Advisor Speak

30th November 2009

4 mantras for success in distribution

Which distributor will succeed in the new environment? Wealth Forum’s eminent panellists – Anil Chopra of Bajaj Capital, Neeraj Choksi of NJ India and Srinivas Jain of SBI MF brainstorm and arrive at the 4 mantras for success in the distribution business of tomorrow.

At the recently held Wealth Forum Advisor Awards – 2009 which were presented by SBI Mutual Fund, Wealth Forum conducted a panel discussion to debate the future of financial products distribution in India.

Will the slew of new regulations drive small IFAs out of business? Will it spark off a consolidation in the highly fragmented distribution business? Will platforms grow as a result of these measures or will they die as a consequence of the AMFI platform? Will retail investors be denied access to mutual funds due to lack of intermediaries?

Or, on the other hand, will this result in a much needed professionalization of the intermediation business and give rise to a new breed of highly qualified advisors?

The eminent panellists for this debate included :

Anil Chopra, CEO, Bajaj Capital
Neeraj Choksi, NJ India Invest
Srinivas Jain, CMO, SBI Funds Management
Vijay Venkatram, Wealth Forum moderated this panel discussion.

The panel discussion was lively and thought-provoking. Four key mantras were spelt out at the discussion – which hold the keys to success in the financial products distribution business in the years to come.

VV : Neerajbhai, with all the new regulations coming in rapidly, how do you see the future of financial products distribution evolving over the next 3 years?

Neeraj Choksi : For any business to evolve, regulatory changes are necessary and that is what we see happening. I am confident that in the next 3 years, the market for financial products will grow significantly. If we are today a US$ 1 trillion economy which is likely to grow to US$ 2 trillion in the coming 5 years, with a savings rate above 25%, it is obvious that there are going to be huge investible surpluses that need to get channelized into appropriate investments.  There are a number of Indian and foreign players in the asset management and insurance space who are looking at expanding their business to take advantage of this growth.  This growth opportunity will also be available for the intermediaries – just as it is available for the manufacturers.  Now, which segment of intermediaries will sieze these opportunities better, who will grow faster, what will be the pricing strategies – these all will evolve over time.  But the basic growth story is there for us to participate in.

VV : Anil ji, we have heard Neerajbhai talk about the vast opportunity that lies ahead in terms of growth of financial products and that who within the intermediation space will seize these opportunities better, will evolve over time.  Can I ask you to do some crystal ball gazing and share your perspectives on which distribution segments you believe will be able to grow better and which one may struggle over the next 3 years?

Anil Chopra : Good question. I think those distributors who put their clients in the centre, will survive and thrive.  Friends, we need to change from a product orientation to a customer orientation.  Products will come and go. I’ve been in this industry for 25 years now.  When we started this business, we were only selling company deposits – which offered 3-4% higher than bank deposits and were therefore attractive for retail investors. Awareness levels were low, product sophistication and choice was low and savings rate was also low.

But, look at the journey we’ve undertaken in these 25 years. For several years, company deposits were the backbone of distribution businesses. Then came the phase of over 10 years where US64 became the most popular instrument and July would witness a flurry of sales when the NAV would be low. Then came the NBFC wave – at a point in the 1990’s, NBFCs would mop up over Rs. 1000 crores per month – big amounts at that time. Then, post 2000, we saw the growth of the mutual funds industry – in a much better, more competitive, more regulated manner.

The point I want to make friends, is that over the years, products came and went. So also, in future, products will come and go. But the one thing that remains constant in our business is our clients. As long as we stay focussed on our clients and their changing needs – and ensure that we provide solutions to their needs, our business will not only survive – but will grow rapidly.

This has been the story of Bajaj Capital – we have embraced all financial products as they developed in our market place. Today our product bouquet includes all mutual funds, all general insurance products, all life insurance products, stock broking, real estate advisory, art and antiques advisory, structured products, PMS – the list is endless.

We’ve had a number of discussions this morning at the conference on fees vs commissions. Friends, I think fees is the way forward for advisors. This is a journey – it will take time – but I can promise you that the percentage of advisors who shift to fees + commission and eventually only fees – is only going to rise with each passing year.

To answer your question, Vijay, I think any intermediary who adopts a client centric approach and who embraces a fee based model and gears up his firm for this, will do very well, will grow rapidly, and will participate in the future that Neerajbhai spelt out.

VV : Srinivas, we saw in the media recently, excerpts from a McKinsey study on the future of financial products distribution in India.  Given their close working relationship with the SBI Group, I am sure you are privy to the entire report. Will it be possible for you to share with us some of the key insights you’ve picked up from this study? What is SBI MF’s perspective on the road ahead?

Srinivas Jain : Firstly Vijay, I think this forum will be remembered for long as an important milestone in this business because we have here such a large number of the finest minds in the advisory business, assembled in one place, discussing the new environment and finding solutions. Back to your question – the McKinsey study, you will appreciate, is a proprietary one – and I can therefore only share some of their observations that are in the public domain.  One of the observations they made is that in all the countries they have surveyed, India is the only one that is moving from a fully commission based distribution model to a fully fee based model at such a pace. They believe this is a dramatic shift – especially when one considers the pace that the UK is adopting and what Australia is doing.

McKinsey also says that in the near term, income streams of distributors will suffer as AMCs can only partially make up for the distributors’ income loss by dipping into their own revenues.  The “gap” – after accounting for what AMCs are able to pay and some fees that distributors will charge – is variously estimated between 40 to 80 bps – as the net revenue loss for distributors.  This can lead to a near term impact in business volumes.  However, the study projects a very robust long term growth path for mutual funds – of around 35% p.a. on a CAGR basis. 

The other significant point that they make is their view that IFA wrap platforms are the future for financial advisors.  Full fledged wrap platforms will enable advisors to build robustness in their business models and will enable better regulation of the business.

Anil Chopra : There is one point I’d like to make : just like a stock broker will always advice you never to fall in love with one scrip, I would also like to tell my advisor friends – never fall in love with one product.  Always stay focussed on your customer – never on the product.

Srinivas Jain : I would like to add to what Mr. Chopra said.  Mutual fund is not a product – please don’t consider funds as a single product.  We can bundle anything and everything that your clients need into a fund based product.  There are today products from fund managers that cater to real estate, art etc – viewed from that perspective, mutual funds will always remain relevant for your clients and therefore for their advisors.

Anil Chopra : The only product that we offer is advice.  We always say : Bajaj Capital has only one product – and that is its advice to its clients. Friends, do not call yourselves distributors – become advisors to your clients.

VV : If I can summarise this debate, you should sell only one thing – and that is your advice to your clients, based on their individual needs.  And when you look for solutions for your clients needs, you will undoubtedly keep discovering that mutual fund products offer solutions to many of your clients’ needs.

VV : Neerajbhai, I am going to ask you a question that I thought somebody would ask you in the morning – but since nobody did, I am going ahead.  There is a lot of talk about the AMFI platform and how it can help investors and IFAs.  We have also seen the stupendous success of your platform.  There are a number of views in the market about the future of “super-distributor” platforms like yours, in the context of an AMC industry initiative to launch a common platform. What do you see as the future of platforms in India?

Neeraj Choksi : Firstly, I think we need more platforms in our market – as only then will the real value of platforms get reflected.  If you look at Australia for example, there are 40 odd platforms – with the top 3 or 4 accounting for bulk of the market share. Around 90% of transactions in Australia are executed through these wrap platforms.  I therefore think that new platforms coming into India will help create awareness of the capabilities of platforms in building a practice.

Secondly, as far as the AMFI platform is concerned, as pointed out by Kailash this morning, AMFI’s intention is to reduce transaction costs and enhance convenience.  So, its more restricted to a transaction and settlement platform.  There are all kinds of platforms – starting from a basic transaction platform to a full scale practice management platform.

As Anil ji very correctly said, keep the customer in the centre of your business model.  For platforms, the customer is the advisor. As long as we keep our advisors in the centre and focus on adding value to them, we do not have to worry about anything else.

Anil Chopra : Friends, the writing is very clearly on the wall.  Platforms are the future of financial products distribution.  Take my word for it.  Next 1 year, 5 years, 10 years – the percentage of business transacted on platforms will continuously rise.

Please understand them, adapt your business models to them and get attached to one of them.

There is another perspective that I think is very critical, going forward.  Over long periods of time, portfolio returns are less impacted by stock or fund selection – but are actually more impacted by the overall costs involved in managing the portfolio. In my view, over the next 10 years, the biggest alpha that we can generate for our clients will come not from fund selection but from our capability and skills in keeping costs down to the barest minimum for our clients.  Costs will probably become the biggest differentiator in evaluating a portfolio’s performance.  Stay sharply focussed on this aspect – and you will find yourself on the winning side always.