Mumbai-based MFD Hemant Rustagi started his advisory practice in 2004 when the industry’s asset base was barely Rs 1.50 lakh crore. The mutual fund industry has clocked an impressive CAGR of 21% from 1.50 lakh crore in 2004 to Rs 27 lakh crore now. After spending 18 years in fund companies, Hemant discovered that India’s massive population would need many advisers/distributors to espouse the cause of mutual funds. From a humble beginning with a few clients, his firm Wiseinvest Advisers today has two offices, employs 48 people with Rs 1,000 crore worth assets under advisory in mutual funds.
What has helped advisers like Rustagi is conviction in the product. To capitalise on this sunrise industry, Hemant realised early that he needs to build an institution that outlives him. For a venture to grow and become a brand there are a few things that every adviser/distributor must focus on. Let’s look at how an advisory practice can evolve into an institution.
Team
Business can be built only with a great team. “Many distributors feel that it is difficult to recruit the right talent and if they get someone on board, they will poach clients and start their own business. Distributors have to overcome this fear. Thus, it is necessary to have a team to grow,” suggests Rustagi.
The decision to hire people would depend on the distributor/advisers’ business goals. If the adviser envisions building an institution, it requires manpower, systems and processes in place.
Typically, there are four verticals in an advisory firm – sales, advisory, back-office/operations and client service. In start-up advisory firms, the founders typically bring new clients and take care of financial planning/advising clients. Larger advisory firms could have dedicated managers for these roles. Back office, operations and client service require a team, irrespective of the size of a practice. If not, the adviser would end up spending more time in mundane tasks rather than growing the business.
Even clients would like to deal with a firm that has a team and not solely dependent on the founder. The founder remains the face of the organisation, at the same time, there are other people to get the work done. “Having a team conveys to clients that they will be able to help them resolve their queries. Otherwise, clients would expect the founder to be around all the time,” says Hemant.
Rustagi says that the decision to hire someone or the pay scale would depend on the lifecycle of an adviser’s business. According to him, advisers need not necessarily hire highly qualified candidates from top institutions with high pay packages. “The person should have a passion for this work. Helping people achieve their goals through mutual funds requires a lot of patience and sincerity to act in client interest. The person even if they aren’t highly qualified can be trained over a period of time,” says Rustagi.
Hemant is not alone. There are many advisers across India who have successfully transformed their one-man show practice. A Chartered Accountant rank holder and LLB, Pune-based Bharat Phatak started as a sub-broker in 1991. In 1994, Bharat along with his partner Ajit Khasnis took up membership of the National Stock Exchange. To expand their product offerings, Phatak started building the mutual fund vertical. Today, their firm is the largest distribution house in Pune with assets under advisory of Rs 5,000 crore across products.
Wealth Managers India currently operates with a team of 40. Bharat says that a combination of training, on the job learning and providing challenging assignments to the team has helped him create a solid practice. Bharat has given equity stake to the core members of his team which brings skin in the game and a dedication to achieve bigger goals. Bharat has already identified four next-generation leaders within his firm.
Exiting business
Many businesses in India struggle with succession planning. Not surprisingly, advisory practices that are mostly run singlehandedly are not immune to this challenge. Fortunately, in an advisory practice, an MFD can continue to earn trail revenue even if she decides to call it a day. If the business has a team to take care of clients, operations and advisory, the business can sail through and can even grow through referrals and mark to market gains. This can help the founder get a higher valuation at the time of exit.
“A practice that is not institutionalised will have a difficult time to exit. Clients are loyal to the founder. If someone agrees to buy out your assets, there is no guarantee that the clients will not exit. In an institution like set up, clients are aware that they will deal with someone else in the future. This makes the exit process smoother,” observes Hemant.
MFDs and advisers need to work towards transitioning their firms from person-driven to process-driven practice.
“I think first and foremost we owe it to our clients. Continuity in their life plans needs to be ensured and it should not depend on a single person. This is equally important to the team members who join the firm, where their role blossoms as their experience and standing increases. It will help the firm to become more process-driven and less person dependent. The firm can sustain and grow, even when founders fade away,” says Phatak.
Shyam Sunder of Peak Alpha says that advisers build their practice over many years of painstaking effort and they need to realise what it is worth. “A practice that collapses if you walk away is not one that someone will be willing to pay much for. An institutionalized practice, on the other hand, is likely to be valuable for an acquirer, since he knows that customer assets and relationships are not person-dependent and will retain their value even under a new ownership.”
Technology
Unlike other businesses where future revenues would depend on a variety of internal and external factors, in an advisory practice, the founder can chart his own growth story. The founder knows the income she can get if AUM reaches a certain level. Thus, all one needs is conviction and a desire to grow the business. Thankfully, advisers today have many technology tools to help them cut costs and scale-up. Services like online investment/redemption/switch, CRM, tools, calculators, portfolio view, mobile applications, website are a must in any advisory practice. They are no longer perceived as a value add; they have become a necessity in a remote working environment.
Legal structure
Many mutual fund distributors start off with taking individual licenses and make it more formal subsequently as the business grows. Most distribution firms prefer a Limited Liability Partnership (LLP) structure which is less onerous in comparison to Private Limited Company. LLP is beneficial in terms of cost, compliance requirements, ownership, taxation, etc. That said, Pvt Ltd Companies are perceived as more credible and have their own advantages. The choice depends on the kind of structure an adviser wants and her future plans. It is advisable to seek legal advice for a bespoke solution.
Financial Advice
Shyam feels that this area requires attention in terms of strong processes. “The regulatory environment increasingly demands that advice be in the customer’s best interests. If you are a SEBI Registered Investment Adviser (RIA) you have a fiduciary duty to your clients, which means you have a fundamental obligation to always act in your client’s best interests. Further, strong processes also mean that your clients are receiving the best advice, no matter who gives it.”
To sum up, creating robust processes with the help of technology and having a trained team backed with a clear goal is essential in building a practice that can weather all storms and sustain even when the founder takes a back seat.
