Bengaluru-based adviser T. Srikanth Bhagavat, founder of Hexagon Wealth chats with Ravi Samalad about how he overcame the challenges in his advisory practice, shares his advice for distributors to diversify their revenues and more.
Tell us about your early days. What were you doing before venturing into financial advisory?
I am a Mechanical Engineer and also hold a post-graduate degree in Management (Finance) from Symbiosis, Pune. Before starting Hexagon, I have worked in corporate finance and merchant banking. These assignments helped me evaluate the creditworthiness of borrowers and very importantly, risk, as I was involved in advising infrastructure companies in the early days of private infrastructure in India.
How were your initial days in the practice? What kind of challenges did you face and how did you overcome them?
The initial days were some of the most exciting days in memory. Every day was a new challenge; every deal was like scaling a peak. Some of the challenges I have faced in the early days were:
Data: What is as freely available now was just not available back then. I would employ one person exclusively to feed in daily net asset value (NAVs) into a spread sheet that I would then process end of every month to get the output that I wanted. Right from creating tables of periodic returns to calculation of statistical measure like Sharpe, Treynor, Beta and Alpha. I would closely track debt allocations and durations. Given the high quality of content, my charts were pretty popular with treasuries of banks and managers would refer to them before making investment decisions. Today, one just needs to have the Morningstar Advisor Workstation! Using AWS, we look closely at risk and return trade-offs when building portfolios. The Morningstar Workstation gives us valuable and actionable information on this. Further, it is useful to make comparisons of existing and recommended portfolios. The style box is a feature we use extensively too! Clients also like to see the Style Box when we sit on reviews. Using the X-Ray feature makes it easy to communicate to clients on portfolio characteristics and behaviour.
Investors: Mutual funds were a strange animal to many. It evoked memories of US-64 and Morgan Stanley debacles to those were familiar with mutual funds. Unlike today, convincing investors about mutual funds was a huge challenge back then. Since my initial breaks were with bank and corporate treasuries, I would use those cases to build credibility with retail investors!
Human Resources: As a small company, getting good managers in any case was a challenge. And over time as mutual funds became more popular, Hexagon became a hunting ground for banks and other recruiters. Dealing with attrition was a challenge. After the initial frustration with attrition, I learned to ignore it and instead focus on building systems to insulate me from the effects of attrition. That stabilised my practice and allowed me to grow, improve compensation and retain talent.
Why did you choose to become Registered Investment Adviser (RIA)?
Advisory is in our DNA. We were already doing everything that Securities and Exchange Board of India (SEBI) wanted us to do (and more - transparency, scientific portfolio construction, financial planning etc.) in the RIA regulations. We were charging fee based on the asset size since January 2010. It was but a natural progression to become an RIA, with just a few tweaks on process to make it auditable.
What percentage of your revenue today comes from fee?
Around 40% of our revenues today come from fee.
How are the needs and aspirations of high net worth HNI client base different from retail clients?
Operationally, HNIs require high quality reporting and data. Servicing expectations are very high. Given their high level of awareness in general, our conversations with them need to be at another level altogether. In terms of aspirations, we need to be sensitive to their lifestyle. The inflation index for them varies with that for retail investors. Retirement planning for HNIs goes beyond basic needs. For instance, making place for hobbies, passions, and philanthropy is a must. Estate planning is beyond basics due to larger sums of wealth involved. In terms of risk, they have a greater leeway to absorb risk or have the luxury to be conservative and still achieve their goals. For businessmen one also has to balance personal wealth with business needs.
How have you recalibrated your practice with the changing times?
- Our initial years were focussed on institutional clients with very large AUMs. But we gradually wound down that book when the pitch queered due to pass-backs. Our craving for loyalty got satisfied when we discovered the joys of working with individuals and their families. This was a landmark change that required bold steps and a change in the way we worked.
- We pay more attention to documenting our process as a result of RIA regulation. So that is an area where we have changed the way we do things.
- HR practices are more established as we have grown in size.
- We have included more asset classes to be a one-stop-shop for HNIs.
- We have introduced both active and passive strategies to deal with the post global financial crisis meltdown.
- We have increased our ability to customise portfolios.
- We use digital platforms like NSEMF II for transacting.
- With growth, an organisation structure has come into play, second lines are created.
With the impending cut in revenues due to total expense ratio (TER) revision, some say that it would be difficult to attract new distributors in the industry. What would be your advice to someone who is looking to enter mutual fund distribution? How should existing MFDs who have recently started their practice cope with this situation?
I think there is a huge opportunity. There are multiple models that new entrants can adopt unlike earlier times when the market was smaller. They can choose based on their strengths and vision.
High volume - low value or low volume - high value; distribution or advisory; offline or online or hybrid; urban or Tier II; the choice is pretty wide. All of them offer an opportunity to prosper and grow.
Existing MFDs should conduct a SWOT analysis and boldly make changes. Investment in business is required, sooner the better. Reskilling will enable survival. The rest will become dinosaurs. Those who have recently started are better off as they have fewer mental barriers to break! I truly believe that the barriers are in the mind and not in the market.
How can IFAs diversify their sources of revenue?
Apart from mutual funds, opportunities are ripe for fee-based financial planning, life insurance, health insurance, estate planning, tax planning & handling returns, home loan syndication, real estate broking are a few areas that I believe hold potential.
How are you coping up with robos/online investment firms? How have you adopted technology in your practice?
Hexagon Wealth runs on a high value low volume model with advisory at its core. Online platforms or robo advisers cannot replicate our role. The latest investor surveys also show that most investors prefer a human adviser as against a robo adviser. We work on deepening relationships as opposed to transactional models. But that does not preclude us from using technology! We were among the earliest in this part of Asia to have a sophisticated online reporting platform for our clients way back in 2000. Today, transacting is digital; customer relationship management (CRM) is digital; data security is highly secured; reporting is digital; research is enabled and taken to a higher level with Morningstar Workstation and proprietary computer models; some of the workflow is by using tech. And there is more to do!!
How big is your team?
I have an 18-member strong team that is divided into advisory, operations, research & analysis, accounting and compliance.
Your future plans
I am focussed on deepening relationships and quicker organic growth.
