13 December, 2015

Direct plans put onus on advisory

I recently read a small news item about sharing of mutual fund (MF) direct plan feeds with distributors and advisers. This one small step can, however, plays a catalytic role and change the way MFs will be bought.

Direct plans of MF schemes offer lower-cost investment options for investors as they bypass distributors. The lower cost can translate into better returns. But it also means no operational or reporting support from distributors.

Also, in direct plans, there is no adviser to offer counsel. This lack of advisory input can be detrimental, if advice is not accessed separately. Else, the investor should be savvy enough to understand the landscape and be able to make considered decisions.

Earlier, advisers did not have access to feeds of investments done in the direct mode. This created a hurdle in accessing advice. The investor had to send across all information on their investments every time, which the adviser had to work on further; a time consuming process. Hence, advisers were mostly not suggesting direct plans. While direct plans have been in existence since 1 January 2013, it was very cumbersome to invest through these as there was no intervention from the distributor and the investor had to go through the entire process herself. This meant doing all the paperwork for every mutual fund and then submitting it. Discrepancies had to be followed up and rectified.

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Many MFs have enabled online investments, but an investor still had to go to each site separately. So, if an investor was dealing with a dozen MFs, there will be a dozen user IDs and passwords. Online platforms were supporting regular plans, which were distributor-led. Direct plans were completely ignored on these platforms due to commercial considerations. Other platforms are emerging, but may take time to be fully operational with direct plans. Even today, MF Utility does not offer direct plans to investors online; only offline.

This small step of allowing access to the feeds to the distributor or adviser will remove one hurdle. Advisers can now get access to the data, offer advice for a fee while the client benefits from the lower expenses of a direct plan. When online platforms offer the direct option, there will be a transformation. But we need to wait for that.

But will the advice be unbiased? The Securities and Exchange Board of India (SEBI) had come out with Investment Adviser Regulations in 2013 to enable a class of advisers (Registered Investment Advisers or RIAs) to provide unbiased advice. It imposed several responsibilities such as higher education, experience, certification, reporting, compliance, record maintenance, audits and more, thus, effectively raising the bar. The regulation sought to avoid conflicts of interest, needed segregation of activities like distribution and advisory, high levels of disclosure and arms-length dealings.

It also imposed fiduciary responsibility on the adviser. Fiduciaries are those who put the client interest first. This is a sea change from the caveat emptor (buyer beware), which generally prevails in financial services. With the emergence of a true class of advisers, advice and product sourcing could be separated.

The problem till date has been that product distribution and advice were tightly bundled. Remuneration came from the product manufacturers and not directly from the clients. Distributors were representing the fund houses, rather than the clients. Direct plans unbundle distribution and advice. No commission is paid and so expenses charged are lower. With a direct plan, distributors would have to charge their fee for distribution and advisers for advice. This puts the onus of offering good services on the distributor and the adviser, and helps clients access better quality advice without having to pay over and above what they are currently paying.

It is wrongly believed that direct plans would mean lower costs for investors. It is only true that the charge deducted from the fund is lower. But investors would still need advisory and implementation services, which need to be paid for. Investors, however, can decide the level of services she wants and pay accordingly. So, if someone wants to do everything herself, the costs are lower. For most people, the overall costs would remain more or less the same. Only the way it is paid changes.

If we look at a portfolio consisting of direct plans (both equity and debt), exchange-traded funds and low-cost funds, the difference in charges as compared to regular funds would be about 1%, on an average. Based on services offered, the investor would now pay this amount or more or lesser to the adviser and distributor. That’s how it should be. In direct mode, the investor has more control over the level of services they receive and pay for. This is good for the entire ecosystem—the investor is assured of unbiased, client-centric advice from an adviser who does not receive remuneration from the product manufacturer.

Distributors can charge for their services in line with the services rendered-implementation, reporting and enablement.

Hence, the biggest change is in the way people are paid for services rendered. For some, this may be difficult to stomach. But in time, we will all start appreciating the advantages of this. Advisers and distributors having access to direct plans is a win-win proposition that will transform MF distribution and advisory, and eventually the financial product landscape itself.

Article written by Mr. Suresh Sadagopan, published in Livemint.com on 14th Dec-15

24 November, 2015

Perils of retiring at 45

Many detest their jobs. They want to break free at some point and do their own thing - be it strumming on a guitar, indulging in pet hobbies like gardening or travel; or simply not be on a silver string that their corporate bosses can tug. They want out of the rat race. But, things are not as rosy and straightforward as a person envisions when thinking about early retirement. For starters, the guitar strumming and gardening may look wonderful until monetary issues start looming large at some point.

Retiring early has two major implications. One, the period to accumulate the corpus is much lower. Two, the survival period is longer post retirement. Also, if one is retiring early, some important goals like children's education and marriage may not be over; and the person would need to meet these from the savings. This will turn out to be a huge problem, and therefore an individual would need much bigger corpus earlier in life to take care of the longer survival period and other commitments.

It may not sound scary on the face of it, but a look at the calculations might make you think twice. Anand is 35, married with two kids aged seven and three. Employed with an information technology firm, he is doing well for himself. His earnings are Rs 1.6 lakh a month, after taxes and deductions. The family lives in their own home, which is bought on loan and the outstanding amount is Rs 24 lakh. After expenses, equated monthly instalment (EMI) and other commitments, he is able to save about Rs 60,000 a month. His provident fund is Rs 12.5 lakh; is eligible for gratuity; and has investments of Rs 22 lakh, which includes fixed deposits, PPF, mutual funds, and equity shares.

His goals include retirement by 45, after which he would pursue his passion for golf, travel and music. The other important goal is children's education which he estimates at about Rs 50 lakh per child in today's value, for graduation and post-graduation.

To calculate where Anand lands up at 45, we assume that his income grows by 10 per cent every year; expenses go up by 8 per cent and investment returns are 9 per cent. At 45 he gets to a very decent corpus of Rs 3.66 crore. This includes PF and gratuity receivable, after adjusting for taxes.

But, children's education expenses will come after his early retirement. Suppose we provide a lump sum for that at 45; the amount required would be Rs 2.33 crores at that time. The balance corpus available will be just Rs 1.32 crore, which has to sustain him for the next 40-45 years. His expenses can be Rs 6 lakh a year at present if he doesn't have liabilities such as housing loan. A decade later, in the first year of retirement, he would need about Rs 13 lakh to live a similar lifestyle. Assuming his returns after adjusting for inflation, also called as real returns, is two per cent, the corpus will last just for 11.5 years, instead of 40-45.

The situation, however, completely changes if Anand works until 60. After factoring in the expenses for his children's graduation and post-graduation, he will be left with a corpus of Rs 23.5 crore. The expenses of the family would be Rs 41 lakh a year in the first year after retirement. The savings accumulated can last for another 83 years, assuming a real return of two per cent.

Hence, retiring early is not easy, unless one is willing to scale down expectations post retirement. Typically, there are other problems too, that one would face.

Cannot go back to work: The problem in retiring early is that if there is underfunding and one wants to go back to work, it would not be feasible due to age. In many cases it may not be possible due to medical reasons.

Also Read : Looking to retire early? Plan your time well

Commitments after retirement: This does not look like a problem at first. But if goals like children's education and marriage come after retirement, and the amount required for these turn out to be much more than what a person had anticipated, it can be disastrous.

Part time work: There is a lot of time on a person's hand, when he retires. Even when individuals retire at 60, they still have two-three decades to live. If a person retires at 45, it will be three-four decades. After the initial euphoria of retiring and getting out of the rat race, one may start having misgivings about one's decisions.

Many say that retirement at 45 does not mean they will completely stop working. They usually plan to take up consultancy assignments for money and to keep themselves busy. While that may be possible, it beats the idea of retirement. Also, it may be frustrating to work as a consultant and get paid small sums. Many, who have held positions of power and responsibility, would find these consultancy assignments a big come down and even downright demeaning.

An early retirement once put to action cannot be easily reversed. The joy of retiring early can easily become a millstone around the neck, due to money shortage and other reasons.

Rather than taking an early retirement, one can look at sabbatical of one or two years to pursue hobbies and interests after planning for it. Else, a person can take up a job, at a lower pay, which can help to pursue his or her interests.

An early retirement once put to action cannot be easily reversed. The joy of retiring early can easily become a millstone around the neck, due to money shortage and other reasons.

Rather than taking an early retirement, one can look at sabbatical of one or two years to pursue hobbies and interests after planning for it. Else, a person can take up a job, at a lower pay, which can help to pursue his or her interests.
The article written by Mr. Suresh was published in Business Standard on 21st Nov-15

05 November, 2015

Good advice can make all the difference

Everyone worries about their tomorrow and want it pan out in a certain way. This is because the future we dream of is not just for us, but also for our families.
Aspirations build up over time, and we need money to support them. We work hard during our waking hours to live our todays and secure our tomorrows. We spend the prime of our lives—35 years or more—slaving away to ensure that our family goals are met. And what do most people do with the money they have made? Well, they just don’t bother about it that much, even though the purpose of earning money is to secure their tomorrow.

It is true that finance is not a topic that interests many people. It actually scares people, and most would want to brush it aside or postpone dealing with it until absolutely necessary. Most people do not want to go through the brochures, understand the product and all its features—it’s way too boring.
In the end, the hard-earned money is unceremoniously dumped into one scheme or another, to get it out of the way. Most people just ape what a friend or colleague had done with her money. And many times, they follow the ‘advice’ of a friendly agent. The agent scores as she fills up the forms, collects the cheques and gives receipts for tax savings. But during this whole process, the investor’s goals, the suitability of the product to the goal, the risk-return metrics inherent in the product or the risk tolerance level are even not considered. Such a decision is not expected to be aligned with the investor’s actual needs.
Isn’t it ironical that the money we spend all our waking hours earning is given such scant attention? Why are people not ready to hire someone to offer them good advice? One explanation is that either they feel they know enough to take decisions on their own or that they can simply ask their friends. The problem here is that the friend is equally clueless.
What about the ‘advice’ given by agents? There are problems here as well. Firstly, agents generally only have knowledge about the products that they are selling and their area of expertise, and not the entire gamut of financial products. Moreover, they are trained to sell products; the maximum that can be expected of them is that they offer products that are intended for the goals—such as a child plan. These agents are not trained to understand the financial goals of an investor, draw up strategies, study alternatives and advise on optimal strategies to achieve desired ends.
This is where financial advisers come in. They have the client’s interests in mind, and also know the subject well enough to analyse their situation, come up with alternatives and evaluate strategies to achieve desired outcomes and put together a portfolio to do precisely that. But if they do all of that, a lot of their time will be spent. Hence, these advisers will charge for their services.
The Securities and Exchange Board of India (Sebi) had issued Investment Advisers Regulations, 2013. This was done to ensure that there is a set of high quality advisers who are client-centric and can represent them, and will adhere to high benchmarks in terms of qualification and compliance. These advisers can only collect fees from their clients and not have any other source of income so that there is no conflict of interest. This focuses their efforts and makes them work solely for their client’s benefit. They are expected to assume a fiduciary responsibility. Fiduciaries are those who put their client’s interest ahead of everything else, including their own.
Such advisers will charge a fee for their services. Therefore, investors at large have access to unbiased advisers who can be relied upon to do what is in their best interest. However, the fee bit is troublesome to many, as they have never paid for advice. They pay indirectly (which they know). What they are hesitant about is paying a fee directly.
But depending on product sellers for advice can be costly; much costlier than the fee paid directly since what is sold may be a high-expense product. Worse, the product may not be suitable for the person in terms of risk-return, liquidity, and tenure. Having such a product could lead to not being able to achieve goals, coming up short or mismatches on various fronts. Hence, free advice can turn out to be quite expensive, in more ways that one.
If one wants proper advice, one needs to pay a fee for it. And since a fiduciary puts her client’s interest foremost, the investor can have clarity and peace of mind as she can be sure of the direction she is going in.
Most good things in life cost money; you can add good financial advice to this list.

This article is written by Mr. Suresh | published on livemint.com on 5th Nov 2015

21 October, 2015

TV programs coming in fast and thick!

Dear Friends,

Suddenly there has been a flurry of activity in terms of my participation in TV programs. God has been very kind indeed :)

I did two shows in India Today TV some time back and again about a month ago. I'll be doing one more tomorrow.

Also, did a show for ET Now in the past few weeks. This show was interesting in that it had an audience and there was participation from the audience and Q&A sessions too, which I found to be a welcome diversion & hence enjoyable. For the first time, I saw about five cameras recording the show!

India Today TV program link -


ET Now program link -

I have just participated in what is a very important program ​with NDTV. Recording happened yesterday.

This program is called The Big Fight. Most of you might have seen this program which can be virtually on any subject. It's mostly anchored by Vikram Chandra.

This program is on What to invest in this festive season. The panelists apart from me were - Niranjan Hiranandani ( CMD, Hiranandani Constructions ), Ramdeo Agarwal ( Jt CMD, Motilal Oswal Securities ), Sanjeev Agarwal ( CEO, Gitanjali Exports ) & Gulam Zia ( Executive Director, Knight Frank ).

The sets were elaborate with a plethora of arc lights and again multiple cameras. Felt like Shahrukh Khan, being in the arc lights!

The seating was on shallow chairs - it looked like big fight panelists were wantonly put on the edge, during the program! There was an audience for this program. Questions & interactions with the audience was there - eminently moderated by Vikram.

I thoroughly enjoyed participating in this program, which I would rate as the biggest in my career so far, on scale & prestige. The program is going to be aired on a Saturday before Diwali ( mostly 7th November ). I'll inform you of the exact schedule when I come to know about it.

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