Why stock brokers should get into mutual fund advisory

Vatsal Shah on how he diversified his business to build a successful mutual fund practice.
By Morningstar |  17-07-18 | 

 Morningstar and ICICI Prudential Mutual Fund kick off Adviser Talks series which chronicles the success stories of advisers by featuring Vatsal Shah of Sushil Finance. He chats with Morningstar's Ravi Samalad on why stock brokers should look at mutual fund advisory, why ETFs will become popular going ahead and more.

Your firm started with stock broking and diversified into mutual fund distribution. Could you tell us what made you shift focus towards mutual funds?

We started out as primary market brokers in 1982. We started marketing IPOs. After mutual funds came, we started selling new fund offers till 2010. Our chairman and my father Mr. Sushil Shah keeps analyzing GDP and mutual fund penetration data of different countries. The total AUM to GDP ratio was 2% in 2010. Globally, this number was 10% to 12%, even in some of the other developing countries.

Also, the regulatory changes like ban on entry load and other rules benefitted investors. We felt that the industry is set to take off from here. So from 2010, we started focusing on mutual funds more seriously.

How did you convince your direct equity investors to invest in mutual funds? Was it a challenge?

In fact, it was much easier. Factors like failure of stock to give any returns after coming out with bumper public issues, telecom scam and coal scams affected market sentiments. When we compared the returns of mutual funds with direct equity portfolios, we found that mutual funds had outperformed stocks over the period of five years from 2008 to 2013-14. Our study showed that more than 80% of listed stocks had failed to give higher than inflation returns over a long-term period of 10-15 years. Evidently, it was clear that stock investing and mutual fund investing is not either or but both are necessary. So we tied mutual fund investing to goals and for wealth creation we still recommend stocks to our clients. When you link an investment to a non-negotiable goal such as retirement or children’s marriage etc. the purpose and sense of investment changes.

Watch the Facebook Live interview here.

You follow a robust research methodology while shortlisting funds. Could you share with us your research methodology and how it helps you?

Before recommending any product, we make sure that we understand the products very well. We stick to our long-term principles of recommending highly researched schemes. We look at the following parameters while filtering funds:

  1. Checking normalized returns over point to date returns
  2. Independent draw-downs over different periods
  3. Company concentration, industry concentrations and
  4. Rolling returns and their respective standard deviations over various time periods – preferably 3 years

There is a move towards digital investing. How have you adopted technology in your practice?  

We have focused on technology from the beginning. There are very robust exchange platforms for demat-driven mutual funds. The benefit of demat is that it eliminates errors. Arounds 90% of our new SIP registrations are in demat mode. Going ahead, we believe that the overall AUM in demat will be higher than in physical for the entire industry.

How are you leveraging your sub-broking network to grow your mutual fund book?

We tell our sub-brokers that mutual fund is their retirement planning. In the age of 35-40 years if they focus on mutual fund advisory, they will have a sizeable assets under advisory, or AUA, by the time they reach 60 years of age. This will give them a trail income. We explain to them that their clients also need mutual funds. If they don’t provide mutual funds, someone else will do.

Our current mutual fund book is Rs 500 crore. While we feel we are fairly late in entering the mutual fund space but we are happy with our progress so far. We are clocking around Rs 3 crore SIP book every month. Our aim is to take it to Rs 10 crore per month.

As markets mature, do you think exchange traded funds, or ETFs, will become more popular in India going ahead?

If you look at the global context, direct plans were introduced for institutional investors. In India, we are seeing a lot of robo advisers offering direct plans to retail investors. Ultimately, we believe that direct plans will be replaced by ETFs which are most cost effective. When exchanges start introducing new indices, ETFs will start replicating them. The industry’s SIP book which is currently at Rs 7,000 crore should reach Rs 30,000 crore in the next five to seven years. At that time, ETFs will gain momentum.

What are your plans to grow your business in the next three years? What are your key focus areas?

Currently, we are focusing on minimizing errors as the industry is still grappling with data mismatch and non-updated KYCs. Eliminating errors will help us take the next leap. Further, we are focusing on investor education. We educate investors about achieving their life goals every weekend in our offices.

What would be your advice to brokers wanting to diversify into mutual fund distribution?

In the field of psychology there is term called ‘cognitive bias’ which makes people believe that what they are currently doing is best. This bias keeps most brokers from entering mutual fund advisory as they feel it cuts their own revenue. But that’s not the case. It only increases the pie – only those who can overcome these biases will be able to start focusing on this business. Also, mutual fund advisory is less onerous as compared to equity broking. Brokers already have a captive client base so its much easier for them to enter this space. They should leverage the exchange platforms. It’s a huge ocean as even urban cities are still underpenetrated. I would advise them to sell products which are good for investors and not those which offer the highest commissions.  

How do you think independent financial advisers can tackle the competition from online investing platforms?

There are many countries in the world where internet penetration is higher than India. Even for regular consumption products, only 10% products are bought online in such countries. In India, we are dealing with money and the penetration of mutual funds is too low. So there will be space for everyone. On a standalone basis, there will be four to five platforms with sizeable assets. Five platforms will have bigger volumes but when you compare them with 80,000 feet-on-street distributors, it will be very less. Robo advisers are meant for self-directed investors.

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