The Hindu Business Line : Entry barriers are a must to have serious players: Wealth Advisors

India should not merely ape the West in driving down fee structures for advisors. The business has to be made more sound by raising entry barriers, based on management and qualifications and the ability to add value, says Mr V. Mahadevan, CEO of Wealth Advisors, a wealth management firm with assets under advise of Rs 5,600 crore. Excerpts from an interview with Business Line:

When we last met, you told us about how you asked stock market investors to take money off the table in end-2007. That really helped portfolios preserve value. Would you make a similar recommendation today?

What we have always done is to follow a set asset allocation pattern for every client. We are never extraordinarily bullish or bearish at any point in time. Our clients were not over-exposed to stocks and thus were able to buy when markets fell. As markets fell last year, from 12,000 levels onwards there was a view that valuations were comfortable enough to buy, and at 8000-9000 levels in the market, we gradually added stocks. Today most of the portfolios that our clients own are in healthy positive territory.

From now on, over a two- to three-year time frame, we still believe that equities are going to be a good asset class. However, we are a bit cautious about stocks in the short-term because liquidity has driven this rally quite fast and fundamentals are yet to catch up. We will not recommend investing too much of fresh money at this juncture but use corrections as opportunities in the near term.

In this business, it is important for advisors to remind investors of the thought that went into while constructing the original portfolio. You can rebalance your portfolio; but investors should not let the market conditions decide their risk profile.

Have you added assets and clients over the past year?

Yes. We added Rs 1,500-1,600 crore over the past year. We did not resort to market practices like churning client portfolios or pushing new funds in the last rally and, thus, currently are in a far better position to acquire new customers. More importantly we have not lost customers but added customers in the downturn. Today we have assets under advice of Rs 5,600 crore.

What debt options would you recommend to retail investors at this juncture?

When it comes to the mark-to-market component of debt portfolios, we are pretty defensive at this moment. We currently advise our investors to stick with the shorter end of the yield curve now as we perceive some interest rate risk to the longer tenor debt options. We all know that inflation is going to get back to the 4-5 per cent range by March 2010. If interest rates are going to climb by March 2010, getting into a gilt fund or an income fund with a longer tenure now will be counter-productive to the portfolio. We will wait for the Government’s borrowing programme and the foodgrain situation to be known by January/February 2010.

On FMPs, we have always been focused on the quality of the portfolio. We did not look at the FMPs offering the highest yields last year and were sticking to better quality portfolios even if the yields were 40-50 basis points lower. In a bull market it is sometimes difficult to convince a customer to take that call. But now we can with lesser effort.

The regulatory push in recent times has been for reducing commissions paid to distributors from investor money. How are you responding to these changes?

We have always followed a customer-centric model and that is working to our advantage today. This industry is plagued by two issues. One, it is generally working on a high-cost structure. The second thing is that there are no entry barriers today in the advisory business. In a lighter vein, there is the saying that if someone has nothing else to do they can be an astrologer, interior decorator or financial advisor. Now margins are going to be lower and accountability higher. Therefore I think this business will gradually shift to a research-based business with emphasis on education, training, technology and process.

The other side of all this is that if you want serious players in this market, there have to be relevant entry barriers. I am not advocating entry barriers based on capital alone; I think it has to be on the basis of qualifications and the quality of the management team and their ability to add value to clients. There is a thought process that someone who is 60 years need not pass qualifying exams…. I do not agree with that.

There also seems to be a strong tendency to emulate the West in fee structures in the advisory space. Why not see the underlying realities too?

In the US, there are just about four lakh advisors and the assets are more than 100 times the assets in India. In India, we have more than 30 lakh advisors. At the peak of the market more than 40 per cent of the retail savings in USA were in equities, whereas in India, in the peak of the bull market, it would be just about 7 per cent. More than 45 per cent of the households in USA invest in mutual funds as against less than 1 per cent in India.

In India, the need is to build a strong retail equity culture based on long-term savings rather than equity trading. The way forward is to enable the growth of advisory businesses on a sound and long-term footing with hygiene levels of commissions/fees, keeping in mind the need to invest and build quality businesses.

There is also the need to bring greater disclosures. Does the investing public know the number of SIP’s in the country? What is the average tenure and average amount? What is the number of households who invest in equity funds? Dissemination of such information is critical for laying road maps, inviting opinions from the participants and for a healthy growth of the industry.

Can’t investors make the distinction between good and bad advisors and pay the fee accordingly?

There is the belief that better advice will be paid better and poor advice will be dis-incentivised by the market and by investors themselves. However, in reality many of the investors are not really able to distinguish between good and bad advice… if that were so, the global crisis must never have happened. While a small section of investors can distinguish between good and bad advice, most cannot. And in fact many not even attempt to.

For example, in life insurance, in many cases the person who takes the policy takes it because he has been approached by a relative or a friend or buys out of obligation. I believe that the industry needs two things. A good road map on how regulations are going to evolve. Two, if we have entry barriers in terms of education, certifications and related regulations, good quality advisors will enter this business and stay. Further there are roles for the product providers, advisors and clients and each have to play their role well.

We hope that over 12-24 months there will be broad acceptance of the practise of charging a fee for financial advice. There will also be clarity on what will be the level of fee. A lot of industry players are looking to a 1 per cent kind of charge.

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