your key proposition, you run a big risk. If you upskill yourself and offer what the investor actually wants from you, there is no need to fear any competition, any regulation, any market development. Concentrate on learning, on gaining deeper insights into markets, products, investor behavior - and position yourself as an advisor, not as a service provider.

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