In a country like India where customers take “financial planning advice” for granted, and consider it free by the distributors, in lieu of buying products from them, it is really a tough uphill task for most Advisors out there

Let us do some math. Rs 15,000 multiplied by 500 is equal to Rs 75 lakh. Here Rs 15,000 is the yearly advisory fee that a financial advisor charges (for example) and his number of clients are 500, so by simple math calculation, he makes Rs 75 lakh per annum. Does it not sound like a lucrative business. After all most suggestions would be standard, emails and Skype have anyways made life easier. Mutual funds and insurance plans anyways are available directly. Sounds super cool. But hey, what about the expenses. Oh yeah, we forgot that. That should not be difficult. Or will it be? Let us explore.

1 senior certified financial planner (15 lakh), 4 junior planners (Rs 6 lakh each), 1 investment manager (Rs 5 lakh), 1 operations manager (Rs 5 lakh), 2 support executives (Rs 3 lakh each), 1 accounting/ compliance (Rs 4 lakh) =  59 lakh in terms of annual salaries.

Investment in basic technology – Rs 3 lakh, office rental & operations – Rs 9 lakh. The total is Rs 71 lakh after adding all the above costs. And it is difficult to get more conservative than this estimate for a pool of 500 clients. If you spend anything further on research and technology, suddenly the model starts looking unviable. And technology is something you cannot escape in present day and age. Yes, with scale, you do make reasonable profits but that also entails investing in infrastructure and talent to manage larger pool of clients.

But ain’t there numerous Advisors who have made fortune out of advisory profession and larger firms running offices in all major cities? Yes, that is correct and here comes the Assets under Management (AUM) part of the game. Assets under Advisory (AUA) is the new buzzword though but essentially it means AUM. It is not uncommon to see Advisors waiving off entire upfront advisory fee – Rs 15,000 mentioned earlier – and instead charge a fixed percentage on the assets managed. 0.75% to 1% is an acceptable fee in the industry to advice on the assets. So let us say a client has Rs 5 crore assets, an Advisor can charge zero advisory fee but if he charges 0.75% on 5 crore, it comes to Rs 3.75 lakh.

Before you jump to multiply 500 clients with Rs 3.75 lakh, understand that finding even 50 such customers is extremely difficult for an Advisor, leave aside 500. And majority of the larger Advisory firms are hunting these clients – commonly called as Ultra High Net Worth Individuals (UHNI). And when you deal with such UHNIs, the service levels have to go few notches up, and hence the related expenses.

However, the Rs 5 crore UHNIs are only at the bottom of the pyramid. Those with Rs 25 crore plus investible surplus – an intimidating term which basically means the money available to invest – are the ones which most drool over, including wealth management arms of top banks. There is a mandatory internal audit which every firm needs to comply with and that adds another Rs 1.5 to Rs 2 lakh annually depending on how big the firm is. The requirement of signing the advice on the same day the advice has been delivered, again adds to the complexity.

With an army of MBAs, well-groomed relationship managers and solid technology platform the large organisations are better equipped to service the top of the pyramid clients. Though whether it also translates into better returns to the clients is something which is subjective, and debatable.

There is a small set of individual driven financial advisory firms with small teams, who do cater to this segment and are happy to have an array of up to 50-100 UHNI clients as anything beyond that throws up operational challenges. But do note, there is a small set.

The point of doing this math is to illustrate here that though SEBI has all good intentions of separating advisory from distribution, detailed in its Investment Advisory Regulation, and subsequent clarifications, the viability of the pure fee-only model is low.

The challenge is also about changing DNA of a distributor to an Advisor, especially of someone who has focussed only and only on sales numbers. This is in addition to the issue of people not wanting to pay for financial advice. Leave aside a premium for quality advice. Especially, when the larger ones offer ‘better looking’ services at a much discounted fee.

The new regulation prohibits Advisors to earn commissions from products and have strict disclosure norms. This also means that unless Advisors advise on asset classes beyond equity, such as real estate, gold, and structured products that gets them indirect, and sometimes direct, commissions, to make ends meet for first few years would be almost impossible.

In a country like India where customers take “financial planning advice” for granted, and consider it free by the distributors, in lieu of buying products from them, it is really a tough uphill task for most Advisors out there.

This article was first published in The Businessworld Here.