I will come straight to the point. I think advisors are over obsessed with equity investments. They mostly believe that it is only equity which can create wealth in the long run. I do agree with this but partly. Over exposure in equity can be damaging too.

I find the following reasons why advisors promote equity.

• As an asset class, equity has historically offered high returns.
• It somewhat offers higher commissions / fee as compared to debt.
• It is a bit difficult to sell debt funds given other debt options available with clients.
• Debt is dull, equity is exciting.
• Equity helps increase AUM faster since mark to market is expected to be better than debt.
• Everyone around is talking about equity and promoting equity.  So advisors think it is the right thing to do.
• SIP is a wonderful product to take exposure in equity.
• Lastly, advisors are highly obsessed about increasing client’s returns though clients are mostly indifferent to high returns vs average returns.

Risks of going overboard on equity

• Skewed asset allocation of clients towards equity.
• Downside risk is pretty high. During bad times, client’s behaviour can overrule advisors conviction.
• Advisors are always bullish on equity. Advice can be compromised because of self bias.
• AUM of advisors can drop significantly in bad times.
• SIP builds AUM in the long term. Advisors burn out and leave profession.

Typically, advisors are in the AUM business. The more AUM they will have, their revenues will go up. Every new advisor is told that SIP will help them create a good AUM. I agree. But this happens over long periods. Usually, 5-10 years. By this time, many advisors burn out and leave the profession. Again, due to maximum allocation to equity, a downturn can play havoc.  I suggest keeping a balance of debt and equity in client’s portfolio as well as in the books of an advisors AUM. I strongly recommend advisors to sell debt funds. It helps increase AUM. It helps reduce risks. It helps getting higher wallet share of client’s investments. In this regard, I find selling STP (Systematic transfer Plan) can be a good option.

Advantage of selling STPs

• The base of STP is debt funds. Typically, an investor’s investment in debt is higher than equity.
• In the short term STPs can build reasonable AUM which can help an advisor sustain.
• It helps maintain asset allocation mix. SIP being in equity, STPs being in debt.
• STP AUM is more stable for an advisor and can run longer.

Even when advisors sell STPs, they intend to transfer funds into equity faster. While this can be a strategy to stagger investing into equity rather than lump sum, the real purpose of this article is to promote capital appreciation transfer to equity on a monthly / quarterly interval. It has a lot of benefits including comfort of clients that their principal is mostly safe in a debt fund. It works pretty well with clients. The concern of short term capital gain tax and exit loads is too little an issue considering the advantages of STP.Selling Rs.25,000/- worth of fresh SIPs every month can generate an AUM of around 25crores in 10 years at an average return of 12% pa. However, with the help of STPs an advisor can reach this figure faster.

If you see industry AUM, over 70% is in debt. If you see large advisors AUM, typically it is over 50% in debt. The message is clear. Sell more debt to increase AUM and get higher share of client’s wallet.  STPs can help an advisor do it.