On Business Models

Amar Pandit , CFA , CFP

Amar Pandit

A respected entrepreneur with 25+ years of Experience, Amar Pandit is the Founder of several companies that are making a Happy difference in the lives of people. He is currently the Founder of Happyness Factory, a world-class online investment & goal-based financial planning platform through which he aims to help every Indian family save and invest wisely. He is very passionate about spreading financial literacy and is the author of 4 bestselling books (+ 2 more to release in 2020), 8 Sketch Books, Board Game and 700 + columns.

After reading the post, “The Oldest Barber Shop in the World?”, one of the readers wrote to me, “Excellent post Amar. I thoroughly enjoyed it, and I started thinking about business models in general. I questioned myself about my own business model. Can you shed some light on different business models and what a business model really is?” In this post then, I attempt to explain the concept of business models, and the ones that exist in our industry (including some additional possibilities).

A business model is essentially a blueprint for how your company creates, delivers, and captures value. It outlines the way in which your organization operates and makes money, detailing its service offerings, target market, revenue streams, cost structure, and the logistical and operational details that make your business function.

For you, understanding your business model is critical to achieving long-term success. The core elements of a business model typically include:

Value Proposition: What unique value do you offer to your clients? This could be specialized financial guidance, personalized service, innovative investment products, a world class client experience driven by you and technology or simply access to mutual funds.

Customer Segments: Who are your clients? Understanding the specific needs of different segments, such as retail investors or high-net-worth individuals (HNIs), is crucial.

Channels: Through what means do you reach your clients and deliver your services? This could be through in-person meetings, digital platforms, or a hybrid model.

Customer Relationships: How do you interact with your clients, and what type of relationship do you maintain? Is it personal, automated, or community-driven?

Revenue Streams: How does the business earn money? This could be through fees (fixed, hourly, or percentage-based), commissions, or a combination of these.

Key Resources: What assets are essential to your business? This includes skilled financial professionals, proprietary technology, and brand reputation (will write a separate post on what I mean by this even though I have written multiple posts on branding).

Key Activities: What actions are critical to your operation? This might involve financial life planning, goal-based investing, market analysis, and continuous professional development.

Key Partnerships: Who are your allies and collaborators that help you run the business? These could be platforms, software providers, asset managers, or other service providers.

Cost Structure: What are the main costs involved in running the business? Understanding fixed vs. variable costs helps in pricing your services effectively.

Try answering all the above in the context of your business model.

When it comes to your business, catering to retail investors versus HNIs presents different challenges and opportunities. Retail investors might require more standardized services and can benefit from technology-driven solutions that provide scale and efficiency. In contrast, HNIs often require a more personalized approach, with bespoke solutions and a higher touch service model.

Firms that try to cater to both segments without clear differentiation might struggle with operational inefficiencies, brand dilution, and a value proposition that resonates fully with neither group. It’s like a tailor who tries to sell both off-the-rack clothes and bespoke suits without clear separation—it can lead to confusion and diminished trust in the quality of both offerings.

For those serving the retail market, a focus on automated investment platforms, lower-cost service offerings, and educational resources can be beneficial. On the other hand, serving HNIs might emphasize personalized wealth services, estate planning, and exclusive investment opportunities.

The challenge for many firms today is that they have some HNI clients and many retail clients. And the offering is relatively the same for everyone. These HNI clients are up for grabs by sophisticated firms, and this poses a significant risk to your business. We have seen so many cases of solo professionals losing sizeable accounts over the last couple of years. Professionals like you have lost single clients with AUMs of Rs.5 Crore, Rs.10 Crore, Rs, 100 Crore, and even Rs. 400 Crore (yes, a single client with an investment of Rs.400 Crore).

Therefore, understanding your firm’s business model and clearly defining which segment of the market you want to serve can help in creating a targeted strategy that aligns with your clients’ needs and your business goals. This alignment is crucial for delivering value, achieving customer delight, and driving sustainable growth.

The financial services industry is diverse, with various business models that cater to different client needs and preferences. Here are some examples in India:

The Mutual Fund Distributor (MFD) Model – Retail:

Financial Professionals earn commissions from the mutual fund products they sell to clients. In this model, the focus is to provide clients with access to mutual funds, selection of mutual funds, investor education, portfolio construction, facilitate transactions, and provide performance reporting.

The MFD Private Wealth Model – HNIs:

This model is like the above in terms of revenue, but the value proposition is expansive and different. The value proposition here is of personalization and specialization.

But at the same time, there are many firms that are only selling products under the garb of private wealth. These services are packaged extremely well and sold through an aggressive (and smart) sales force.

The Registered Investment Advisor (RIA) Model:

Advisors typically offer comprehensive wealth management services under this model. This model charges clients a percentage of their total assets under management. The RIA model in India represents a segment of financial advisors who are registered with the Securities and Exchange Board of India (SEBI) and mostly operate on a fee-only basis. But many RIAs still have clients on a commission only model through a separate division, firm, or family members.

The Banking Model:

In the banking model, financial institutions offer a comprehensive suite of services that may include savings and current accounts, loans, credit facilities, life insurance and wealth management. The banking sector serves as a one-stop shop for financial needs, often leveraging their large customer base to cross-sell products. Banks typically earn money through interest margins, service charges, and various fees associated with banking products. They also earn through their wealth management divisions by offering mutual fund products, insurance, and portfolio management services. They serve both retail investors and HNIs, providing personalized service for the latter, often through specialized private banking divisions. But as we know there is a heavy focus on selling life insurance and annuity products. There is no real personalization and specialization delivered here even though many of the wealth counters and private bankers keep talking about it.

The Pure Digital Model:

This model represents the new age of financial advisory where the services are entirely online. Pure digital wealth managers, or ‘robo-advisors’, use algorithms and sophisticated software to provide financial advice and manage clients’ investment portfolios with minimal human intervention. The revenue is usually generated through commissions, flat fees, or subscription models. These platforms cater to tech-savvy investors who are comfortable with digital-only interactions. But it’s very difficult to operate this model profitably so many have shut shop, some have pivoted to a hybrid model, and some are on the verge of shutting shop (or recognizing their need to pivot).

The Loss Leader Model:

In the loss leader model, these firms lure customers by showing savings in certain products and then mis-selling other products to make up for the loss of revenue. Many big wealth counters did this and still do this… And many platforms are still doing this. For example, they provide mutual fund products at zero commission to entice clients to use their platform. The firm then aims to monetize the relationship by encouraging clients to trade stocks, for which the firm charges brokerage fees, or by selling additional products like insurance, structured products, or loans where they earn higher commissions or fees. Mutual Fund Revenue is paltry compared to the revenue made by getting investors to trade. The key to success in this model is the ability to effectively cross-sell and upsell other products and services, making up for the initial loss of revenue from the mutual funds. These firms are so aggressive and there is absolute disregard for regulation by most firms. There is absolutely no care about the financial well-being of clients. Just show savings in direct plans and then just sell, sell, and sell…

This is the type of competition we face.

Here are some of the other business models.

The Hybrid Model:

Combines elements of the above models, allowing advisors to cater to a broader client base. Advisors might charge AUM fees for asset management and separate fees for financial planning or consulting.

The Family Office Model:

Provides comprehensive services for high-net-worth individuals and families, including investment management, estate planning, philanthropy, and more. This model emphasizes exclusivity and highly personalized service.

The Niche Specialist Model:

Focuses on serving a specific type of client, such as medical professionals, entrepreneurs, or corporate executives, with specialized advisory needs related to their professions or lifestyles.

The Integrated Financial Services Model:

Offers a one-stop-shop experience by combining wealth management with tax planning, legal advice, and other financial services, often collaborating with other professionals like accountants and lawyers.

By understanding the nuances of each model, you can align your services with the needs of their target market while remaining true to your own expertise and business objectives.

Each of these models requires different infrastructure, expertise, and marketing strategies. Financial firms choose the model that aligns with their strengths, market position, and customer base, often evolving their approach as the market and technology change. The digital transformation in financial services continues to influence these models, particularly in the increasing demand for personalized and accessible financial advice through digital channels.

What is your business model going to be? And how are you future proofing your business model?