3 IIT batchmates who disrupted the Indian MF distribution

By Ravi Samalad |  02-12-19 | 
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About the Author
Ravi Samalad is Assistant Manager - Editoral for Morningstar.in.

The robo/online investment advisory space in India seems to be coming of age. With the launch of direct share class in 2013, a number of robos have sprung up and we are already seeing consolidation.

Providing transactional facilitation has become been commoditized and robos have to justify their business models by adding value and diversifying product offerings. We caught up with Vijay Kuppa, Chief business officer and Chief Operations Officer of ORO Wealth, to understand how they are navigating the robo space.

From Left to Right: Nitin Agrawal, Yogesh Powar and Vijay Kuppa.

Take us through your initial journey.

We started in Jan 2016. I used to work in L&T Treasury managing their India investment book. My business partner Nitin Agrawal used to work with Deutsche Bank in Singapore. The third partner Yogesh Powar leads technology. He is also a batchmate from Indian Institute of Technology (IIT).

When Modi came to power, domestic institutional investor (DII) flows started increasing. So we saw an opportunity in financialization of savings.

Family offices and banks cater to high net worth individuals (HNIs). Retail investors tend to invest through multiple sources like banks and distributors. It is not possible to have so many relationship managers (RMs) to cater to the huge population. So it had to be a tech play.

If you go to smaller towns, many people have not invested in mutual funds.  There was a vacuum in retail advisory space. To capitalize on this opportunity, we quit our jobs and started ORO Wealth.

The first set of clients were our friends and family. Then our colleagues from previous originations and friends from IIT joined. This is how we acquired the first 250 clients. Since we were the first platform to offer direct plans, this helped us receive positive media coverage and gain referrals.

Why did you choose to offer direct plans instead of regular plans?

We realized that a lot of problems were due to regular plans. The regulator was pushing to promote direct plans. If you see over the last few years, robos providing regular plans have not been able to scale up. So we caught the early trend. It was a good differentiating factor to build market share in this space.

You can now see that robos offering direct plans have outpaced those offering regular plans. If you are online, it has to be direct. You can still have a Business to Business (B2B) offering where you can be offline because they provide the personal touch and value. If you are online, you are not adding that great a value by offering regular plans.

How much assets do you manage/advise?

In Registered Investment Adviser (RIA) parlance, we track two metrics – assets under management (AUM) and assets under advisory (AUA). The AUA metric tracks clients who take advice from us but don’t transact while AUM is the assets managed by us. Our AUM is Rs 500 crore while AUA is Rs 4,500 crore. Clients share their portfolios with us which helps us track the AUA metric.

How much fee do you charge?

It is based on the type of engagement. We have quarterly, monthly and annual portfolio review. For a quarterly review, we charge Rs 2,500 annually. The highest we charge is Rs 999 a month, which is for monthly review.

What value add do you provide to justify your fee?

We show our track record in advisory. If I have to charge Rs 2,500, then I have to show that I will add value worth at least Rs 10,000. All our products are built to add value.

Since inception, we had virtual Relationship Managers (RMs). We started charging fee for RMs. The RM talks to clients on phone but we don’t meet clients because our business model doesn’t allow that. Clients are welcome to come to our office though.

The RMs will help set up your account, perform your Know Your Client (KYC) and map all your folios under one Common Account Number (CAN). The platform is for free.

Often, people need help in understanding the recommendations. Once they answer the risk assessment questionnaire, they get an asset allocation and our recommended funds. So clients ask us why have we recommended equity, debt or gold. Sometimes, they only want to invest in say a mid-cap or small cap fund by looking at past returns. The RMs explain why all the funds are necessary for the portfolio.

Retail investors could be averse to paying fee for advice. In such a scenario, how difficult it is for players like you to change this culture and sustain your business?  

We used to charge per transaction, then based on AUM, then we finally made the platform free. We charge them for an adviser. We have also been experimenting with fee models to see what works best. Indian investors are not accustomed to paying fee separately. They don’t know that they are already paying something in regular plans. When we charge explicitly it is a big disruption for them.

Today, we have 1,00,000 who have taken advice from us. We have 20,000 who have transacted and 4,000 paid customers. I agree that it is tough to collect fee, but the trend will change in the days to come.

Why are large players like banks and national distributors going slow in launching robo platforms?

Banks can either build, buy or partner. If you compare a bank versus a tech player, banks sell regular plans while tech players sell direct. Banks don’t have the tools. Fintech’s have the tools. Going direct has business implications for banks. So they want to add value. They want to build better products and their strength is RMs. It is working for them, so they are continuing.

Do you see robos like you playing a bigger role in the growth of passive funds?

If someone has to sell Exchange Traded Funds (ETFs) it is better they manufacture and sell it themselves.

Direct plans have reduced the TER. If someone wants to enjoy the entire TER, they have to be both – distributor and manufacturer.

The lines between distributor and manufacturer is blurring. For instance, shops like Dmart and Shoppers Stop sell other products as well as their own in-house products under the same roof. It is a common trend in other industries. NJ India is taking the lead in our industry by launching a fund house.

You provide B2B services to Top Tier banks and Companies. Tell us more about this partnership.

We realized that our tools are beneficial for the industry. We have partnered with national distributors and banks who use our tools to service their customers. Sharekhan, Kotak Securities and a large private sector bank use our tools. It is an Application Programming Interface (API) integration. There is a tool for bank RMs as well. A large telecom player and a phone manufacturer will also be using our platform as product partners soon.

Our tools can be used by fund houses as well. There are 2 crore unique investors in mutual funds. Around 85% are in regular plans. 15% comes from direct investors. 10% comes directly to AMCs through online platforms while robos account for the remaining 5%. We are talking with fund houses to become technology partner for their direct customers.

How do you plan to tackle competition from big players  with deep pockets?

It could be tough to fight with players with deep pockets by selling direct plans only. A small company can’t win this battle. Our strength lies in advisory, research and algorithm. When we saw larger players coming in, we started focusing on value add. We are converting ourselves as partners rather than as direct competitors. They could partner with us for products and advisory.

Have you broken even?

We are close to breaking even.

What is the road ahead?

We have acquired a Portfolio Management Service (PMS) license. SEBI likes you to manufacture PMS and offer it to HNIs first and build a track record. Then they allow you to go retail by launching an asset management business. It is a three-year journey. A lot of AMCs have gone down that route.

What kind of funds will you launch under PMS?

The underlying could be indices, or an index built in house. We will create our own basket but we will benchmark against an existing ETF. We are still in the designing phase. We want to manufacture our own ETFs down the line.

Why are you bullish on passives?

Ever since SEBI asked fund houses to benchmark funds against Total Return Index (TRI), index funds are slowly gaining traction. In the last 1.5 years, the biggest outperformers are index funds. Scheme recategorization and lowering total expense ratio will also provide a fillip to passives.

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