Paradigm Shift In Indian Ultra HNIs & Family Offices - Broking To Advisory

Paradigm Shift In Indian Ultra HNIs & Family Offices - Broking To Advisory

Amit Jain, Co-Founder & CEO, Ashika Wealth Advisor, 0

Amit mentored several startups & financial enterprise and currently leads wealth advisory of the Ashika Group.

The broking era in financial product industry trended at the peak from 1996-2008. Those days money was invested for the percentage of 'Cash back' or famously known as 'Pass back' as Indian financial product market was evolving with new products like ULIPs, Mutual Funds, PMS and other financial products. Those days investors were not aware of the compositions and pre build expenses ratios in these new products. So they invested in these new products trusting their old traditional brokers. From 2003-2008 Indian stock market had a dream run. So, everything was going up, wherever investor invested, they made money, so they never felt a need of advisors and continued to invest through their traditional brokers by keeping their short term gain (pass back) in mind. This immediate short term gain was so fascinating that after receiving this, they tend to forget invested amount completely. They never regret, as every asset class, especially equity market, was going in upward direction. If I remember correctly, pass back used to be between 2-70 percent depending on the financial product.

This trend had to end and it happened in 2008 when global markets crashed. None of the traditional agents could envisage this crisis. Hence, investor’s portfolio were down by 30-50 percent across all equity products, including Unit Linked Insurance Plans(ULIPs). In a post by first post, allegedly a ULIP scam was highlighted. It claimed that investors were defrauded-off huge sums where the estimated loss was about Rs. 1.56 lakh crore. Agents had missold the ULIP product, receiving commission of as high as 70 percent. Investors were laid of the tenure being three years, while it was actually a long term product. The outcome was, 70 percent of the estimated losses of the investors were paid to the agents as commission.

Post 2008 global crisis, investors started asking questions to their tradition brokers about the products, their composition and expense ratio as they realized their lack of knowledge & blind trust on traditional brokers had made them suffer this huge loss. Investors also realized that none of the asset class can always go up so it is advisable to diversify across asset classes, that too after due understanding of asset class, product objective & expense ratio, and risk involved.

Post 2009, Investors showed a huge shift of preference from brokers to advisors, who are competent and can advise without having any bias for any product or company. Even after 2011, this importance advisor becomes much stronger, as the Indian market corrected once again by(24 percent) along with recessionary environment in real estate investments. This phase of 2012 was even tougher for Indian investors, as their traditional investment asset classes i.e. real estate &
gold had generated negative ROI post inflation. These asset classes are still in bear market phase even after years. During this economic phase, investors realized the worth of a competent advisor who can preempt the asset cycle and rebalance the portfolio across asset classes by keeping a global and local economic view. The shift was substantial with a clear indication of leveraging the benefits of fee based financial advisors for their competence and unbiased advisory.

This Phase Of 2012 Was Even Tougher For Indian Investors, As Their Traditional Investment Asset Classes I.E. Real Estate & Gold Had Generated Negative ROI Post Inflation

Advisor over Broker
Customer Centric Approach:
•Advisor focus on ROI of investor by keeping risk appetite & tenure in mind.
•Broker focus on products with high commission.

•An advisor should be highly qualified, preferably a CFP and should have understanding of all innovative financial products across the Globe. This competence may help him to choose the best of products for his clients across asset class beyond geographies.
•Brokers may suggest traditional investment avenues due to lack of knowledge and exposure to innovative products and global geographies.

Active Fund Management:
•Advisor adopts tactical investments approach by periodically rebalancing the portfolio across asset class by keeping Global and local economic view in mind.
•Broker may continue to hold investment without periodically rebalancing it, as he may not be competent to do so due to his limited exposure, or he may think he has given passback so his work is over.

Active Entry, Exit & Switch
•Advisor should be active in ad¬vising client for appropriate entry, exit and switch timings across asset classes, as each asset class has cyclical & he should be competent to advice entry, exit or switch options to his esteemed investors.
•Broker may not be competent to advise on above parameters due to his limited knowledge & exposure.
Adaptability for New Ideas:
•Competent advisors may envisage new next decade multibaggers at appropriate time due to his upgraded knowledge & exposure.
•Brokers continues to focus on traditional products, as he is comfortable with traditional ideas only.

Now we are the 5th largest economy in the world, and increasing it shall be challenging for fund managers to generate alpha over benchmark. We all had excellent ROIs on our investment when we were on curve of moving from under developed economy to a developing economy. However, it shall be a challenge to have same historical ROI with passive fund management style as we have limited opportunities in our old business models. We advise all family offices to have active fund management and periodic rebalancing or rotation asset classes & sectors.