On Direct MF Plans, Ethics, Conflict of Interest and All That Sort of Thing

Published: April 12, 2013 at 2:11 pm

Last Updated on January 31, 2021

Scenario 1: A certified (certifiable?) financial planner tells his client: “do you want to invest in direct mutual funds? They may give better returns but did you know that this is only suitable for those who can choose and manage their funds on their own? You don’t need to take this burden on yourself, let me (continue to) do this for you”. (I can of course get a fee from you for investment advice alone but I want trail commissions from your investments too. Besides, if you go ‘direct’ I have to get the MF fund portfolio history from you and not from the AMC. This is too much of a pain for me analyze and advice). Bracketed sentence thought but not spoken.

Scenario 2: A certifi… financial planner discusses in length in his blog tax efficiency of certain debt instruments and how even small post-tax return differences can matter.  In his next post he covers direct vs. regular plans of MFs. He mentions in passing how direct plans can result in a return difference of about 0.4-0.7% each year and then goes on to discuss para after para about the disadvantages of investing directly.  Through his blog, needless to say, he is on a mission to promote financial awareness and literacy.

Source: Casey Wheeler Consulting

Let us look at them again:


Scenario 1: The certifi… financial planner A. True story? True enough story? Exaggeration? I will be happy to think so but scenario 2 worries me.

Scenario 2: The certifi… financial planner B. True enough story based on composite planner behaviour and quite disturbing, to say the very least. Here are few such articles (more can easily be found):

Lengthy process, but higher returns in direct MFs

Direct Plans are not a threat to genuine Financial Planners/Advisors

(registration required)

MF direct plan investment to have tax implications

Why is scenario 2 disturbing?

A certified financial planner has a very specific code of conduct and set of ethics to follow. These include:

  •  “….not place personal gain or advantage before the client’s interests.”
  • “not solicit clients through false or misleading communications..”
  • “…honesty and disclosure of material conflicts of interest.”
  • “Professionalism requires the Financial Planning professional, individually and in cooperation with peers, to …serve the public interest.”

I strongly believe one-sided articles by CFPs in which the disadvantages (to the investor) of going ‘direct’ are overtly emphasized, giving the impression that they are insurmountable are violations of the CFP code of conduct/ethics. None, repeat none of the issues mentioned in these articles are insurmountable.

A fee-based planner (one who gets a fee for planning and commissions from AMCs for MF investments) advising against direct plans is a blatant instance of conflict of interest.

Not trying to say everyone is doing it, but that enough people are. Few planners to their credit do encourage their clients to go ‘direct’. Incidentally Value Research Online has also joined in the tamasha. One day they advice: (Direct plans are the) Best mode of investing in mutual funds. The very next day their CEO (under pressure?) writes, Direct, Indirect or Nothing?, nearly reversing the stand.

What are the issues?  If investors go direct,

  1. fee-based financial planners will lose out on trail-commissions.
  2. fee-based financial planners cannot retrieve investor data feeds (transactions, redemptions etc.) from the AMC. They will have to get the information from the investor and work on it. This may take longer. Here is an extreme statement: “advisor will no longer have access to investor’s information and therefore portfolio reviews and rebalancing, shifting from equity to debt funds depending on goals, strategic asset allocation may not be possible.”
  3. intermediaries/distributors will lose business

What can/should planners do?

  1. The first issue is financial. More than 90% of planners are fee-based. So I would think there is a strong enough dependence on commissions for survival. Fee-based planners will have to charge a higher fee to the direct investor. Many have started doing this. A separate service for ‘direct investors can also be provided. Sadly no one wants to consider this possibility.
  2. The second issue is a non-issue. To say rebalancing may not be possible with a direct investor client is nonsense. To say this will cause errors borders on incompetence. Clearly mention to the client that it his/her responsibility to provide portfolio information. A fee can be charged for extra work put in by the planner to analyze the information from the client.
  3. I don’t have a business bone in my body but I would guess that sheer investor laziness (to learn), if not prudence to use (the distributors) value-added services will keep intermediaries/distributors afloat.

Of course a planner can increase the fee and inflate it each year to exactly offset his loss (clients gain) in trail commissions! On the other hand the client may not pay and the planner may lose him/her. Either way tough luck!

Of course many investors do not know how to choose a MF. Of course picking the right MF is more important than lower expense ratio. I always tell my students: Ignorance is not a crime. Staying ignorant is. In this case, I would think, encouraging someone to bask in their ignorance by lob-sided representation also is.

To say, ‘a new investor should go the ‘direct’ way’ is utter nonsense. Selecting mutual funds is neither rocket science nor brain surgery. Anyone with a little inclination can do it.  (Here is a step-by-step guide to choose an equity mutual fund). Direct MF plans offer a wonderful opportunity for any investor to learn.

 The REAL issue: Unfortunately very few people want to learn. Most want free advice, free service and great tax-free returns. Want to adopt a ‘fill it, shut it forget it’ approach to investing and at every opportunity want to hide behind their ignorance.

 What should investors do?

It is your life, your investments, your goals. If you don’t make the effort, read and understand investment options, who else will? Please remember MF investment is not a laundry service. Whether we do it ourselves, through a planner or an intermediary, we have no choice, repeat no choice but to learn and understand the nature of the investment. Using a planner or an intermediary like FundsIndia for convenience and their value-added services is fine, provided we don’t compare returns with a ‘direct’ investor down the line. The point is we must make an informed choice depending on our personal situation and not waver. Whichever way, lets make an effort to learn before life chooses to teach us a thing or two. Let us remember that she does not suffer fools gladly.

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