Since the post on, ‘What you need to know before hiring a financial advisor’, I have been bombarded by two kinds of emails/comments.
- Requests for sharing the list of fee-only financial planners, which is a pleasant and welcome surprise and
- About how mutual fund distribution is not necessarily a bad thing and how I just don’t get it! ‘It’ being the ‘business’ of financial advisory.
In this post, I would like to clear the air a bit before taking on the titular question!
Update: While the rest of this post is still relevant, it is important for readers to recognise that SEBI has mandated that distributors should only provide incidental advice about the products they sell. This means, they cannot offer goal-based investing or financial planning advice.
SEBI has also cautioned that investors should only deal with SEBI registered investment advisers. So ...!
I have nothing against mutual fund distribution. I just cannot stomach it when a financial planner does it. Hey, I am not alone. SEBI says so too!
Although I am a direct mutual fund investor and strongly encourage such an investment mode it is not because I dislike distributors or that they are of no use to investors.
I believe the direct route is the best way an investor can take conscious control of his/her finances. The extra returns are just the cherries on top an already tasty cake!
Mutual fund distributors are entrepreneurs. All entrepreneurs put their interests first. They sell what sells. They say what it takes to sell. Nothing wrong from their point of view.
From the customer’s point of view, their actions can be far from optimal. Please do not expect them, their friends in the industry and/or a typical personal finance blogger to bell the cat. That would be beyond naïve. (Do not be surprised if your favourite blogger turned out to be a distributor!)
Ask a distributor a dumb question and you are likely to get a commission-driven answer!
So there are things that one should expect from a distributor and there are things that one should not. There are do’s and there are don’ts.
If I think, or if a professional tells me that hiring a professional means, I can forget about homework, one of us is an idiot and it is not the professional!
So one needs to double-check every advice (medical/financial …). Whether it is prudent to invest time on constant double-checking or on DIY is a question, that each of us will need to answer on a case-to-case basis!
Before we begin, it is important to recognise that every advice that a distributor offers have commissions linked to it. A new purchase, stopping a SIP, redemptions etc. This is not necessarily a bad thing, but is important to keep in mind.
What to expect from a mutual fund distributor?
- I want a distributor to select good funds suitable for my investment purpose with a justification behind the fund selection.
- If my funds underperform, I need advice. Solid quantitative advice.
- Reasonable help with capital gains and taxation.
That is about as far as I can think! Sounds good? Sounds fair?
What NOT to expect from a mutual fund distributor?
In one phrase: financial planning advice!
- Do not expect distributors to select funds that match with the risk profile of your financial goal. In fact, even financial planners fail to recognise this sometimes and use risk profilers to gauge risk appetite!
If you do not understand why the risk profile of your goal is more important than your risk appetite, no one can help you! Remember the adage, garbage in, garbage out!
- Never ask a distributor, which is the best fund to invest in? This is a dumb question and you are likely to receive a commission-driven answer. Always ask for a short-list of funds suitable for your purpose. Take the list, review it yourself before choosing. An elementary understanding of risk and return is necessary .. eventually if not immediately!
Remember: Best does not mean high returns! Best means consistent good returns with low downside risk.
- Never ask a distributor, how much should I invest? This is a dumber question. Have a goal in mind, determine how to invest for the goal and you have the answer. Contact a distributor for mutual fund expertise and not for financial planning!
- Never encourage distributors to talk to you about NFOs! NFOs (open or closed-ended) are driven by commissions.
If gold does well, AMCs offer ETFs/FoFs and urge distributors to shove them down investors throats! Now that we have a market rally, everyone will encourage equity investing! Now ‘long term’ will again become 5 years! See any new gold funds these days?!
- Don’t have cash unattached to any financial goal lying around. Tag a goal to the amount, at once. Understand which fund category is suitable for you and then approach the distributor.
- There is more to mutual fund investing than returns and saving tax! If you think only about returns and tax, you will find yourself surrounded by clutter. Clutter that is commission-sensitive and time-sensitive (ELSS, double-indexation FMPs)!
- Don’t follow any advice blindly. If the distributor says your SIPs can continue ask for logical reasons with proof. Remember a distributor can lose trail commission and possibly part of upfront commissions if you redeem. So he/she may not have your interests at the forefront.
How to choose a fund distributor?
- I have interacted with a few pure distributors for a couple of years now. My experience is that those with a history of stock picking understand market volatility better. Those who deal with bonds and are conversant with bond returns and risk, understand debt funds better.
- Choosing an online distributor like FundsIndia, ScripBox, RupeeVest, ICICdirect, etc. seems like a better option to me. Along with convenience (assuming that is a key requirement), you can invest calmly with no pressure and take an informed decision.
- Never buy mutual funds from a bank! Need I explain why?! Unfortunately, there is more bad news on this front. Sebi wants AMCs to push distribution via PSU banks!
An interesting read: The inside story of mutual fund distributors
Sounds like a lot of work, does it not! It sure does. Whose money is it anyway?
Why not invest via the financial planner? Is it not more convenient?
Conflict of interest is often camouflaged as convenience. Which is why it is now illegal for planners to earn distribution commissions. Of course many of them have found ways to shift the earnings to a family member. If you are not repulsed by this, what do I care?!
Why not invest a little more time and DIY all the way? I am with you there … now that I have cleared the air that I am not against distributors!
Bottom Line: You will need to be in control and drive the conversation. You have a need and seek a suitable product. You know the kind of product to choose but need help in selecting one. A distributor helps with this. If you meet a distributor without a plan, he/she will offer you one –quite possibly better suited for him/her!