In this episode of Adviser Talks, Suresh Sadagopan of Ladder 7 Financial Advisories, chats with Ravi Samalad about how he made the transition from distribution to RIA.
Why did you choose to become an Investment Adviser?
This is a logical progression. In the distribution led model we are representing a principle. We are all supposed to be doing the right thing but there are conflicts. So, a model where you can preserve your ethics and integrity is advisory. I am independent, represent the client 100% and I have no other paymaster apart from the client. It maybe a more difficult model to adopt but I think we will all have to grow.
The regulator has given the option of both execution and distribution model to operate within RIA. Why have you been transitioning your clients towards direct plans when you have the option of offering regular plans?
It made lot of sense to me. I used to operate on a hybrid model when direct plans were introduced. The feeds were offered to us only in 2016. In 2016, MF Utility started offering direct plans. So that was the enabling condition for us to launch ourselves into a fee-only advisory. We informed our clients regarding direct and they understood that it's a superior model.
The regulator came up with RIA model in 2013. SEBI also knew that suddenly a new class of fee-only advisers cannot spring up from the ground. They have given the option to do both - advisory and distribution within the same entity. Because that is the way probably a distributor can transition to advisory model. But this is not the end. SEBI's intention is to create a class of fee-only advisers in the true sense of the word. Ultimately, all of us who have adopted the advisory model have to realize that and transition to the fee-only model.
Not all clients completely embraced this model. It's always difficult to pay fee upfront even though you know that you are saving in some other place and its not a new amount that you are paying. In spite of that a lot of people appreciated it.
Now, we are offering only direct plans. It's a fee-only advisory model. All the legacy assets which are being transitioned from the regular to direct. There were some issues regarding direct feeds which has been sorted.
Watch the interview here.
You have been charging fee since 2004. How did you go about convincing clients to pay fee?
It's always a value proposition that clients are looking for. Nobody was aware about something called financial planning back in 2004. So, I had to go ahead and tell people that this is what I will be doing if you come to me for advice. There was not much of a resistance. Also, my fee was reasonable. I was running a fee and commission-based model for obvious reasons. I mean the market was at a very early stage of development and I had no other option but to run that model. The kind of plan and advice that we gave was scaling up and we were able to charge higher fees. At one point in time it become viable for us to charge fee-only. We became fee only in the sense that we were not really asking the client to come to us for execution in 2010.
Direct plans were not available then. I am really thankful to SEBI that they had a hybrid model in place which really gave us the breathing space and the time for transition.
As far as RIA is concerned, the kind of knowledge and expertise that we will have to display and we'll have to build up is of a higher nature. Distributors who wish to transition into an RIA have to do a few things to become RIA. It's not that people are not willing to pay fees. We charge a reasonably good fee which is enough to sustain an advisory team. It’s a question of what kind of value we deliver to the client and not about the quantum of fee. I mean clients are very intelligent they know the stakes are very high today and they want an adviser who is on their side. And if we play that role to the tee, I think we are in business.
What would be your advice to distributors who want to recommend direct plans. Is recommending direct plan and charging an advisory fee a solution?
When SEBI came with a direct plan it was kind of an enabler for a fee-only advisory service. Direct plan was never about actually saving cost. It was always about separating advice from distribution. What people have to realize is that direct plan and regular plan is not a way of making that arbitrage. Only 1% to 2% of the investor population have the capability to invest in direct plans on their own. And the remaining 99% of the population require proper aligned advice. And that is the market we have come into and that is the market which probably in future is going to grow. So, fee collection and changing consumer psyche is a challenge. That said, we are not questioning whether we should pay a fee to a doctor, lawyer, or to an architect. It's largely an issue of what happened in the past. The mindset is already changing.
So far only 1,000 RIAs are registered with SEBI. What can be done to grow the advisory community?
There is trepidation in the hearts of people that this model will not work. This is definitely a tougher model. So the hesitation is well founded. But this the future. There is a bit of regulatory uncertainty also. We are all learning. The regulators across the world are trying to bring in fiduciary responsibility. They are trying to protect investors.
What would be your advice for budding distributors and RIAs?
I guess both RIA and distribution model will thrive in India because we are reaching out to different customer segments. Many distributors are successful and have well qualified. It's for them to really realize what they really want to do going forward. You have to come and experience the fee-only advice. The kind of respect you can get you will have to experience that. I have experienced that and anybody who chooses to make that transition will know that.
Distributors can make that transition to RIA. It's a mindset change. It's not that they don’t have the capability. They have to take the leap of faith.
The multiple consultation papers from SEBI has created confusion in the minds of investors. So distributors are waiting for some clarity.
What are the major trends that you foresee coming in the financial advisory space?
People tend to think that robo-advisers will not replace humans. I don’t think so. If we are going to do the basic stuff, we will be replaceable. If you are going to move to the higher ground, that is when it is going to be difficult for robo-advisory to replace us.
The younger generation is tech savvy and they are very comfortable getting advice online. So robo is a threat. But I take it positively. We will have to use technology to compete with robos. Technology can make us redundant. That said, we can use technology and dedicate our time on our strengths – business development and meeting clients. We are doing life planning. We have introduced will making services and life transition services. Comparatively, these things are going to be far more difficult for AI or algorithms to replace.
There are probably three dozen platforms both in regular and direct space. These platforms are direct competition to all of us.
The second trend is that the TER has gone down. So, distributors need to scale up their practice. RIAs also will have to be on their toes because some of the services that we are currently providing can be offered by algorithms. So, we will also have to be more innovative to remain relevant.
What would be your advice to someone who wants to enter this financial advisory space. Should he become a distributor or RIA?
They have to make up their mind whether they wish to be an adviser or distributor. Today, it is relatively easy for a newcomer. Many RIAs who have made the transition from MFD to RIA have legacy portfolio, which always makes it very difficult to make the transition. New advisers are in a much better position to start fee-only advisory and build the business over a period of time.
