IFAs need to adapt and evolve to remain competitive

By Guest |  26-12-19 | 
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Morningstar invites thought leaders from the investment community to share their insights. Views expressed are personal and should not be construed as investment advice.

An old adage, “Nobody is perfect in everything.” Times are changing rapidly; you should either be an expert or have enough knowledge to advise and provide suitable products to your esteemed clients. It seems difficult, but this is the need of the hour. Industry is moving gradually towards financial planning and asset allocation. The right knowledge can give you the acclaimed status of a ‘Financial Planner’ and ‘Goal Solver’.

Overall, industry is ready to invest a substantial fraction of their budgets to educate the end client; no doubt it is an important exercise and needs attention. However, at the same time we should not ignore that the person who brings the investor in the industry in different products needs same or more attention from manufacturers to provide regular training programmes. In my over two decades of industry experience, I have never come across any manufacturer who comes with a company policy to train Independent Financial Adviser (IFA) on regular basis with tracking methodology. It is similar to the fact that we are inclined to train ‘patients’ but ignoring the ‘doctors’. Now, there is a disclosed budget for client training and awareness but undisclosed policy and budget to train IFAs.

As an industry enabler, we need to understand the problems that one IFA encounters and should provide long term solutions. During my interactions with different IFA segments in different locations, they are facing these issues:

  • Dependency on 1 or 2 products leading to a high business risk
  • HNI client attrition risk
  • Changing client demands
  • Prohibitive technology costs
  • Inability to attract skilled manpower
  • Increasing compliance/ due diligence
  • Limited in-house research capabilities
  • High client servicing cost

Just like an adviser suggests his clients to diversify their portfolio, IFA should also diversify his balance sheet.

Going forward, dependency on just a few products may be a suicidal approach. IFAs need to increase the number of asset class offerings. This would automatically impact the diversification in client’s portfolio as well. In this evolving regulatory environment, you don’t know where you would land in future hence asset diversification will help you to up-keep your business.

Secondly, banks are attracting high net worth individuals (HNIs) to offer wide range of products and services including loan against security (LAS), loan against property (LAP), liberalized remittance scheme (LRS) and credit facility. IFAs can increase their number of products with enhanced knowledge but services will come at a cost.

Further, electronic and print media are playing a very positive role to make investors aware about different products. Investor has expectations that his IFA should have knowledge about products more than him. Some manufacturers are active in training IFA segment but have limited themselves to their business. Regular education and trainings are available in class room and online but the charges for such trainings pinch small IFAs.

In the modern world, lots of things can be handled by robust technology like back office, client conversation tracking, asset allocation, risk profiling, financial planning, online transactions, communication etc. Technology will help if IFA wants to expand his services in other locations having a control on business & advice. It is useful, but a costly affair because technology always upgrades every alternate year.

Most of the initial level jobs in financial industry are generated by IFAs. They spend time and money to train talent but can’t retain the talent for long term. This is translating as a double leakage in their business; moving out of trained manpower and some clients too along with that talent. IFAs can plug this leakage by increasing higher revenue, creating long term career growth path, sharing higher responsibility and revenue with his manpower. Otherwise, a brand is a strong magnet, easily attracts whenever proximity increases.

To provide long term solutions to IFA’s problems, the industry should come with different business models that would help IFAs to sustain in long term and would attract others too to join ‘financial advisory’ business. He should not only make money to manage his kitchen, but should set the example for others that industry is making millionaires if you have all the desired things in place at a reasonable cost. Industry can think on ‘Pool tied agency model’, ‘Franchisees of Pack’, ‘Promote Financial Platforms’ etc...where IFA gets all business related tools on marginal cost and simultaneously compete with national distributors and banks.

The author Rajan Pathak is an Independent Financial Consultant (EX-CEO, IFAN Finserv (Formerly ING).

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