5 common mistakes Financial Advisors should avoid

Aug 8, 2016 / Dwaipayan Bose | 115 Downloaded |  8222 Viewed | | | 3.0 |  11 votes | Rate this Article
Mutual Funds article in Advisorkhoj - 5 common mistakes Financial Advisors should avoid

Financial advisors have made a huge contribution to the development of the financial services industry in India and to improving the financial lives of Indian investors. As a society we know the virtues of saving, but among vast sections of the society in India we had no investing culture. This is gradually changing and the financial advisors have played the most important role in this regard. The growing popularity of mutual funds outside the top 15 (T-15) cities in India is also, to a large extent, due to the efforts of the financial advisors in the smaller cities and towns across India. In the early 90s, the mutual fund industry’s Assets under Management (AUM) was below 50,000 crores; in the April to June quarter 2016, the average industry AUM was nearly 15 lakh crores (source: AMFI website). A number of factors contributed to this rapid growth in the industry AUM, but the important contribution of the financial advisor community to this growth story has to be acknowledged.

While the financial services industry has grown at a rapid pace in India, how have the businesses of Independent Financial Advisors (IFAs) grown? Some IFAs have built very successful practices with good client rosters and substantial AUMs, while many others have stagnated over the years. Large numbers of IFAs gave up their practices after the financial crisis of 2008 and were replaced by new entrants. With the evolution of the financial services industry over the years in terms of regulations, technology and competition, setting up a successful financial advisory practice is not the easiest of tasks. It takes a lot of effort, both in the start up phase and also on an ongoing basis. However, we feel that, with proper planning, well defined strategy, hard work and most importantly, patience, a financial advisor can be a very rewarding business career. However, there are pitfalls, which financial advisors must avoid, in order to build a successful financial advisory business, which we will discuss in this blog post.

  1. Financial Advisory is just another sales job:

    An ex-banker Chartered Accountant friend of mine quit his banking job 10 years back to become a Tax Consultant and Independent Financial Advisor. Over the years, he has built a very successful financial advisory business in the New Delhi region. A few years back, when he was in the process of expanding his practice and hiring sales staff for that purpose, he asked me to join him for a cup of coffee as he was interviewing a candidate. When I joined the interview I noticed that, the candidate was a self assured young man with about three years of work experience selling consumer white goods and computer peripherals. He was apparently quite successful in his job and very confident that he will also be successful in the financial advisory business. He told us that, at the end of the day, there is no difference between financial advisory and any other sales job; is every financial advisory like any other sales job?

    After a lot of thinking, the answer that I arrived at was, no it is not. If you are selling a washing machine or a printer cum copier, you are selling something that the customer can put to an immediate end use. All you have to do is to convince him why the product you are selling is better than the other products in the market. What is a financial advisor selling? Some will say, they are selling financial security, wealth creation, achieving dreams, so on so forth; but if we get down to brass tacks, what a financial advisor is really selling is money. Money is not an end use in itself, but a means to an end use. Therefore, as a financial advisor, you need to get much more involved with a client on a personal level, than if you were selling him or her, a house, car, washing machine, laptop, vacation, etc. The return on effort put by the advisor may seem not so rewarding in the initial stages of the relationship. But financial advisors should remember that, the relationship your customer can last a lifetime and over a period of time, if properly nurtured, can be very financially rewarding for you.

  2. Underestimating Smaller Clients:

    One common mistake, which many new financial advisors make, is chasing after the high net worth investors and in doing that, they tend to ignore the less wealthy investors. If you are among the advisors chasing the HNIs and ignoring retail, you should know that, if I am an HNI with a few crores of financial assets, I would, very likely, have existing financial advisory relationships. There are also a variety of other channels through which HNIs can invest, namely, directly with AMCs, demat account with their stock brokers, private banking channels so on so forth. HNIs are also likely to give you very little time, more likely to be more knowledgeable about markets than you (not that there is anything wrong with it) and very demanding as far as servicing is concerned. Retail investors, on the other hand, are likely to be less demanding, will give you more time and opportunity to hone your client relationship skills. Building strong client relationships with less wealthy investors can be the stepping stone to acquiring HNI clients through referrals. Also, the retail investors, especially young clients, can themselves become HNIs in the future. As discussed earlier, deep client relationships, hard work and patience are important virtues in the financial advisory business and they will definitely pay off in the long term.

  3. The curse of knowledge:

    Over the past several years, a number of young financial advisors with a professional education like MBA, CA, CFA, CFP, etc have joined the financial advisory space. These young professionals have more conceptual knowledge, more product knowledge and a high degree of awareness of the latest market trends. While this is great news for the industry, good knowledge does not necessarily mean good communication skills. In the financial advisory business, good communication skill is a critical success factor. What is good communication skill? It is the ability to converse with the client in his or her own language, at his or her own awareness level. It is ability to understand the client’s objectives and to empathize with his or her own concerns. As an example, simply saying that, “equity is the best asset class over a long investment horizon” and reeling off numbers to prove that equity returns were higher than fixed income, gold or real estate will not assuage investor concerns that, they can also make a loss.

    Usage of jargons is often counterproductive. When buying a car, the customer is often impressed with features like alloy wheels, ABS, automatic transmission, cruise control, paddle shift etc, but it does not work that way, when it comes to buying a financial product. Investors need to clearly understand, why they are investing and what they can expect from their investments. Knowledge is a great asset, but what financial advisors do with their knowledge to provide solutions to investors, is what matters in the final count.

  4. Trying to do business over phone or email:

    The head of financial planning of a large sized diversified financial services company lamented to me about 2 or 3 years back that, the business of his division was not at all satisfactory and that the top management of the company was planning to shut the division down. I asked him what he thought, were the reasons behind the unsatisfactory results. He told me that, the financial planners in his team spent almost their entire time in the office and not enough time face to face with clients.

    My friend was totally correct. It is not possible to do end to end sales over the phone or email. Some years back, telesales was a trend in the financial services business and IFAs invested a lot of money in building such capabilities, but it was in most cases, money wasted. Financial advisory business is done face to face with clients. The truth, which new advisors must face, is that you have to get an appointment to meet a client in person, if you want to do business with him or her. Getting an appointment does not necessarily conclude in a sale. Rejection is tough and financial advisors need to have the emotional strength to endure it. On the flipside though, you will not be able to do business, unless you get an appointment with your client. So get out of your office and go out there to meet people.

  5. Over-staffing your practice:

    This applies to financial advisors who have built a successful practice. In order to chase more volumes and revenues, they sometimes tend to over-staff their practice. In boom years more staff may mean more revenues, but then in bear market you are left with excess staff. Your human resources can be either an asset or a liability depending on market conditions. A restructuring decision is usually emotionally tough, not just on the people deemed excess, but also on the retained staff and on you. Therefore, you should always ensure optimal staffing of your practice.

On the other hand, though, the one man army model, limits your business growth prospects. If you want to grow your business beyond what you can achieve all by yourself, you have to hire talented resources, but you should be very clear about the goals and expectations. Are you hiring a staff for sales, for servicing or for transaction processing? If your answer is “all three”, then your organizational strategy is flawed. As far as servicing and transaction processing is concerned, you can leverage technology to automate a number of tasks and make substantial productivity gains (please see our post, How can financial advisors use technology to take their businesses to the next level). When hiring staff you should have realistic expectations of them. Frustration and later friction are often a result of unrealistic expectations.

New customer acquisition is obviously the biggest challenge for IFAs once they have maximized the potential of their immediate network. The time tested means of customer acquisition for most traditional IFAs is referrals. However, once IFAs reaches a saturation point within their immediate and adjacent client network, they look at hiring sales staff to expand their client base. This can work in the initial stages of your practice, but simply hiring more sales staff, in most cases, result in diminishing marginal returns on investments. Just because someone has been successful in his or her previous role, it does not necessarily mean that they will be successful in your organization as well. You need to create an ecosystem in which your sales staff will be successful. Social media and modern digital marketing techniques are customer acquisition channels with huge potentials. You can leverage the power of technology and use your sales staff to provide the crucial last mile connectivity to the customer.


Setting up a successful financial advisory business requires personal skill development, well thought out customer acquisition strategy, hard work and patience. Many successful financial advisers have emotional attributes that enable them to deepen relationships with their clients. The ability to clearly understand the client’s needs and concerns, developing solutions that address their client’s specific requirements and most importantly articulating it to the client lucidly is essential in building relationships. IFAs should not let their conceptual, market and product knowledge overwhelm effective communication with their clients. New advisors should not ignore smaller retail clients in pursuit of HNIs because working with smaller retail clients can help you improve your advisory skills, build deeper relationships and acquire new clients through referrals. IFAs, especially new advisors, should know that, building trust with the client is essential for getting the business. Trust is built in face to face meetings, not over phone or email. Finally, once advisors have achieved certain size or scale in their practice and are looking to add staff, they should have well thought out organizational strategy that optimizes both productivity and business growth.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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