With the slew of regulatory changes across various financial products recently, wealth managers are finding their income streams evaporating steadily. This is leading them to change their business model
The financial services business was supposed to ride on the increasing prosperity of a rising Indian population and with it the business of wealth managers and financial advisors was supposed to boom. Indeed, from foreign banks, which deal with the upper end of investors, to stock brokers turning distributors and selling products to the bottom end of the market, wealth management was supposed to be a large and growing field, addressing the needs of savers at all levels.
But despite a booming stock market, the wealth management business has suffered a setback. Their product lines and business volumes are down, thanks to aggressive interventions by regulators and poor performance by financial services across the spectrum of financial products available in the market. Their revenue model has taken a big knock as a result. The reality is that wealth managers are facing a tough task in attracting money, whether it be from the salaried classes or high net-worth individuals (HNIs).
At the lower end of the investing population, mutual funds and insurance products were for years the bread-and-butter for wealth managers in the country. They provided these advisors a steady and dependable source of revenue, with good appetite from investors and fat commissions from grateful product manufacturers. Mutual funds were much in vogue even among retail investors and wealth managers lapped up commissions of 2%-2.5% for their efforts. In addition, new fund offers (NFOs), which were a dime a dozen slightly more than a year ago, also provided advisors the opportunity to generate upto 4%-5% in commissions. Trail commissions were another source of funds for advisors as fund companies forked out reasonable amounts to them in the years after selling the product.
However, with the securities market regulator Securities and Exchange Board of India (SEBI) abolishing the entry load in August 2009, wealth managers found themselves stripped of a lucrative opportunity. SEBI's directive to curb the practice of tying investors to a specific distributor in perpetuity and passing on trail commission to new distributors has led to a raging battle to capture the assets under management (AUM), with banks especially active in hunting for the business of other distributors. Finding it difficult to sustain activities in such an environment, many wealth managers have virtually relegated mutual funds to the back of their inventory.
A source with over 20 years of experience in this field told Moneylife that the revenue model of advisors has taken a beating. "There is indeed a huge vacuum at the bottom of the pyramid. Earlier advisors were making money out of products like mutual funds. Now they are suddenly not interested. Many have scaled down businesses considerably," according to the source.
Unit-linked insurance plans (Ulips) were by far the healthiest source of income for these advisors. With commissions extending upto 30%-40% the invested amount, Ulips provided a happy hunting ground for advisors. The insurance regulator, Insurance Regulatory and Development Authority (IRDA), clamping down on these commissions has been another knock on the income of advisors, with commissions shrinking to as low as 6% now. For advisors to keep their wallets full, they would have to generate volumes much higher than what they are now. However, with the rejuvenated structure of Ulips being on offer only for a while now, it is unclear how it is shaping up in the market. It is certainly going to be tough selling the same product with a much lower incentive.
At the upper end of the investing population, too, the picture does not appear to be encouraging. HNIs, who so often are the primary candidates for money managers to dump complex investment products on, are not living up to their billing. Portfolio management services (PMS) of wealth managers have built up a pathetic reputation for themselves in the past. Dismal returns and shoddy advice along with frequent churning of portfolio and high management fees have left an indelible mark in the minds of these HNIs who are now somewhat sceptical of handing over their millions to wealth managers. Structured products, another offering in the suite of wealth managers, attract a very tiny segment of the HNI population. It is a niche product that has not yet caught on with the investors here. Even the structured products have not proved themselves; some of them lost a lot of money in the last market crash. The scope for income generation is very limited in this segment.
Interestingly, a rejigged wealth management business, built on trust and excellence, is still a very viable proposition because the promise of the business based on the premise of rising prosperity remains as attractive as ever. Indians are indeed getting wealthier and need timely and correct advice as to where to put their money, especially since financial services providers have a predatory approach while selling. It is this mid-market that many stockbrokers and banks are trying to address. Banks already have the footprint and need to find ways to deliver the necessary advisory services with the customers' needs in mind.
Rakesh Goyal, senior vice-president, Bonanza Portfolio Ltd, is upbeat about the prospects of the business. "Margins of financial products are coming down as expected and we are prepared for it. But it is going to be increasingly difficult for mutual funds, insurance companies and others to have their own offices. They will have to depend on distributors. Therefore, we are looking forward to scale up from 1,500 to 5,000 outlets by 2013-14. Currently, we have a presence in 515 cities across the country. We will have to create a retail model, like Big Bazaar. It will be a volume game."
Mr Goyal said there was a need to also expand the range of products. "In the financial space we are offering a full basket of products like investment banking, currency, commodity, equity, mutual funds, insurance bonds, NCDs, and so on. We have multiple products to suit the investment objectives of people. Some products like bonds, NCDs were not popular in the past. They are in good demand now. Some products like traditional insurance or the discount card of Indian Health Organisation still offer good commission. Lump-sum investment in mutual funds has gone down, but is being replaced with SIP investment in mutual funds. Institutions will return to mutual funds. People will still buy Ulips rather than traditional plans due to better returns." Wealth managers certainly hope so.