The IFA/MFD industry is changing very fast and the speed of conversion is much faster compared to history. The industry had already changed in the last 5 years where the IFA 2.0 came into place. The IFA industry's new name is the Fintech industry where technology is the key pivot point for turning and remodeling the old business. India in the coming next 5 years will find a significant jump in a different type of financial product for investments and also a change in the control of manufacturers of financial products.
The quality of new IFAs/MFDs will make you feel proud as they are more knowledge-driven financial advisors. They have created a new culture for the advisory industry but thanks to regulators for making the advisory segment through RIA. Today we find that Ex Bankers, Wealth managers from the distribution Industry, and Ex AMC managers and seniors are coming up together to join this industry of Independent Financial Advisors. This has pushed up the scale of the Industry and its parameters followed by expectations from the client's end. Now the IFA industry moving towards a new version from 2.0 to IFA 3.0. In this IFA 3.0 version many small and mid-size PMS and AIF manufacturers are going to take birth. The revenues are to become 50% of what we are earning today in the coming 3 to 5 years.
Selling Insurance and third-party products are not going to fetch revenues since Passback of the commission has grown significantly from the National Distributors' end to the same clients giving strong competition. All clients know what commission is earned in each and every product being sold or offered by an IFA.
Lockdown and the covid situation have been a blessing disguise for the IFAs looking to set up their own stock advisory and later into PMS manufacturers.
The competition based on advisory and knowledge has also attracted new competitors. Hence an IFA becoming a manufacturer of financial products is the only option left for the community. Multiple IFAs working independently previously are forming new companies and coming together to form PMS and AIF products. Getting control of products and earnings is the key aspect of the future for the IFAs.
Today’s clients are more demanding compared to what they used to be down the line last 10 or 15 years before. The technology gave birth to ROBO advisory and to the discount broking concept. The cost of operating has become so low that profitability competitiveness has intensified. This is very much prominent within the IFA community. Multi-product is now fashion more than a choice for the IFAs. The breed of financial advisors has accumulated and grown a significant amount of AUM within a very short span of time as compared to the traditional IFAs.
On the other hand, many old traditional IFAs are exiting the business as their revenues are no longer as glorified as they used to be in past. This is also one of the key reasons why there has been a sudden spike in the number of AUMs getting sold off and others are buying at a discounted valuation to raise more capital from the market.
Post-Covid many IFAs have become aggressive in terms of selling PMS ad AIF. Diversification of products and managing the demand of the client is obviously one reason behind such a high absorption rate by IFAs but it’s also more due to the revenue side. But the new era of IFA’s 3.0 is something more interesting to discover and that this segment will bring new competition as well as new growth for the PMS and AIF industry in the next 2 to 3 years. The size of the PMS industry stands at Rs 19 trillion. As many as 330 PMS providers compete for investor assets and this will grow times in the coming 3 to 5 years.
Many IFAs across India have come up with different modules of stock advisory. The broader intention in the long term is to come up with own PMS licenses and set up the industry accordingly. One of the most attractive models which have become popular across the clients and IFAs is that many IFAs have hired some equity research analysts and advised the clients and manage the portfolio whereas the execution remains with the client's old trading company where he has his account in place. Now in the last 18 months, we have found very clearly that all these equity market advisory platforms have flourished and have been able to attract significant new clients. Now the biggest advantage of being just an advisor and not an execution of stock trading and portfolio management is that this advice has no fees and is out of sheer client support and building a future-focused PMS advisory platform.
Now once the whole advisory setup of the stock portfolio has been created and goodwill has been established by the IFA then it’s just a matter of time to come up with your own PMS platforms or AIF. This is the process map for the IFAs to become manufacturers in the coming years.
The point as we mentioned above is that the IFA industry cannot survive by merely selling Third part products. It has to become its own manufacturer now. The revenue of the business will reduce significantly in the next 5 years as compared to what we have today. This fall of revenue cannot be controlled since the expense ratio and low of transactions is an unstoppable act that will have its spell.
Many IFAs have already established this brand value of stock advisory without getting into any RIA or execution model and the best part is that IFAs have been very careful about the stock advice they gave to the client since if they suffer any loss these IFAs will lose all the business of that client which is their source of bread and butter.
The IFA industry is under significant turnaround and IFA 3.0 is the only path in coming years where margins are falling and revenues are becoming harder.
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