Commission-free investing: an idea whose time has come

Over the last 2+ years or so, and especially over the last year, I have gained the reputation of being a IFA-hater due to my promotion of direct mutual fund plans, DIY investing, conflict of interest, SEBI regulations and fee-only financial planning.

I have been part of heated debates on direct plans and fee-only advisory in Facebook group Asan Idea for Wealth and lost friends and a bit of my health as a result.

With the benefit of hindsight, I can safely conclude that I have wasted time and energy. I should have kept my thoughts to myself and let father time do the job.

I should have known that the concept behind direct mutual fund plans is not something that one can stamp out or wish away. It is an idea whose time has come. There is no stopping it now.

Choices for commission-free investing are growing rapidly. I state below a set of facts and try to answer some unpleasant questions from a neutral perspective.

SEBI is talking about selling mutual funds in e-commerce sites (we will probably have 3 kinds of plans and 3 kinds of NAV -what a mess),

II Online distributors of direct plans (in exchange for a flat fee or percentage of AUM) are cropping up (once a month from what it seems!). These target a significant section of the population who want the benefits of direct plans, the convenience of switching funds anytime they want, with minimal paperwork and without multiple logins.

The main arguments IFAs make about direct plans are (1) no convenience,  (2) lack of professional advice and (3) lack of account statements (feeds) fromAMCs for direct plans.

The online platform addresses (1). CAMS and Karvy are becoming investor friendly by the day. One can update FATCA status online from their sites.  The AMCs are joining in too. More and more AMCs have made it easy for KYC compliant first-time investors to invest online with ease. AMC are well aware of the importance of direct AUM.

III KYC is the only step for which physics presence is essential. Now E-KYC is catching on.

As for (2) professional advice, enter robo-advisors.

IV Robo-advisory is catching on rapidly in India. Personally I am not convinced that this is a positive development. However, it is a development that cannot be ignored.

What is Robo-advisory? An algorithm (coded by the people who run the website) is used, after getting user inputs, to determine asset allocation for a particular financial goal, and/or suggest mutual funds.

Not all robo-advisors offer direct plans and those who do may either charge a fee linked to AUM (which is like trail commission) or a flat fee.

As far as I know the robo-advisory itself is free and the fee is only for the mutual fund portal offered. A country which relishes free lunch, would lap up any list the algorithm would dole out as “top funds to invest in”.

Perhaps robo-advisory is a good way to get started, but I am not too sure about its utility when it comes to reviews and de-risking the portfolio as a financial goal nears.  They are however a serious threat for both the IFA and financial planner in at least the big cities.

Getting clients to attend reviews is a big challenge for investment advisors. Many start with professional recommendations and begin to DIY.

Over the past few years, I have heard/read some seriously immature comments about DIY investors. Fact is, financial advisory can never be equated to medical advice or any other profession. It is the clients money and he/she can do what she pleases with it. As you can see there are decent choices emerging.

(3) The advisor who suggests regular funds receives the clients account statement. This is known as a feed. When direct plans were introduced many use the lack of feeds for direct plans as an excuse for not recommending them. Fact is, with consolidates account statements from CAMs and with software like Mproft, Perfios and Value Research to process them, this is no longer a valid excuse.

Read more: Portfolio management is possible without AMC Feeds!

Now with online portals for direct funds, it has only become easier for the fee-only planner to get account statements from clients.

V SEBI Regulations. SEBI has made it incredibly clear that those who distribute products cannot offer financial advice. Yet very few members of the advisory community have bothered to comply. Even among these, I know of several instances where a close relative is a distributor.  In fact SEBI has even cautioned investors not to deal with those who are not registered with SEBI as investment advisers.

SEBI should first regulate advisory at the AMC level because MF AMCs disregard SEBI Advisor regulations

Awareness about fee-only planners is increasing. More and more investors want to invest in direct mutual funds after paying for professional advice.

It is only a matter of time before those who refuse to comply will either be forced to, or face legal consequences.

Note: Automated (rbo) advisory is a grey area wrt to these regulations. They offer product suggetstions and yet (some of them) earn via commissions.

Is this the end of the line for distributors?

Hell no! Most investors do not realise that banks are the biggest threat to the retail distributor and even online distributors. Most of us tend to confuse strong social media presence with success!

So banks and online distributors will thrive because they have the reach, the means and the visibility. AMCs need them in order to survive.

I thnk retail distributors in big cities are in trouble. Young earners who are computer savvy and want everything online will lap up the choices mentioned above.

What should investors do? The choice of investors is also incredibly clear.

(A) Consult a fee-only financial planner and invest via direct mutual funds.

(B) DIY and invest in direct mutual funds either directly with the AMC or with one of these portals for a fee (preferably flat)

Commission-free investing is here to stay. It is an idea whose time has come.

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