Reams have been written on the debate that started in early 2013 post the launch of Direct plans in mutual funds. The views vary from person to person depending on what is at stake for you on the subject.
If you are the manufacturer (AMC), the thought of getting direct funds is always exciting, whereas if you are a distributor (financial advisor), you are against the whole idea of direct plans. As an investor, the first reaction is wow – I am going to get it cheaper and save money but is this really good for the investor? The jury is still out.
For me the most important stakeholder in this debate is the investor. Why am I putting the investor on this pedestal? Because at the end of it, the survival of both the distributor and the mutual fund company depends on whether the investor is really getting benefits by investing or opting out of direct plans.
To analyze the merits and demerits, I am dividing the investors into the following categories:
Retail investors: A retail investor is an individual who buys and sells mutual fund units and cannot afford to hire a financial advisor for a fee. They are less informed and are more influenced by the news floating around. Because they cannot afford the financial advisors but definitely need guidance to manage their money. The two choices they have are either go to AMC directly and invest or go through a financial advisor. If the investor goes to the AMC, will the AMC be able to give unbiased advise and if the need be suggest to the investor to look at funds managed by other AMCs. Your guess is as good as mine. One of the basics of good investing is diversification and that gets completely defeated when there is a conflict of interest. Investing is not about fill it, shut it and forget it. You need to at least review once a year if not at a greater frequency. If the investor goes to AMC, will someone sit down and review the investment. Again, your guess is as good as mine. The best solution for this category of investors is the financial advisor who will advise the investor and will help diversify if required. Besides the advice, the investor will be able to review and service the client as well. Am I saying that the advisor has no conflict of interest? Like all industries, our industry will also have few black sheep with a very short-term agenda of making quick commissions. But with the regulator putting a lid on the expense ratio and commissions to distributors & advisors, the conflict has been resolved to a great extent. Also, the market forces will put those advisors out of business who put their interests ahead of the investors.
HNI investor: This category of investors can relatively afford financial advisors and many of them have people working for them to track their portfolios. Such categories of investors are better placed to take a call whether they should go for direct or regular plan as compared to retail investors. The amount of savings that they will get is substantially higher if they go for direct plan. However, if they do not have their own resources to research and invest, then they are equally vulnerable to the conflict of interest of the AMC. The way forward is to appoint a CFP or RIA or an advisor who has won your trust through his/her actions over a period of time.
Institutional Investors: This category of investors who are basically looking at deploying their short-term surplus till they find better use of it. Their main objective is capital protection and marginal returns. Being an institution, they have the necessary bandwidth of allocating the job to the treasury or the finance department to track and make the choices from the available funds. The quantum of investment is large in these cases and concentrates mostly around debt funds. They are best suited for direct plans.
My take: For an investor, there are merits and demerits for both the direct and regular plans. However, I think the advantages that an investor gets from regular plan outweighs the disadvantages that the direct plan brings.
- Direct plan:
- One saves a very small percentage of the total expenses ratio.
- No one to advice you on the funds to be invested.
- Conflict of interest as the manufacturer will always recommend own funds. You may miss out on other better funds.
- The amount of time and effort required would not be worth the absolute amount you will save on the direct plan.
- Direct plan will bring lot of administrative hassles.
- Regular plan:
- The financial advisor explains the multiple options available after understanding your objectives.
- The administrative hassles and time consumption is taken care by the advisor.
- The advisor can give you post sales service as he handles limited clients.
- Relatively lesser conflict of interest.
- Conflict of interest: If the conflict of interest is present both in direct plans as well as Regular plans, then how does an investor decide which plan to take:
- The key is to plug this conflict of interest.
- The regulator has already reduced the fees paid to distributors by AMCs. Gone are the days of high commissions and incentives for pushing a particular fund or scheme.
- The regulator should restrict the incentives like foreign trips/ contests etc. that lure many financial advisors to promote a particular fund. If at all such trips are launched, they should be based on the aging of the assets and not for short-term sales enhancing methods.
- Increase the trail fees and reduce upfront. This will ensure that the advisor’s interest is also aligned with that of investors. Currently if the investor’s objective is long term and the advisor’s vision is short term for earning higher commissions, there will always be conflict of interest. Plug this objective through long-term incentives and reduce short-term goodies for distributors and advisors.
Concluding remarks: Direct plans are good for well-informed and well- staffed investors whereas for retail and HNI investors, regular plan is the way forward. As an investor do you want to be “PENNY WISE, POUND FOOLISH”? The choice is yours as it is your hard-earned money.
Lokesh Nathany
Storyteller | Motivational Speaker | Trainer | Curator | Host | Financial Protection & Goals Champion | TEDx Speaker | Founder –
My Innings |
“Awarded 50 Most Innovative Storyteller of the year by World HRD Congress & World Storytelling Congress”
Mobile: 9052203070 and Email: lokesh@lokeshnathany.com
Disclaimer: The views expressed are absolutely personal and does not represent the views of any of the organizations I represent or am associated with.
