Wealth Forum conducted its 5th annual Advisor Confidence Survey in May 2016, where we invited 310 of India's leading IFAs from 48 cities across India to share their outlook on markets, products, business and AMCs. These 310 IFAs comprise the top 5% of IFAs in their respective cities: their views therefore represent the pulse of the leaders within IFA fraternity on key business issues.
We received 232 responses in all, from the 310 IFAs who were invited to participate in this survey. We are grateful to all 232 leading IFAs who took out the time to respond to this rather exhaustive survey. The geographic spread of responses received is given below:
Like previous years, this year's survey will be published in 3 parts:
Part 1 : Business Confidence
Part 2 : Market and Product Confidence
Part 3 : AMC Confidence
In this part, we bring you the pulse of the leaders on business confidence.
To see the previous years' survey results, Click Here
Advisor Confidence Survey 2016: Business Confidence
1. Outlook on volume growth
34% of respondents are very confident of volume growth (down marginally from 38% last year) rating their confidence at 10. Overall though, confidence in volume growth has reduced from 8.6 last year to 8.1 this year. A declining trend since the Modi election highs of 2014 is now clearly discernible. It is indeed unfortunate that at a time when the MF industry seems more optimistic than ever before about volume growth, one of its key distribution segments - India's top IFAs - don't share the same level of enthusiasm. It appears that between direct plans, disclosure and robo advisors, business confidence is getting a little dented, even among the most successful IFAs across India.
A score of 8.1 is very healthy without doubt and reflects that India's leading IFAs believe they will be able to effectively combat all the challenges that are coming their way. Probably the best way to read this number is that challenges are real, they will have an impact, but overall, India's leading IFAs believe they will be able to grow business volumes quite well, despite these challenges.
2. Outlook on revenue growth
Revenue growth confidence, which was running neck-and-neck with volume growth confidence in 2014, is falling a lot sharper than volume confidence. Revenue worries are real. The impact of enhanced commission disclosures on effective margins is clearly a concern. The regulator's desire to reduce expense ratios - a decision on which seems imminent this month given all the rumours flying around - is also a worry for respondents in terms of its impact on trail commissions.
Despite uncertainties, a good 30% of respondents have rated their revenue growth confidence at 10 - signifying their confidence that their business models are equipped to handle these challenges. The percentage of respondents who have rated their confidence at 5,6,7,8 and 9 are broadly in the same range of 10%-14%, in sharp contrast to the 30% who have rated their confidence at 10. Clearly it seems even within the leading IFAs, there is a set who look like pulling ahead of the others, on the strength of more robust business models. The highest proportion of these confident IFAs is in the East - which in 2013 and 2014 was trailing behind other regions in terms of relative confidence. Could it be that with so much bad press and scams related to chit funds in the last couple of years - which were hugely popular in the East - mutual funds are gaining increasing momentum, thus fuelling IFA confidence?
3. Outlook on fee based income
Despite the regulator's keen desire to see migration of mutual fund intermediation to a fee based model, the movement on ground suggests that the business is simply not geared for such a move. Over the last 4 years, the proportion of respondents who are charging zero fees has remained in the 30-39% band. There is a perceptible rise in the 1-10% category - suggesting that leading IFAs are making their tentative beginnings towards a hybrid model of fees and commissions. The proportion of leading IFAs who believe that more than 50% of their revenues will come from fees is still stuck in the single digits - a clear indication that the market is just not ready for a purely fee based revenue model.
In an environment where expense ratios are set to fall, trail commissions too will fall. A hybrid model which allows intermediaries commissions and fees seems a sensible way of enabling distributors to gradually make the necessary transition over the next several years. The current dispensation of forcing an IFA to choose either pure fees or pure commissions while permitting corporate entities to run hybrid models seems highly inappropriate, in this context. IFAs who wish to commence charging some fees, are reluctant to do so since that would automatically mean they register as RIAs - and lose future commissions.
A sensible way forward will be to permit a hybrid structure for all intermediaries, without insisting that they all first register as RIAs, and encourage adoption of a small fee based income stream, to compensate for likely fall in trail commissions. It is about time that we seriously look at fee offset models, and enable regulations for this. If an IFA is earning 1% trail today, why not permit him to charge a fee of say 1%, offset this against commissions he receives, and therefore effectively raise a bill on his clients only for the shortfall? In the event trail goes down to say 0.5%, he would then raise a bill for the balance 0.5% on his clients, in order to protect the 1% income that he sees as fair for his services. By raising the bogey of commission passback on fee offset models, we are not permitting a sensible and calibrated transition for the distribution fraternity.
If the regulator is anyway looking at dropping TERs over time, this entire debate on commissions vs fees and direct vs regular plans becomes inconsequential in the big picture. What would be nice (but has never happened in our country so far) is for the regulator to give a 5 year road map on how they wish to see TERs being reduced in a calibrated manner. Once that road map is known, let distributors come up with fee offset models or other variants that enable them to migrate successfully to a lower commission environment, with a clear view on time lines. The relevance of direct plans too will reduce, one imagines, when the overall TER is reduced to a level which the regulator (hopefully in consultation with industry) believes is fair. After all, the genesis of direct plans came from the perception that TERs are high because distribution commissions are high and self directed investors need not pay such high costs of embedded advice, when they didn't need advice.
Its time to take pragmatic steps forward to enable financial products intermediation to gradually transition into a hybrid income structure. Little is achieved when the regulator takes one extreme position and distributors take the other.
4. Outlook on costs
Cost pressures are creeping up each passing year. When you look at heightened cost pressure on one hand and lower confidence on revenue growth on the other hand, the picture on profit outlook for leading IFAs doesn't look rosy. Over the last 2 years, the one big cost element that continues to impact larger IFAs is service tax. Its not easy to absorb a 15% hit on your income - especially when you know that this is a levy that ought to be passed on to the recipient of your service.
5. Willingness to invest for the future
Willingness to invest for business expansion has reduced to some extent since last year. Obviously, uncertainty in business and revenue models is taking a toll on overall confidence, which reflects in a little more of a wait-and-watch approach towards business expansion, among India's leading IFAs. A score of 7.3 in itself is a reasonably healthy score - but the context to bear in mind is that if the leaders of the IFA fraternity have a collective score of 7.3, the rest perhaps have a score that's far less.
Given the industry's inability to attract new IFAs in sizeable numbers, one would have imagined that the mantle would fall on leading IFAs to expand their teams to harness the volume spurt we are witnessing, and which we all believe is sustainable. Eagerness to expand is however becoming a little more muted, which should be a worry for the industry - which continues to believe that it gets the best quality assets from the IFA channel.
6. Impact of direct plans
At the heart of ebbing business confidence among IFAs is the negative impact of direct plans on their business. The North seems to be particularly badly impacted - with leaders of the IFA fraternity there rating negative impact of direct plans at 5.6, likely to go up to 6.6 in 3 years time. The trend over the last 4 years is worrying - negative impact is growing year on year, across all regions, and is perceived to grow even more over the next 3 years.
Enhanced commission disclosures in CAS, especially with direct plan TERs (which investors don't own) mentioned alongside regular plans that investors do own, will only heighten these worries. We have said this before and continue to reiterate: channel bias is unbecoming of the regulator. The latest in this ongoing channel bias is the regulator's keenness that AMFI use some of the investor education pool to promote direct plans! Where will this channel bias stop? Why are IFA associations focussing more on commission disclosures (most of which they are supposed to be doing anyway since the last 6 years) and less on a blatant channel bias by a regulator who is supposed to be above this? Why is AMFI not writing formally to SEBI expressing concern on actions that exhibit a channel bias? Why isn't AMFI showing data to SEBI on the lakhs of new folios that have been opened in the last 3 years under regular plans (when direct plans have been available) to reinforce the message that the industry owes a responsibility to these investors not to get them unnecessarily confused about whether they have made a wrong investment decision, only because of regulator instigated propaganda on the virtues of direct plans?
7. Transactions platform: MF Utility losing the plot?
MF Utility does seem to be losing the plot, going by the pulse of the IFA leaders. Enthusiasm for MFU as a business support platform for IFAs is waning considerably, with the scores plummeting from 5.6 at launch to 3.9 the following year and further down to 3.3 now. What should also worry MFU's management is that the "threat" perception of MFU is also waning. One of the big concerns that IFAs expressed initially about MFU is that it will promote growth of direct plans by offering aggregated transaction execution convenience for direct plans, free of cost. MFU is losing ground even on this score - suggesting perhaps that MFU is perceived as becoming less relevant in the industry.
This would be an unfortunate turn of events for the industry's flagship collective project, that was supposed to vastly simplify transaction execution for all stakeholders. Opinions among IFAs are sharply divided - there are some who are avid users of MFU and swear by it, others believe there are just too many hiccups in execution. Many continue to be passive bystanders, watching the debate between the believers and the disbelievers. In all this, a question that many IFAs are asking is this: why are leading AMCs working so hard to promote their individual mobile apps and net based platforms - none of which is open architecture, when they are all co-promoters of an industry wide open architecture platform? Would it not be more fruitful for leading fund houses to pool resources and focus on promoting and enhancing MFU? Just as AMFI is now pooling resources (under SEBI's instructions) to create common investor education initiatives, perhaps a similar focus can be given to promote a common transaction platform.
In sharp contrast to MFU's waning popularity, NSE's platform seems to be gaining from strength to strength. 17% of respondents are already using it, another 10% gave it a score of 10 on 10 for probability of using it by March 2017, and another 16% assign a high probability of 80% - 90%. With the overall score jumping from 4.5 to 6.1, the NSE platform seems to be directly grabbing share from MFU in terms of either using it or intending to use it as a transaction platform. It looks like among India's leading IFAs, 61% favour NSE's platform and 33% favour MFU - leaving by inference only 6% who have not yet made a choice on their preferred platform.
8. Distributor vs Advisor: the pendulum is shifting perceptibly
While 43% of respondents have given a low score of 1-3, signifying low intent to apply for an RIA licence, there is a sizeable 29% who have either already acquired an RIA licence or have a high intent (scores of 8-10) of doing so by March 2017. There are another 28% in the middle - sitting on the fence, perhaps unable to make up their mind yet. A look at how these scores have moved from 2014 to 2016 suggests a clear momentum towards accepting RIA as a reality. The pendulum seems to be shifting perceptibly now.
What's aiding this pendulum to shift is a clear perception that the regulator will mandate migration of distributors to the RIA mode in the foreseeable future. A huge 60% of respondents believe this will happen within the next 5 years, while only 11% believe this will not happen at least in the next 10 years. The regulator's oft repeated desire to see distributors take to the RIA route has been heard loud and clear by India's leading IFAs. Some are willingly going down that route, many not so willingly.
What should be a worry is that if 60% of respondents believe RIA will be enforced within 5 years, we still have 43% of India's leading IFAs who have little or no intention of making this move yet. Is it because they do not have a corporate structure to enable a hybrid model - which the larger firms have opted for? An overwhelming majority of RIAs today are either operating the hybrid model in a corporate structure or have unofficial referral arrangements in place to ensure continuation of commission incomes within the family/group. The former is blessed by SEBI, the latter is frowned upon. This does not make sense. If SEBI has indeed decided that RIA is the preferred intermediation model of the future, the need of the hour is to work out arrangements whereby a transition can be facilitated more smoothly. Permitting hybrid models for all distributors, with say a 5 year window, could be one such solution. This would especially make sense if SEBI is anyway looking at reducing TERs over the next 3-5 years, thus squeezing out a lot of the commissions that are built into them at present.
9. Impact of enhanced commission disclosures
India's leading IFAs see a very significant 26% of their assets getting negatively impacted due to the enhanced commission disclosure regulations that take effect from October 2016. A quarter of your assets at risk is not a comfortable feeling at all - by any stretch of imagination. How much could this impact revenues? Again, a very sizeable 22% say India's leading IFAs, about their own businesses.
Right now, the 800 pound gorilla in the room is enhanced commission disclosure, because its near term impact is likely to be the highest. With the SEBI chairman reported not in favour of any review of the commission disclosure circular, it does appear that the circular will be enforced, perhaps as is, in October 2016. There continue to be efforts underway to persuade SEBI to tone down some of the disclosure - for example giving percentages instead of absolute amounts, doing away with direct plan TERs and so on.
Meanwhile, it is prudent for IFAs to take a base case that the circular will be enforced as is. Proactive steps need to be taken by each distributor to estimate the extent of the issue at hand in their own customer bases and proactively engage "high risk" customers well in advance of October 2016. One such strategy was shared by Ashish and Manish Goel of Vista Wealth in Wealth Forum recently (The best way to deal with commission disclosure). Being proactive can limit the impact on your business. Doing nothing and then reacting when clients react seems to be a recipe for disaster. So, even as IFA associations continue trying to engage the regulator on this issue, at an individual level, the focus needs to shift to how you are going to demonstrate the value of your advice and guidance, before its cost becomes a focal point of discussions from October 2016.
10. Impact of robo advisors
India's leading IFAs do not see robo advisors as a key competitive threat to their businesses over the next 3 years. The national average score of 3.4 does not reflect any significant regional variations, except that East seems a lot less concerned than other regions. There are now dozens of robo advisor platforms that have been launched or in final stages of launch, many of whom are PE funded. Its still early days to get a real sense of their competitive strength, and perhaps this reflects in them not being perceived as a huge threat by IFAs, at least as of now.
This is a most interesting space to watch as the regulator seems to be placing a lot of hope on online platforms delivering low cost market expansion as a solution to anaemic growth in on-ground distribution footprint.
The developed world is seeing robo advisory platforms being snapped up by large financial conglomerates with established client bases. Stand alonerobo advisors seem to be struggling to acquire new clients cost effectively. But, if you put these platforms as an add on facility for an established client base of a bank or a brokerage firm, it suddenly seems to make a lot more sense. Is that the way we too will go? Too early to tell.
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