Vista’s 10 pillars for building a successful IFA business
Ashish and Manish Goel, Vista Wealth, Delhi
In our earlier article Mutual Funds Sahi Hai, PAR IFA Zaroori Hai , we focused on perils of this bull market and what we must do to help our clients avoid these pitfalls and achieve a happy outcome from their investments. In this article, we will focus inward – into what we need to do to build robust and scalable business models that can withstand the vagaries of market cycles and emerge stronger after each market cycle. At Vista, we follow 10 pillars that we believe help us become prudent IFAs and help us build a successful business. We hope these 10 mantras are of some help to you, in your own efforts to build successful businesses.
Pillar No 1: The effort – reward equation
If there is one slide that defines Vista’s business model, it is this one:
When you acquire a new client, spend a lot of time initially, a lot of your effort in educating and empowering him so that he gains conviction in your long term goal based wealth creation strategy. This process can take 6 to 12 months, sometimes a little longer. But once you have invested this time and effort, you have won his trust and faith. This trust and faith will translate in future years into sharp increase in your revenue, even as the time spent with this client comes down significantly to only routine engagement. Only when you are able to achieve this equation of rising revenue with falling involvement, can you think about building scale. We at Vista have focused on this model over the years and have been reaping the rewards of this model.
Equation has now reversed – and that’s dangerous
Today, most IFAs are seeing a very different effort – reward equation playing out. New clients are being acquired easily, there is very little time that seems to be required to convince them to invest in mutual funds, and revenues are high right at the outset of the new relationship. These are relationships that are established on weak foundations. Maybe they came through referrals – the people who referred them to you have seen the benefits of the strong foundation that you laid in the earlier years. But these referred clients don’t have the same foundation, IFAs are unable to devote quality time in a bull market to lay these foundations and the new clients are also perhaps looking for quick solutions so that they can invest into the market without any further delay.
These are the relationships that will bog you down over time. These are clients who will demand a lot more of your time in later years. They are more likely to have unsatisfactory outcomes as their expectations were never aligned upfront. And, trying to manage emotions of a client who has already invested is many times more challenging than before they make the investment – as all our IFA friends know.
Growing your business today with an inverted effort – reward equation is a recipe for disaster in the coming years. We will urge all our IFA friends not to succumb to this model. Every client who you acquire in this bull market, must be given the same amount of time, attention, education and empowerment that you offered to clients who came earlier. Ensure that you build a robust foundation with every new client – weak foundations always crumble and fall.
Pillar No 2: Create value upfront and learn to say no
We strongly believe that an IFA needs to create his value in an investor’s life upfront. This value, when created at the outset, builds trust and faith that lasts forever. Whether you are in a bull or bear market, you need to focus on creating your value upfront.
In this effort of creating your value upfront, you will come across clients who may not see value in your methods. Its best to let go of these clients and focus on acquiring those who see value in the way you plan and execute their investment strategies. Clients who seek your services only for transactional assistance are the ones who are most likely to eventually go direct. Clients who disregard your prudent advice are the ones most likely to have unpleasant investment experiences, for which they would instinctively want to hold somebody responsible other than themselves. Both these categories of clients are best avoided.
We have seen from our own experience that when we do not succumb to imprudent impulses of certain investors and tell them clearly that we do not advise them to make certain investments which they are keen on, they may go away at that moment and invest through somebody else. But trust me when I say this, they will remember you for what you told them, when things eventually go wrong. They will come back to you. The key is to stick by your convictions and your experience and not be swayed by your client’s irrational exuberance.
Pillar No 3: 6 months vs 6 years
When you sell any product to an investor, don’t think of what his experience will likely be in the next 6 months. Focus instead on what the experience is likely to be in the next 6 years. That will automatically guide you on which products are really appropriate for the client.
At Vista, we always focus on experience at maturity. We focus only on what we expect the outcome to be when the product or goal matures. We never put any emphasis on what will be likely returns over the next 1 year – because that thinking is completely irrelevant to the final outcome at maturity.
Focusing on the experience at maturity helps you get clarity on exotics. Stay away from exotic products and exotic solutions. Closer you gravitate towards exotics, faster is your path towards extinction. The biggest and best businesses in any industry have been built by just keeping things simple and making processes scalable.
Pillar No 4: Journey is as important as the destination
Many of us believe that our job is to help our clients reach their destination. Experience has taught us however that the journey is as important as the destination. Its easy to say, “The client has a 10 year horizon – lets put the money into equity”. However, if we haven’t sensitized the client to how bumpy the journey can be, if we haven’t done our homework well in understanding the real risk appetite of the client, he may find the journey too hot to handle and may bail out at the wrong time – which is neither in his or your interests. The day we internalize that for investors, the journey is as important as the destination, we will embrace risk management whole-heartedly. We will then look for products and solutions that smoothen the investment journey, even as we keep up our efforts on educating clients and sensitizing them about the roller coaster ride that markets take us through.
Pillar No 5: Minimize risk vs maximize returns
This is a very important distinction that you must make if you wish to become a prudent IFA. Many IFAs see their role as maximizing returns for their investors. This however is a very short term oriented outlook. If you have genuinely embraced a goal based approach and truly believe that your job is to help clients reach their investment destinations as smoothly as possible, you will interpret your mandate as getting them to their destination by taking the least possible risk. If an investor can reach his goal by investing in accrual oriented debt funds, why would you want him to go into equity funds merely because markets are experiencing a bull run? What is the payoff of taking incremental risk and what are the pitfalls of this unnecessary risk?
Let us understand one thing clearly: no client wants more risk. They may desire higher returns, but when presented with the facts and projections of how much risk they actually need to take to reach their investment destinations, few will agree to take on higher risk than is required. Our job is to help clients see the full picture: the risks associated with higher returns and the risk-return profile that their financial plan requires. Getting clients to see this will automatically shift focus to risk minimization rather than chasing highest returns.
Pillar No 6: Correct your own biases
We often say that an IFA’s role is emotion management – manage the emotions of your client and you will put him on the road to success. But that is only one side of the picture. Very often, we IFAs too influence client portfolios with our own biases. We keep talking with fund managers, we ask them “kya lagta hai”, we see strong inflows and we then start forming our own perceptions about markets. And when we build a bias in favour of a continuing bull market, we then influence client portfolios by over-allocating to equity beyond risk profile.
The right path for an IFA is not only to help control clients’ emotions, but also your own biases. We must learn to be very clinical about shaping portfolios strictly in line with risk profile and agreed asset allocation and periodically rebalance only from an asset allocation perspective and not with any biases for or against markets that we may personally have.
Pillar No 7: Embrace the PEER model
We follow the PEER model for our business at Vista.
P : Portfolio matching meticulously with each product. We have clearly defined product categories for every time bucket and matching of every investment is done meticulously on this basis. For example, 3 months horizon means only liquid, 6-9 months is arbitrage, 1-2 years is accrual based debt funds and so on. We do not permit any deviations in this. We will never recommend or agree to go with equity for 1-2 years horizon.
E : Before the portfolio matching is a critical task of expectations management. Unless expectations are set and agreed upfront, it becomes very difficult later on to reset unreasonable expectations.
E : Emotions management. We tell our clients upfront that we are not the best portfolio managers, we may not be the best stock or fund pickers, but we are clearly very good at one thing – and that is emotions management. We help clients understand that managing emotions contribute over 90% towards investment success, with all other factors accounting for the balance 10%. We tend to focus on the 90%.
R: Risk minimization. We tell our clients clearly that our job is not to maximize their returns, rather our job is to minimize their risk. Our job is to help them achieve their financial goals by taking the least possible risk.
Having a clear communication with all clients on our PEER model has helped us immensely. It aligns our clients and our thinking, it helps set the right expectations from the product and from us. It enables us to build relationships based on trust and faith.
Pillar No 8: Be bearish on business in a bull run
When investing, it is often said, “be fearful when others are greedy, and be greedy when others are fearful”. We believe this quote is equally true to our business as IFAs. Back in 2014, when we talked about 3 bull runs, we were investing heavily in our business expansion. Now, while we continue to be very growth focused, we are restraining ourselves to some extent. History has taught us never to extrapolate good times into infinity and make cost commitments based on an assumption of ever expanding revenues from an ever lasting bull run. So, while we will do everything we can to make the most of the current industry tailwinds, we do not want to make an assumption that the present rate of growth will last forever. Mutual fund industry is a cyclical business – prudent IFAs emerge out of each cycle bigger and stronger. Those who are reckless become victims of the cycle.
Pillar No 9: Stay focused on your old clients
Nowadays when we are getting lots of new clients, it is very easy to forget our old clients as we fill up our days running after new business. It is in such times however that we must remember that it is these old clients who built the foundations of your firm, who gave you referrals that have helped you grow. Never take them for granted. Ensure that you spend enough time engaging with them – the last thing you want is to keep building a taller and taller structure while ignoring that your foundation is becoming weak due to neglect.
Pillar No 10: If you don’t stand for anything, you will fall for everything
If you haven’t done so already, please define the core values that will guide every action in your firm and ensure that you and your team live by it. Your core values and your investment philosophy are the two articles of faith that will keep you focused on your path and help you avoid all the distractions that come your way. You have to stand for what you truly believe in. If you don’t stand for anything, you will fall for everything.
We wish all our IFA friends prosperity, growth and success. Let us all resolve to become prudent IFAs who will differentiate ourselves in the world of financial intermediaries as truly independent, client centric professionals who use their experience and wisdom to help their clients navigate their financial journeys through all the ups and downs that markets will always throw at us.
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