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WF: You have been running a very successful fee based financial planning firm for nearly 10 years. What prompted you to consider financial planning back in 2004, and especially a fee based service, when it was so nascent in India and how has your journey been in these last 10 years?
Suresh Sadagopan: Let me start right at the beginning. Before 2002 I was in a completely different field - I was in the field of training. We were reselling training resources - CDs, video cassettes etc. which we used to import from abroad. So we were a resource for HR departments and trainers. That ran for more than a decade. Over time, we found some challenges in terms of getting appropriate material at appropriate prices that were acceptable in the Indian market. So, we gave up that business.
In 2002, I decided to get into the financial services space - it was a sunrise industry and anyway I had done my MS in management and I had always been following this space. I came into this sector through insurance. I was associated with ICICI Prudential, who gave us these profiler kits which had company information, product information as well as customer information sheets. I decided right from the beginning that I would like to add value to the clients by actually analyzing their situation and trying to fit an appropriate product for their particular need. I started using this profiler extensively and would then supplement it with a small report that I would prepare. I didn't know of a term called financial planning, nor was I exposed to anything of that sort. But, in my own way, I would make a report which summarized the customer's situation and made some recommendations. In terms of products, it was a simple alignment of needs to ICICI Prudential products, that were a best fit.
This small effort I put into making my report, led to a fantastic conversion rate. I use to get 4 conversions out of 10 prospects at that time, sometimes it would go as high as 7 on 10. I was told the norm is closer to 1 on 10. I realized that it is not some super skills that I have with me, but it was something to do with the process I was following.
In December 2003 I came across something called financial planning for the first time. I realized immediately that this was a far more organized and professional alternative to the adhoc home grown approach that I had adopted. So immediately I enrolled into the CFP course and even before completing the CFP certification I went into the practice, because I had a positive experience.
I started with a small fee for writing a plan - it was Rs. 1750 at that time in 2004. My first client came on 28th September 2004. The first plan I ever presented was 28th September 2004. In fact now we call it the Ladder 7 day! Fortunately for me, I didn't face much resistence from my clients for the fees, probably because we were charging such a small amount. But, it was still a big thing in those days when insurance selling was full of passbacks - and here I was charging a fee for writing a plan.
I remember when I got my first assignment to prepare a financial plan, I struggled for 3 days to come out with the plan. In my initial days, I wasn't sure of what clients were really looking for. So, I created three variants - concise plan, compact plan and comprehensive plan - each with differing levels of depth and coverage and at three different price points. We found over time that 95% of clients opted for the comprehensive plan - so we scrapped the two other variants.
WF : You have now completely unbundled your service and now have 3 distinct propositions - planning, implementation and review and you charge for each of these separately. What is the proposition in each one and what fees do you charge?
Suresh Sadagopan: When we started, we adopted a fee plus commission model, because at Rs.1750, you couldn't be a fee only planner. I kept hearing of various models, and so in 2007, I introduced a fee offset model as an alternative to fee + commission model. But again what I found was fee and commission model is what most people were comfortable with.
In 2009-10, I took a call that if I have to evolve as a financial planner, I must move towards a pure fee model. I didn't want to adopt the NAPFA model where pure fee based planners don't get involved in the implementation aspect. But, I wanted to set my clients free from an implied guarantee that they must only do all transactions only through me.
I offer my clients a comprehensive financial planning service for which our normal charges are Rs. 28,500 plus service tax. In some cases, where the existing financial portfolio is complex and unwieldy, we study the extent of work and quote and agree the fee before starting the planning process. Clients pay us an annual retainer of Rs.7,500 from the second year onwards. We are available to offer advice on all aspects of their personal finances - from advice on prepayment of loans, switching of home loans, product reviews of any investment or insurance product that come to their notice, tax implications on sale of property, investment of incremental savings, and of course updating any changes in their circumstances that may lead to a review of the plan.
For implementing the plan, we make it very clear that they are free to use us or any entity to implement it. There is no pressure from us to use only our services. Clients are made fully aware that there are commissions on various products that we will earn, should they chose to implement the plan through us.
We also maintain and track client portfolios, conduct periodic reviews and provide a variety of statements. We charge around 0.5% per annum on an AuM basis for this service.
WF: What has been your experience in collecting fees during bad market conditions - many advisors tell us that this is a huge challenge….
Suresh Sadagopan: There are definitely challenges in terms of collecting fees in a bad market. However what we have told our clients is that bad market or good market, there is a certain amount of work that we will have to do. We sign a letter of engagement at the beginning of a relationship which spells out our services and the charges.
The crux of the issue is to make it very clear at the outset that we are not here to try and deliver alpha over market returns. We are financial planners - we are strategists - and we are going to help you achieve your financial goals. We do not have the expertise or skills to produce market beating returns from an equity portfolio - that's not what you are hiring us for. If that's what you are looking for - we are not the right people for you. This is spelt out upfront. Since we keep reiterating what our core proposition is and is not, there is less of a challenge on fees during bad equity market conditions.
Its not as if there are no problems - we do have our share of tough conversations. We do hear from some clients during particularly bad periods in the market that whatever they are earning from their portfolio, they are paying us as fees, and statements like that which are said in times of frustration.
I put my cards on the table I reiterate that you have to pay the fees; it is not something new that I am telling you. We signed a letter of engagement - everything is clearly spelt out there. Yes, today what you may be paying me seems a large portion of the current period's return, but tomorrow, it could be a very tiny portion - and I am not going to come and re-negotiate my fees. Its all there in the engagement letter. Moreover, why are we evaluating on a 1 year basis? I'm here to support you over the next 15-20 years of this plan - through thick and thin. I also make it clear that if he chooses to walk out over the fees, we are absolutely fine with that, but there is no way we will renew the relationship when times are better and he wants to come back. Just as I make a commitment that I will not abandon you over the next 15 years of this plan, so must you stay committed to your part. It doesn't work one way.
So, it's a bit of coaxing and cajoling, a bit of tough talk - a combination of everything that helps us make clients understand that we mean what we say - we are genuinely in it for the long haul and expect clients to reciprocate too.
WF: What's the size of your business now? How scalable do you think is a financial planning business?
Suresh Sadagopan: We have around 300 clients. In terms of AuM, our overall assets under advice may be around Rs.70 crores, with mutual funds accounting for about Rs.40 crores within this.
My answer to scalability is that we must look at other professions like lawyers and chartered accountants to learn how to scale up. We have law firms which are a 1 man show and you have the likes of Amarchand Mangaldas which has several partners and is counted among the biggest in the world. We have so many CAs who operate as 1 man shows and you have homegrown CA firms like Haribhakti who have scaled up so well.
You can scale up if you create a conducive environment for fellow professionals to work and grow. I see so many qualified CFPs who are working in various banks and are deeply dissatisfied with the product push approach they are asked to take. Especially after you have gone through the CFP certification, it does become difficult to adjust to a pure product push approach. These people represent hiring opportunities for firms like us, which want to offer an honest service to our clients.
Its not easy though to get good people. In our recruitment process, apart from an interview, I make candidates take an exam. And, you will be surprised to know that only 1 or 2 out of 5 pass our exams - even though they are qualified CFPs. Its not that our exams are tough - its just that we don't give multiple choice questions - because in front of a client, you don't get multiple choice options. You need to create a plan - and that's what we make them do in the exam.
If you want to scale up, you have to take on a mentoring approach. You need to become the coach and guide for your team and help them develop professionally. Lets understand this - attracting and retaining quality talent is a universal challenge. Even TCS and Infosys have the same challenges - why should we think we are any different? Infosys runs a full fledged university to train new recruits because it doesn't get people of the quality it expects. We are all in the same boat. That doesn't mean we shouldn't try to scale up.
WF: You are now actively preparing the groundwork to seek the Investment Advisor licence from SEBI. Why are you opting for it, when there is an easier option of not becoming a registered investment advisor, using the exemption that's available for mutual fund distributors and insurance agents?
Suresh Sadagopan: The way I look at it is that the Investment Advisor regulations are written for people like us. We are not distributors, we are financial planners and the closest regulated service that we can opt for is the new Investment Advisor regulation. I may prefer to call myself a financial planner rather than an investment advisor - but, in the landscape of options available to us in terms of regulatorily recognized models, this is the closest to our model.
We want to prepare for an eventual scenario where there are no commissions on any products, and where the only revenue is fees from clients. Its happened in some countries, it can happen eventually here too. That's the direction of regulation world wide.
We are going about it in full earnest. Implementation is now hived off from our firm - clients have an option to use the services of a distribution business that my father runs. All disclosures are made to clients. We will move that piece into a separate office itself - we are actively looking for space right now. I will apply only when I have fully segregated the two businesses. I intend making a complete disclosure to SEBI about all our activities and the fact that my father has an active ARN. If SEBI disallows our application, we will create a private limited company and then carve out an SIDD (separately identifiable division or department) as required by SEBI for the investment advisory work. Either way, our intention is to fully comply with the regulations.
Why are we doing this? Simply because in the initial period, very few will volunteer to become registered investment advisors and comply with the incremental norms. Those who do can look forward to the halo effect - to have some gold dust sprinkled on them as pioneers of a new era. Why not have a halo around your head?
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