Wealth managers likely to opt for advisory fee model

The recent move by the Securities and Exchange Board of India (Sebi) to scrap entry load for mutual fund distributors might see changing business models in wealth management.

Wealth managers are likely to increasingly move to an advisory-based fee model from the commission structure earlier. While Sebi does not prohibit charging commission from investors, wealth managers say the industry will now move from pushing products to charging clients on the basis of advice.

In an advisory fee model, clients have to sign a separate cheque in favour of wealth managers for advice rendered to them. Earlier, customers were charged a 2.25 per cent entry load, which was deducted from their total investment. Here, it will not be a flat fee and will be negotiated between the customer and the wealth manager.

However, there are a couple of players who charge advisory fee as a percentage of assets and will not go for a separate cheque model. In this case, they will directly invest on behalf of the client through the fund house.

For example, India Infoline charges 1 per cent of equity assets. The equity assets in this case include everything — portfolio management service as well as equity mutual fund investments. Similarly, Kotak charges a percentage of total assets. ASK’s structure is also based on assets under management. Some of them charge it quarterly on the incremental asset while some charge it on an annual basis.

“Internationally we follow both the models, that is, product-service as well as advisory. In India too, we have the flexibility to offer clients both. But, I feel that people will increasingly look to move towards the advisory model. We need to educate the clients and there has to be a continuous engagement with them”, said Satyanarayan Bansal, CEO, Barclays Wealth.

Wealth managers moving to advisory-based fee structure originates from the fact that clients have begun to question their private bankers on various aspects of portfolio management. “Customers are seeing as to what value the fund manager is adding. They are questioning the basis of churning stocks and are demanding more regular meetings with fund managers”, said Sriram Venkatasubramanian, managing director, FCH Centrum Wealth Management.

A lot of HNIs and ultra HNIs saw value of their assets erode by more than half in the economic meltdown. Hence, they have become more conscious of where the money is invested and are keeping a close eye on the portfolio allocation.

“It has to move to advisory now. Focus will be more on retention of assets rather than churning of assets”, said Hitungshu Debnath, head of wealth management at Angel Broking.