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Key challenges for a financial advisor due to mutual fund complexity

18 Oct 2023

If one were to highlight the one big shift in investment preferences in India in the last 3 years, it is the big shift towards equity. Not only have equity AUMs expanded to nearly 1/3rd of the overall AUM of mutual funds equity SIPs are raking in nearly $1.25 billion each month. This combination calls for a much greater focus on the fund advisory business. As we normally tend to address the problems faced by the mutual fund investors and the challenges of mutual fund industry in India, it is time to look beyond. In a complex and competitive scenario, let also look at the biggest challenges facing financial advisors. Here are 5 such challenges..


Complexity of mutual fund products

To be fair, the Indian mutual fund industry is not overly complex. There is plain vanilla equity and plain vanilla debt and then there are a few options in between. But, things are changing quite fast. Apart from these fund products there are advisory products that are emerging which are an amalgam of various funds to create a financial solution. This is where the immediate challenge lies for financial advisors. Secondly, the financial advisors need to be in the best possible position to help investors combine products to move towards long term goals. In addition, there are new products like REITS and InvITs that are emerging which could offer an additional class with real estate as the underlying. As complexity of products increases, so does the challenge for financial advisors.


Shifts in regulation

There have been some major shifts in regulation and these have a bearing on the role of a financial advisor. For example, the entry loads were banned in 2009 and mutual funds had to introduce a new class of plans called Direct Plans for the benefit of investors. This added a level of product complexity. The recent imposition of DDT on dividends and tax on equity fund LTCG also complicates the financial planning scenario further. Earlier this year, SEBI called for the combination of schemes for a more rational categorization. This also has implications for advisors.


Transitioning to a fee based model
This is possibly the biggest challenge that mutual fund advisors are going to face. For a long time mutual fund advisors thrived on the principal compensation model wherein they doubled up as sales persons and the fund compensated through entry loads. With the ban on entry loads, the pressure is on the fund to squeeze payments out of their Total Expense Ratio (TER). With SEBI putting pressure on funds to reduce the TER, mutual fund advisors will increasingly have to rely on advisory fees for their revenues. But, in a country like India where advice has normally be taken for granted, this is not going to be a simple or sustainable model. That is the big challenge.
Need for skilling and re-skilling financial advisors

The old mutual fund advisory model was quite simple. You tie up with principals with a good track record and the principal will compensate you for the sale. The advisory function was actually incidental. Today the advisory function is the core and the sale is incidental. That is more because investors are increasingly looking to use the Direct Mode or the online intranet application mode to reduce their costs. Secondly, the need for advisory is growing by leaps and bounds and financial advisors are just not equipped with the requisite manpower to handle this shift. There is an urgent need for skilling and also re-skilling the advisory workforce to better adjust to the new requirements.


The rise of DIY investing

Do it yourself (DIY) investing is the next big story in financial advisory, at least that is what it seems to be. In DIY investing, the entire process of financial advisory and investment is driven through an internet based platform. Companies are increasingly launching such DIY platforms and using the power of big data and artificial intelligence to fine tune solutions that are customized as possible. This poses a big challenge for financial advisors. Will they be able to charge the clients a fee when most of the services are available online without any additional cost? Will the financial advisors end up empanelling themselves with these DIY platforms as value added advisors? These are questions which still not have any clear answers.


Just as the mutual fund industry is going through a transition, the mutual fund advisory business is also going through a major transition. Advisors need to adapt to a new investment world which is quicker, more technology driven and where levels of complexity are just too high. One only hopes that the customer benefits in the process!

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