5th July 2012

Ashish Shah started his financial advisory business in 1992 - right after the Harshad Mehta scam. The entire decade of the 1990s was a very difficult one - a weak macro economic environment led to sluggish equity markets right through the decade. As we struggle through a somewhat similar situation now of sluggish equity markets and a spluttering economy, we turned to Ashishbhai for his insights on two aspects : (1) how did he build his business model in such a tough environment, and (2) how did he sustain his clients' interest in his advice, when equity markets were so weak.

Ashishbhai is seen by many in the industry as a maverick - a brilliant but unconventional advisor, brutally straight forward in his views - and a highly successful entrepreneur, with an AuM of over Rs. 2500 crores in client assets. He did things differently - and succeeded spectacularly. Some call him a visionary. Read on as he shares his fascinating insights, in his usual forthright manner....

I am no visionary and being an engineer my knowledge of the financial business was miniscule to say the least. So after resigning from a beautiful job I had to begin right from the bottom. When I joined the business in 1992 the party was already over with the Harshad Mehta scandal causing the markets to plunge from 4600 to 2200. The Babri Masjid fiasco only made matters worse for the markets. It was a period of learning and the initial learning was to keep costs low and that is why I operated out of my home. Today, after 20 years in this business, I permit myself the luxury of a nice airconditioned office in a good locality. But, that is my indulgence today. I started out with an absolutely bare bones cost structure.

My business model has been clear to me since 1993. My philosophy is that my clients come first. AMCs will come to me only if I have a client base and I can have a client base only if I serve my clients well. Our actions have always been client centric and our decisions are made keeping the client in mind.

Indians love fixed income

The first thing I understood about clients is that in India, the investor is predominantly fixed income oriented. 90% of his money goes into fixed income and only 10% goes into markets. So, I decided that I need to be able to first offer good alternatives in the fixed income space. When I started out, 18% interest was the norm in the Ahmedabad market. But I knew then that 18% returns could not last forever. When I offered 10% tax free bonds people laughed at me. I took a lot of effort to explain how 10% tax free equates to almost 16% on a pre-tax basis at the then prevailing tax rate of 37% and how locking into this yield for 10 years is a far better proposition than 18% on short term lending in the market, where you are completely exposed to rates falling. Today, I can say that my view stands vindicated.

You rarely go wrong with fixed income

There is an important aspect about fixed income that distributors must recognize. One is that unless you get your credit call wrong - which happens very rarely - you can't go wrong with fixed income and clients will never complain - unlike an equity portfolio. Focusing on fixed income products can bring you many more clients and many more referrals as clients will always be happy with you. I have not lost a single client - and clients who came to me in 1993 are still with me.

You can make a lot more money for yourself by focusing on fixed income

Shying away from fixed income because it gives lower remuneration is actually completely wrong thinking. You can make much more money in fixed income than in equity. Distributors get 1.25% first year commission and second year onward trail of 0.5% from equity funds. Selling 7 year bonds gets you a 1% upfront and no trail - which means around 0.14% per annum commission. In the same 7 year period, you get an average of 0.6% in equity funds, through a combination of upfront and trail. But, the fact is that you get this 0.6% on only 10% of the client's portfolio while you give up 0.14% on 90% of his portfolio. Do the maths - and you will see that the total income from 0.14% on 90% of portfolio is twice the income you get from 0.6% on 10% of the portfolio. Yes, there will be some finetuning to this calculation because trail on equity can grow with growth in markets. But the basic point I am making is that there is a lot more money you can make for yourself - apart from making clients happy - if you focus a lot more on a variety of fixed income products.

Today, we are branded as fixed income specialists in the market - and I am proud of this. Even today, there are very attractive fixed income products that distributors can easily offer their clients.

Banks are not giving more than 10% in India today and that too on the higher side. With a tax rate of 30% the actual figure comes to 7%. All the FMPs are giving 8.5%; all the tax free bonds are giving around 8%. So this is the domain in which retail bank deposits, with 30% tax, have to be converted through these two products in which we can get 10 paisa brokerage.

Brand yourself as an unbiased financial advisor, not a mutual fund advisor

I am a strong believer in mutual funds, I think they offer good wealth creation as well as wealth protection opportunities. I strongly believe mutual funds should be an integral part of our offerings to our clients. We do SIPs in equity funds for most of our clients. But, it will be a big mistake to brand yourself as a mutual fund advisor. You must have a wide variety of products - bonds, mutual funds, direct equity - in your portfolio of products.

Remember, every few years, mutual funds go through lean phases - we have seen the Morgan Stanley Growth Fund and Mastergain related issues in the mid 1990s, then we saw tech funds melt down in 2000-01, then we saw infra funds crash post 2008. Each of these saw huge retail participation, and therefore huge retail disappointment. During that disappointment, the word mutual fund itself becomes a bad word. You won't get an appointment with an investor if you said you were a mutual fund advisor !

Brand yourself as an unbiased financial advisor with a wide suite of product offerings. Mutual funds must be just one part of your product portfolio. Being and acting unbiased is critical for your success. Today, we are locking in a lot of money that has been in liquid funds and short term plans into long term tax free bonds. I am giving up 40 paisa annual trail for something that will give me 1% upfront for 7 years - just 14 paise per annum. But, that is my problem, not my client's. I must do what is right for him. And, if I do that, I not only get to manage 100% of his portfolio, but also get more referrals from him. Ultimately, I will make my money - but I have to do what is right for my client.

Today, our overall AuM will be above 2500 crores, of which mutual funds will be around 400 crores. The balance is largely in bonds and some in direct equity. Today, we have a business that is not dependent on any one product.

Never sell hybrid products

We don't sell hybrids and therefore have less disappointments. Many distributors got onto the MIP bandwagon, lured by high commissions - and then MIP performance disappointed. We rather decide the asset allocation and then allocate into separate products ourselves rather than go for hybrids. Let's understand one thing : if a large portion of a client's portfolio is in hybrids, chances are that he will be dissatisfied about large parts of his portfolio. Whereas, if you have equity and fixed income separate, and equity markets are disappointing for the time being, the rest of the portfolio is still performing well. When we get clients into equity, we tell them clearly that they should not look at that portion of the portfolio for at least 5 years. We also tell them that after 10 years, they will see that it is that small portion of their portfolio that really created wealth for them. When clients review their portfolios, they see a large part - which is fixed income - giving predictable returns and they see one small part - which is equity - which is currently doing badly. We make no excuses for the market - we stress that this is a portion they must ignore for the time being and not get unduly worried about. We also don't hold out any promises of when market will turn around - we tell them that maybe market will remain weak for another 2 years. We only stress that for long term wealth creation, there is nothing better than equity - provided you are able to sit through extended periods of weak performance. When a client sees a portfolio statement from you, where 90% is doing ok and 10% is not doing well, he is more willing to stay with the portfolio. The same 90-10, when put into an MIP, makes the whole portfolio look bad, and clients get frustrated and exit.

Never sell thematic products

People have always lost maximum money by investing in thematic funds at the peak of the theme. Whether it was the tech meltdown of 2000 or the infra sector in 2008 - lot of money comes in at the height of a sector's performance - and that is what leads to maximum dissatisfaction with mutual funds as a category. I stay away from sectoral themes. I stay away from most NFOs, because I do not find any compelling reason to get my clients into that NFO. If you see the statistics, you will observe that diversified equity funds have delivered alpha over market performance in good and bad times - it is the thematic funds that have hugely disappointed. When clients ask us about equity fund performance, we keep stressing that good diversified equity funds are actually doing better than market, by delivering alpha, even in weak markets. They are therefore better positioned to deliver healthy returns over a market cycle. You will have far fewer disappointed clients if you stay completely away from thematic products and stick to strong diversified equity funds for the equity allocation you want to make for your clients.

In the height of bull markets, another big issue that we always face is when clients want to go overboard and get into much more equity than the agreed asset allocation. It sometimes becomes difficult to talk them out of their enthusiasm. In such cases, we give in writing to them that they are going beyond their agreed asset allocation. Sometimes, when we give this in writing, clients think again before investing. Otherwise, if they still go ahead, at least we know we did whatever we could to dissuade them.

There is a downside to my approach...

My approach has not made me very popular within the MF industry. Some people think of me as a maverick. I ask a lot of questions. I talk straight. I don't sell flavor of the season products. We therefore don't get invited to exotic trips, we don't win AMC awards. But I don't mind that. If I do what is right for my clients, I will hopefully earn enough to afford the same trips for my children, on my own !

Why are we complaining about MF commissions?

My distributor friends may not like this - but I really don't see why we are complaining about mutual fund commissions. For a 10 year period from 1995 to 2004, we sold equity funds and got around 2% upfront commission, no trail in 1st year and then around 0.40% trail from second year onwards. Over a 3 year period of investment, we got around 2.8% as total commission. Now, we get 1.25% for first year and 0.75% from second year onwards. Over a 3 year period, our income now is 2.75% - which is exactly what we got previously. So, why are we complaining? The basic issue is that between 2005 and 2008, we got spoilt by upfront commissions of 4% and 5% and are now unhappy to go back to the old system. It is better for all of us to understand that margins in this business have reverted back to the old norm, after a brief period of enjoying super normal margins.

Embrace the BSE / NSE platforms

I will urge distributors to embrace the stock market platforms. I send out contract notes in my name and get cheques in my name - not in the name of any fund. It is always Wealth First in the eyes of my client, not the product manufacturer. I am able to do a same day switch from an equity fund of Fund House A to Fund House B, using the stock exchange platform, as payin-payout is on a net basis. That is a big convenience both for my client as well as for me. I am able to charge brokerage on my contract note. You must find a cost effective way of gaining membership and start using this platform. It will help you and your clients.

To conclude...

Play with a straight bat and keep things simple. Avoid anything complicated. Always be client centric first. Focus a lot more on fixed income - both you and your clients will be happy for it.