Ladder 7 Financial Advisories offers financial planning services to individuals to achieve their life goals.
A holistic plan is drawn up after understanding the income/ expense pattern, past investments, their specific situation, the time horizon, risk appetite etc. Tax, Estate, risk management issues are looked into and built into the plan. In short, this is a complete plan which is focused on achieving the clients’ goals in the best way possible.
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
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.
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.
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