India's IFAs unite to be industry mouthpiece

By John Sedgwick May 29, 2012

The newly incorporated Foundation of Independent Financial Advisors (FIFA) in India aims to promote dialogue within a fragmented network of distributors and establish a collective mouthpiece for all independent
financial advisors (IFAs).

Dhruv Mehta, Foundation of Independent Financial Advisors In the few months since its foundation, FIFA’s membership has grown to around 50, including some of the leading IFAs from Mumbai, Delhi, Pune and Kolkata, and they are presently in discussion with another two hundred or so IFAs, according to Dhruv Mehta, Mumbai-based chairman and founding member at FIFA. He is also the founder of his own IFA firm in Mumbai, Dhruv Mehta Investment Advisor.

Although there have been a number of similar regional and city-based IFA associations set up in the past, such as Karnataka Association of Mutual Fund Advisors (Kamfa) and IFA Galaxy in Chennai, FIFA is the first to
attempt to take on a broader Pan-India role.

Following its incorporation as a non-profit organisation on Feb. 15, 2012, FIFA has this month met with the industry regulator, the Securities and Exchange Board of India (SEBI), to deliberate solutions to the issues in the
distribution network and views on the reintroduction of an entry load.

“We have had initial discussions with SEBI, but what we now plan to do is have greater discussions with our members and then actually submit something in writing,” Mehta says.

The SEBI has this month created a committee to analyse mutual fund rules, as reported.

The commission fee structure subsequently introduced in place of entry-load fees has not compensated for the loss of revenue IFAs suffered from not being able to charge front-end fees from clients investing in mutual
funds, according to Mehta.

Mehta says that he has seen many smaller IFAs close down since the ban on entry-load fees. Larger organisations have been in a better position to compensate for losses through building larger volumes, adding to
their staff and increasing scale, but this has been much more difficult for a smaller IFA, he says.

“In an IFA model, there is limitation to the number of relationships an IFA can handle,” Mehta says. “If you try as an IFA to increase the number of clients, then your service levels will come down. One person can only
physically handle a certain number of clients.”

Almost three-quarters of IFAs across India have experienced a decline in income over the past few years as a result of the entry-load ban, as reported.

Improving IFA knowledge, creating a collective voice

Although FIFA has only been officially operational for the last three months, the genesis of the association stretches back more than three years, according to Mehta, who has run his own independent investment advisory
firm since 2003.

“One of the things we realised is that a lot of our learning happens when you meet with your peers, such as at events organized by manufacturers,” he says. “We also found that sharing information among ourselves also
helps a lot in terms of giving advice to clients.”

This triggered an idea to establish an association to bring IFAs together on a more regular basis and encourage knowledge sharing, so that individual IFAs can improve the services and advice that they provide to clients.

Separately, Mehta says that following the ban on entry loads in 2009, there was also a call from regulators and manufacturers for IFAs to get together and create a louder, unified voice.

“They said you need to come together on one common platform, because we can’t take note of individual voices, especially with India being such a large country and so spread-out,” he says.

There was also a feeling among IFAs that a lot of the regulatory changes that were taking place were as a response to practices in the banking channels, which has a significantly larger market share of the distribution
industry compared with IFAs, according to Mehta.

“What might be appropriate to regulate them might not appropriate for regulating and individual IFA,” he says.

Common concerns of IFAs

In collating opinions from large numbers of IFAs, there are nearly always some clear “common points” that can be expressed to the regulator, Mehta says.

FIFA’s first unified response was for a SEBI concept paper released in September 2011 regarding regulations for investment advisors. Some of the founding members of FIFA got together and began to collect opinions
from around 100 IFAs from around the country.

In an effort to combat conflict of interest issues, the SEBI proposed that there should be a separation between IFAs who act as an advisor for the client and receive fees only from the client and IFAs who act as an agent of a
fund and receive only commissions from the fund house.

With FIFA not yet established at that time, the group of IFAs submitted their opinions on the concept paper in a collective response for the first time.

Since the ban on entry loads in 2009, most IFAs across India have adopted a hybrid model in which they receive remuneration through both these channels.

Thus, there was unanimous negative reaction to this particular proposal from all the IFAs who wanted the hybrid payment structure to continue and FIFA have since been communicating this message to the regulators.

“Since the first meeting that we have had with the regulator in October, we have found them open and willing to listen to the view point of the IFAs,” Mehta says.

“We have been pleased to find that they recognised that IFAs have a very important role to play especially in retail penetration in the Indian markets,” he adds.

Mehta notes that IFAs can provide advice and services in smaller towns where banks might not want to open a distribution branch.

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