InvestorQ : I am a mutual fund advisor and want to know if there are any major risks for the mutual fund advisory profession and can I continue doing the same?
Debbie Mascarenhas made post

I am a mutual fund advisor and want to know if there are any major risks for the mutual fund advisory profession and can I continue doing the same?

3 years ago

To begin with, you are in the right business at the right time. This is the business with billion dollar potential. What is happening is that the undertone of the industry is changing and you need to adapt yourself to this shift to be successful. Here is how.

Firstly, the mutual funds are getting a lot more complex and nuanced

The Indian mutual fund industry is still not overly complex. There is plain vanilla equity and plain vanilla debt and then there are a few options in between. But, things are changing quite fast. Apart from these fund products there are advisory products that are emerging which are an amalgam of various funds to create a financial solution. This is where the immediate challenge lies for financial advisors. Secondly, the financial advisors need to be in the best possible position to help investors combine products to move towards long term goals. In addition, there are new products like REITS and InvITs that are emerging which could offer an additional class with real estate as the underlying. As complexity of products increases, so does the challenge for financial advisors.

Secondly, there have been subtle and important shifts in regulation

There have been some major shifts in regulation and these have a bearing on the role of a financial advisor. For example, the entry loads were banned in 2009 and mutual funds had to introduce a new class of plans called Direct Plans for the benefit of investors. This added a level of product complexity. The recent imposition of DDT on dividends and tax on equity fund LTCG also complicates the financial planning scenario further. Earlier this year, SEBI called for the combination of schemes for a more rational categorization. This also has implications for advisors.

Thirdly, a lot of millennial investors are preferring the fee based model

This is possibly the biggest challenge that mutual fund advisors are going to face. For a long time mutual fund advisors thrived on the principal compensation model wherein they doubled up as sales persons and the fund compensated through entry loads. With the ban on entry loads, the pressure is on the fund to squeeze payments out of their Total Expense Ratio (TER). With SEBI putting pressure on funds to reduce the TER, mutual fund advisors will increasingly have to rely on advisory fees for their revenues. But, in a country like India where advice has normally be taken for granted, this is not going to be a simple or sustainable model. That is the big challenge.

Fourthly, if you are a financial advisor, you need to continuously re-skill

The old mutual fund advisory model was quite simple. You tie up with principals with a good track record and the principal will compensate you for the sale. The advisory function was actually incidental. Today the advisory function is the core and the sale is incidental. That is more because investors are increasingly looking to use the Direct Mode or the online intranet application mode to reduce their costs. Secondly, the need for advisory is growing by leaps and bounds and financial advisors are just not equipped with the requisite manpower to handle this shift. There is an urgent need for skilling and also re-skilling the advisory workforce to better adjust to the new requirements.

Lastly, we are seeing the rapid spread of DIY (Do It Yourself) investing

Do it yourself (DIY) investing is the next big story in financial advisory, at least that is what it seems to be. In DIY investing, the entire process of financial advisory and investment is driven through an internet based platform. Companies are increasingly launching such DIY platforms and using the power of big data and artificial intelligence to fine tune solutions that are customized as possible. This poses a big challenge for financial advisors. Will they be able to charge the clients a fee when most of the services are available online without any additional cost? Will the financial advisors end up empanelling themselves with these DIY platforms as value added advisors? These are questions which still not have any clear answers.

These are the challenges. The quality of the advise will matter a lot more and people will only be willing to pay for services that computers cannot manage. You need to make a choice accordingly.