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Mergers and stake sales: How MF distributors are trying to gain scale and reach
September, 05th 2019

Distributors are realising the need to collaborate to attack areas that they are individually weak in

You’ve trusted him for his financial advice. You feel comfortable allowing him to handle your money because he has been there with you and your family for years. You wish he’d be around long enough to guide your children too on money matters. But, suddenly, he retires.

Now flip this question and think from your distributor’s point of view. He has spent years in building trust and goodwill. He did earn commissions. But how can he encash all the goodwill that he has earned? Could there be a price for that?

Symphonia, a newly-formed platform to bring together mutual fund (MF) distributors, aims to cater to both these requirements.

Promoted by three of the five directors of Sapient Wealth Advisors and Brokers—one of India’s largest financial services firms—and Amit Basu (who used to head products division of IDFC Asset Management), Symphonia aims to bring around 50 mutual fund distributors on its platform.

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The collective strength of the platform will take on a distributor’s burden relating to compliance, technology and research. It would give distributors the much-needed time to look after their investors.

Mergers and acquisitions are not new in the Rs 24 trillion Indian mutual funds industry. When two fund houses join hands, you get the benefits of a larger team, wide bouquet of products and, hopefully, better service. As the distribution industry goes through sweeping regulatory changes, your friendly neighbourhood distributor could well become a part of a bigger chain. There’s something in it for him; there’s something in it for you too. Of course, there are also risks.

Doing the hard yards

The reforms unleashed by the capital market regulator, Securities and Exchange Board of India (Sebi) in the past 10 years has resulted in a reduction of commissions that fund houses used to pay to distributors. Last year, Sebi also reduced the costs that fund houses can charge investors and rationalised payouts to distributors. Sebi’s investor advisor guidelines have also sought to nudge distributors to start charging investors, instead of fund houses. So, what’s the way ahead for distributors?

From a figure of 20,399 that entered the Indian MF industry in 2017-18, the number of new distributors fell to 17,625 in 2018-19, according to the figures from the Association of Mutual Funds of India (Amfi; the Indian MF industry’s trade body). Between April and July 2019, 3,096 new distributors have so far started selling MFs. As the fall in commissions is an inevitable occurrence, long-time distributors, who’ve seen several market cycles, have started to look beyond.

“Not everybody wants commissions. Our customers also want value addition. There is too much of competition (in the MF distribution industry) and we have to figure out how to sustain ourselves, and what more can we do for our clients,” says Roopa Venkatakrishnan, one of India’s largest MF distributors.

But servicing clients is not easy, even for experienced distributors. Although an established distributor, Roopa was a one-woman army whose office was literally her Toyota Innova—her books, files, and stationary kept in her car as she went about meeting her clients and fund officials through the day, commuting all along. Apart from counselling her clients, especially during turbulent markets, she, like all other distributors, must take care of her back-office. This includes processing her client’s application forms, ensuring they get account statements on time, maintaining records client investments and doing regular “health check-ups” of her customers’ portfolios.

Catering to different geographies

Investors shift cities as they move on to better job opportunities or for personal reasons. What happens then? Can the same distributor continue to serve them? Guwahati-based Pallav Bagaria, who had founded BND Wealth Management along with three other partners in 2006 in Tezpur, Assam says that there is merit in distributors from all over the country coming together to tap customers from across the country. Asks Pallav, “We could have a large client base and in our own right. But what if my client moves to Mumbai? Who will handhold him there?”

In April 2019, Pallav’s BND Wealth Management (with assets of around Rs 680 crore and 2,000 customers) joined hands with Mumbai-based Aargus Advisors (set up by Paresh Kariya and his partners; assets of over Rs 400 crore and 2,000 customers) and merged into Sapient. The latter was founded by Amit Bivalkar and has two other partners, Janak Shah and Rahul Khandekar, and used to manage 6,000 customers across Rs 1650 crore worth of assets.

Today, the combined entity, Sapient Wealth Advisors and Brokers, manages assets worth Rs 3,200 crore and is among India’s largest wealth management firms. Amit, Paresh and Pallav then extended the same logic to promote Symphonia, a distributor platform to bring on board around 25 well-established and hand-picked advisors from all over India. “Symphonia would eventually grow to acquire 50 advisors”, says Basu, chief executive officer, Symphonia.

Elsewhere, Roopa too is in the process of merging her firm with Dhruv Mehta’s, another large independent financial advisor. “A merger would be necessary to reach a greater number of lives across the length and breadth of the country and bring about financial literacy and financial independence to citizens,” she says.

Succession planning

Professions that are dependent on individuals or a group of individuals often suffer from a continuity problem. What happens to the firm after the distributor retires? This is as much a problem for the customer (who by now has come to trust her distributor, if the relationship has been a long-lasting one) as much as it is for the distributor who spends years in building not just assets, but also goodwill. Family members stepping in may not be the ideal solution; the need of the hour, then, is for a professional to take over.

Symphonia seems to have an answer. It will offer an equity stake to all the distributors who come on board. That is also why it has limited the number of distributors it has on-board to just 25 for now, and 50 overall, according to Amit Basu, its chief executive officer. He explains that when one of the partners (that’s what on-boarded distributors are called) decide to retire, Symphonia will scout for a new “and equally capable” distributor from outside the circle to come on-board and buy the out-going distributor’s equity stake. The outgoing distributor gets a price for his business and the client—his investor—continues to be managed by a professional.

HDFC Asset Management (India’s largest fund house with assets of over Rs.3.74 trillion) and Reliance Nippon Asset Management (assets of over Rs 2.17 trillion) listed in recent times. All their fund managers, chief executive officers and most of their senior staff members encashed their stakes successfully (employee stock options given to senior management over the years). Symphonia aims to do the same in the financial distribution space.

Plug and play

To be sure, there are several other platforms such as NJ India Invest and Prudent Corporate Advisory Services that give the benefit of scale to thousands of distributors. Most are plug-and-play platforms; a standalone distributor can join the platform and get benefits of research, technology and back-office operations. Complex goods and service tax computations and filing are also taken care of by many such platforms.

Distributors and fund officials say that coming together, either through a platform such as NJ or Symphonia, or by merging their outfits like in the cases of Sapient, BND and Aargus, has many advantages. Says Nilesh Shah, managing director Kotak Mahindra AMC, “Coming together multiplies the capacity. The combined outfit can offer many products and services such as insurance, loans, wills and estate planning, manage family offices and so on. They can service people from across geographies.” Nilesh says if platforms start offering equity stakes, it also helps the distributor to encash his business, as opposed to what he does now typically when he approaches retirement—scaling down his business.

“Distributors are realising the need to collaborate to attack areas that they are individually weak in,” says Ajit Menon, chief executive officer, PGIM India Asset Management. For instance, as Roopa points out, “a retail investor-focused distributor could join hands with another one who focusses on high networth individuals, or a distributor who is good at marketing with another one who is good at research.” Roopa now works out of her plush office at Nariman Point and employs a staff of six people. She says that many more distributors merging their outfits in future is no longer out of the question.

To be sure, a platform such as NJ brings into its fold new distributors or those who are just starting out in the financial distribution business. It then grooms the new joinee by taking care of back office operations, assists in training and development and provides ammunition to get new clients. A platform that offers an equity stake to distributors makes sense only to those who are established in their businesses, and manage a certain minimum size of assets. And if distributors find value in simply merging their outfits like Sapient did, it is another path that they can take, in future. All these models, experts say, are there for distributors to scale themselves up.

Will the ride be smooth?

That’s a tough question to answer because mergers in the financial distribution space are new. “The value system should match; distributors merging their outfits should be of the same wavelength,” says Suraj Kaely, former head of sales and marketing at UTI Asset Management. Ajit says that established distributors who have built brands over the years may resist the idea of coming together and merging with someone else. Also, the challenge is if the union doesn’t work out, will the divorce be smooth or messy, he adds.

As capital markets mature and integrated with the rest of the world, the financial distribution space will also undergo a transformation. Mutual fund distributor associations and platforms are not new to India. Most distributor associations were formed to merely bargain for better commissions for its members; some were also formed as a social and society platform to tackle common issues that affect the fraternity. But mutual fund platforms could see an evolution and give new reasons for distributors to join hands other than just increasing their own commissions.

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