CEO Speak

8th April 2012

Are IFAs truly independent and truly advisors?
Puneet Chaddha, CEO, HSBC MF


At the Wealth Forum Platinum Circle Advisors Conference held on 23rd March 2012, Puneet Chaddha prefaced his presentation with the caveat that his would be more a view of an outsider rather than an insider. An accomplished banker, Puneet has closely examined the MF industry over the last 1 year that he assumed charge of HSBC AMC. In his thought-provoking presentation, he urged advisors to take a long, hard, honest look at their business models and re-position themselves where required to emerge successful in the changing environment.

Business conditions are challenging and many advisors are finding it difficult to cope with the present business environment. There will however be some who will emerge stronger at the end of this challenging phase - and perhaps those will be the advisors who take a hard and honest look at where they stand today, and take the necessary steps to strengthen their competitive position in the months ahead. In that context, lets take a hard and honest look at where IFAs stand today - from three perspectives.


Investors for the most part are yet unaware of many financial products other than deposits and Government savings schemes. There is very little demand for the kind of products that a typical IFA offers. Investors have historically shown a marked preference for debt oriented investment avenues while IFAs have historically offered equity oriented products to retail investors. A typical retail investor's affinity towards bank deposits has remained strong and unchanged through the last couple of decades of financial products innovation.


Margin pressures continue to be a significant challenge for IFAs. As AMCs become increasingly cost conscious due to their own financial constraints, their ability to pay the kind of commissions that IFAs desire is getting increasingly challenged. IFAs for the most part continue to struggle with getting investors to pay for advice and thus compensate for falling commission income. There are many notable exceptions - of advisors commanding fees for good advice - but these exceptions are still overall in a minority.

Regulatory environment

Onset of distributor regulations pose a new set of challenges for IFAs. The proposed advisor regulations that seek to distinguish between an agent and an advisor, if implemented, will further challenge your revenue models and force a choice upon you, which most of you think is premature.

Are we therefore saying that the road ahead is one of gloom and doom?

There is an opportunity in every crisis


Are IFAs (a) Truly independent and (b) Truly advisors ?

If you are seeking to convert this crisis into an opportunity for yourself, you would do well to ask yourself this honest question : As an independent financial advisor (IFA), exactly how independent are you and are you really offering advice?

The term independence in this context has two dimensions :

    - That you are not dependent on the AMC for any compensation

    - That your advice is not dependent on the nature of the transaction

The term advisor should usually connote the following :

    - That you command respect due to your superior domain knowledge

    - That you are able to convert this respect into a fee that you charge your clients

The answers to these questions will help you clarify where you really stand at the moment - ie, are you an

    - Independent Financial Advisor, or

    - Dependent Financial Advisor, or

    - Independent Financial Agent

Building a sustainable IFA business model

Moving from a distribution oriented business model to an advisory oriented model essentially means moving from Quadrant 1 in this chart towards Quadrant 3. It is important to understand that a move from Quad 1 to either 2 or 4 is not really going to help you build a sustainable advisory model. As an entrepreneur, you would want to move towards a low-cost yet high-impact business model - which is what Quad 3 is all about.


Moving from Quad 1 to Quad 4 is really an expansion of your distribution business model. Moving from Quad 1 to Quad 2 may in your view help strengthen your relationships, but is unlikely to give you that sustainable competitive advantage that a move to Quad 3 can give you.

As you look at re-positioning your business model, ask yourself where you are focussing your attention now, and where you ought to focus, for a decisive move into Quad 3.

Your move towards Quad 3 will be greatly facilitated by focussing on these 3 aspects :

  1. Choose the right set of customers : you must be clear on what is the value that you bring to the table as an advisor and which are the kinds of clients who will best appreciate and value your services. Clarity on your preferred client segment is an important stepping stone towards building your advisory practice

  2. Enter into mutually beneficial client relationships whereby you value your customers for the revenue and referrals they generate and at the same time, they value you for your help in building long term wealth for them

  3. Keep testing your clients' willingness to pay you for the value you are creating for them. The road towards fee based advisory services is tough, but one must begin going down that path and attempt to take as many clients with you into that business model.

Clients will be more willing to pay if they see :

  1. Genuine, sustained efforts on your part to educate them and help them make appropriate choices

  2. A process driven approach towards your advisory services and commitment towards service excellence. Clients value independent advice and good service more than returns

  3. A move towards building your brand and your differentiation vs other competing advisors

Losing some clients may actually be a winning proposition for you

As you transition towards a fee based model, there will invariably be some clients who will not accept the new model - be prepared to part ways with those who are not aligned with your new model. You may just find that parting company with such clients and charging fees from those who come along, may actually work towards your advantage - financially as well, as this table shows :


Note: The above is an illustration based on certain assumptions and the readers should understand that assumptions and statements made herein regarding future prospects may not be realised. The views expressed in the article are personal views of the author and do not necessarily reflect the views of HSBC Asset Management (India) Private Limited or any of its associates.

In conclusion

In this crisis, lies an opportunity for those IFAs who decide to embrace a truly independent advisory model and begin their transition towards a fee based model. I will end my thoughts with this immortal quote from Michaelangelo :

"The greatest danger for most of us is not that our aim is too high and we miss it, but that its too low and we reach it"

The article is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. Investors should understand that statements made herein regarding future prospects may not be realised. The views expressed in the article are personal views of the author and do not necessarily reflect the views of HSBC Asset Management (India) Private Limited or any of its associates. Neither this document nor the units of HSBC Mutual Fund have been registered in any jurisdiction. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

©Copyright HSBC Asset Management (India) Private Limited 2012. ALL RIGHTS RESERVED.

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