The case for comprehensive financial advisor platforms is getting stronger by the day, given rising investor expectations and tighter compliance requirements. However, many successful IFAs continue to be wary of platforms and platform providers, even as they recognize the need to embrace platforms to make their businesses future ready. Ashish and Manish Goel spell out exactly why IFAs are wary of platforms, and ask for some out-of-the-box thinking to break this impasse and move forward towards a win-win situation between IFAs and platform providers.

Greed and fear

We often say that to understand investors and why they behave the way they do, we have to understand the two primary emotions that influence their investment decisions: greed and fear. Greed and fear drive many decisions, beyond investments as well. Let me put the context of IFA thinking on platforms in the same framework of greed and fear.

Two broad types of platforms: transaction and comprehensive

For the sake of simplicity, let me break up platforms into two broad categories: one is transaction focused platforms like MF Utility and the exchange platforms (BSE and NSE). An IFA either pays an annual fee or avails of these services free of cost. Then there are more comprehensive platforms that offer not only transaction execution (some by plugging into the same MFU/NSE/BSE) but also other value adds on the pre-sales aspect (research/ planning tools) and post sales aspect (business analytics/CRM etc). These are by and large operated on a revenue sharing mode (sub broker mode).

Sub-broker platforms have been around for many years, led by industry leaders like NJ India, Prudent and more recently I-Fast. There have been a set of IFAs who have taken up such platforms, but there are still many more who are choosing not to consider these options. In contrast, transaction platforms are of more recent origin, but more and more IFAs are warming up to them.

Greed vs fear explains relative popularity of platforms

Now, let me come back to my greed and fear framework to explain what's going on in the mind of an average IFA. First of all, anything new immediately arouses a fear of the unknown, especially if it is technology related and therefore outside the comfort zone of many. Simplicity is therefore a big driver to eliminate fear of the unknown. Simple propositions that promise to make our operations more efficient, with little or no downside risk, convert the primary emotion from fear of the unknown to greed - greed for higher efficiency, and therefore higher productivity and therefore a chance for higher revenues by spending more time with more clients. Transaction platforms from stock exchanges fit into this zone very neatly. MF Utility arouses a mix of fear and greed - fear that the presence of direct plans on MFU will help migrate clients towards direct plans. On the other hand, greed also plays a part - there is no cost, there is less one time set up effort, and it is a closer fit to the way we are used to processing transactions. For some IFAs the greed vs fear equation on MFU is tilted towards greed, hence they go there. For others, it is tilted towards fear of direct and therefore they stay away. A solution that addresses the fears and stokes the greed will see lot of traction.

Now lets come to comprehensive platforms which currently operate on a sub-broker mode. I think there is a huge opportunity for IFAs to fully leverage the capabilities of a comprehensive platform, but the fear aspects are just so many and so deep, that most are preferring to stay away from them. In a sense, many IFAs are potentially giving up a chance to considerably strengthen their propositions, because fear is so all pervasive. It is similar to a situation where we see savers who refuse to invest in equity due to heightened fears of market volatility - though we know that they are eroding their purchasing power consistently by remaining in FD, sometimes we are not able to help them shake away their fears.

What are these fears?

1. Loss of identity: It is important to understand the context of loss of identity, and why it is so high among IFAs who have been around for many years, and why perhaps it is not so pronounced among the younger lot. Most of us who have been around for many years, started out as sub-brokers for a number of financial instruments - fixed deposit programs, bonds, IPOs and so on. We were always sub-brokers to big brokers/issue managers. It is only when mutual funds came along and started empanelling us directly, that we shed our "sub-broker" tag and started dealing directly with manufacturers. This was a hugely empowering feeling for many. Empowering in two ways - one is we genuinely benefit from the value add of interacting directly with fund managers / senior professionals from these fund houses, training inputs from them and so on. Second which cannot be denied is the ego element as IFAs who are growing their businesses are given a lot of attention by fund houses. By opting for a sub-broker route, established IFAs perceive that their identity vis-à-vis the fund houses will vanish. Younger IFAs who did not go through the transformation from sub-broker to independent ARN holder perhaps don't feel so strongly about such things.

2. Platform ownership: Transferring your assets onto a platform raises a key issue of who owns the platform and what is their sustainability? Is it a truly institutionalized platform that will outlive the promoters or is it very promoter dependent? What happens if the promoter decides to sell out and the IFA is not comfortable with the new ownership structure? Are our assets just an exit opportunity for the platform owner?

3. Revenue sharing: While some of the large platforms say that the revenue sharing will be fair for an IFA in terms of the absolute amounts he gets as his share, given the higher pricing power the platforms enjoy, there is always a fear about what happens if the platform provider decides at some point to alter the pricing. As long as they are acquiring more IFAs, they may offer attractive pricing. If there is a sense that the business is maturing, they could well turn attention to margins to compensate for lack of growth.

4. Legal framework: The legal / procedural framework for moving assets in and out of platforms is so cumbersome that this serves as a built-in disincentive for such consolidation efforts. Maybe the framework has been kept deliberately cumbersome, for this purpose.

5. Comprehensiveness: While many platforms have a lot of pre and post sale support features, the issue is one of comprehensiveness. If a platform addresses 70% of my needs, I still have to find ways outside the platform for the balance 30%. This is a big deterrent for driving efficiency and scale - which are the two big criteria that should motivate us to move towards platforms. Also, for larger IFA firms with teams, the current set of platforms are simply not able to capture our organization structures. We need platforms that allow multi-level logins, with defined hierarchies in place and so on. Without this, a platform is a non-starter for us.

6. Success stories: With so many fear factors, one has to have a huge amount of greed to compensate for the fears, for us to seriously consider platforms. This is where success stories come in. If, through initiatives like Platform Point, success stories of IFAs in India and overseas are showcased who migrated their businesses to platforms and have turbo charged their growth as a consequence, the greed factor starts coming into play.

Need for out-of-the-box thinking

Transaction platforms like I mentioned, are being taken up quite actively by IFAs. Momentum is clearly building on this aspect. These is much less fear, and greed is growing as more and more IFAs see the benefit of superior transaction execution through platforms.

The situation on comprehensive platforms is in my view a case of a big missed opportunity. IFAs desperately need to embrace the full power of a comprehensive platform to strengthen their research, advisory, client engagement and business analytics aspects. Compliance requirements are only going to get tighter - which means more need for a comprehensive platform.

What we need is for solutions where the fears get adequately tackled so that greed for a superior business proposition takes over, and more and more IFAs take to comprehensive platforms. This can come in two ways:

1. Groups of IFAs get together to create platforms that they co-own, to address some of the fears expressed above. But then, its not easy to get bandwidth within some of these groups to devote huge amounts of attention to technology, to make this a reality and then to run it on a going basis. Some groups will succeed, many perhaps won't.

2. Existing platform providers must think out of the box and reach out to IFA groups with co-ownership solutions. They bring the platform to the table, IFA groups bring sizeable chunk of assets to the table and the two parties work out arrangements that adequately address each others concerns.

With the current regulatory thinking indicating a desire to have more stringent regulations around advice, even if it is incidental to an MF distribution business, there is a strong need for IFAs to think more seriously about comprehensive platforms. This is the time for collaborative and innovative solutions that can bring quality platforms to established IFAs in a manner that is win-win for both.

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