December 12, 2016

Why I transitioned my Entire Client Base to Direct Plans

Anup Bansal
Co-founder and Managing Director, Mitraz Financial

Why I transitioned my Entire Client Base to Direct Plans

 

SEBI RIA & Mitraz Outlook

Quote from SEBI Investment Advisers Regulations, 2013, General Obligations and Responsibilities section “An investment adviser shall act in a Fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise.”

Definition of ‘Fiduciary’ – involving trust, especially with regard to the relationship between a trustee and a beneficiary. In simple words, a financial adviser and service provider should be on the client’s side rather than on the product manufacturer’s side.

It is in this context that the question “Why I transitioned my Entire Client Base to Direct Plans” needs to be looked at.

It is well-established that we humans are driven by incentives. Mitraz Financial setup its business model based on this philosophy. When we started in 2010, my partner Varun Girilal and I debated a lot on the model to employ that is transparent, open architecture and fundamentally conflict free. In 2010, there were no direct plans and commissions were primarily the revenue model for most of the advisers and distributors in the financial space. We not only ended up starting a fee-based practice but also built-in a mechanism where any commissions received on client’s account were adjusted in the fees charged to the client. This model ensured that Mitraz did not have any incentive to advise products which were highly remunerative for the company. We were aligned with client’s interest completely and hence we were a ‘fiduciary’.

In 2013, SEBI RIA regulations required us to change the model due to the key requirement of arms-length between Advisory and Distribution. We had to stop giving credit to the client for commissions. Though our advisory processes and practice of not getting influenced by commissions, – hence ‘Fiduciary’ – continued but there has been an element of doubt introduced in the model since then. This may be questioned by clients especially the ones who had experienced credit of commissions in the earlier model. So, we needed products which do not pay commissions at all hence removing the conflict of interest completely. Direct Plans is a move in that direction.

Direct plan vs Regular plan

My assumption is that the readers are familiar with Direct Plans so will not explain the concept. Direct Plans were introduced by Mutual Fund AMCs in 2013 so have been around for more than 3 years. Since the expenses, commonly referred as Total Expense Ratio (TER), are lower in Direct Plans due to the requirement of no commissions, the appreciation is higher. In Equity Funds, the Net Asset Value (NAV) difference between Regular and Direct Plans may be more than 1%. See below for a table and graph to illustrate the effect of 1% NAV difference over a long period of time.

Table_Mitraz Anup Bansal

Graph_Mitraz Anup Bansal

Albert Einstein said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it”.

Direct plans for Mitraz

Now, revisiting the question about why Mitraz switched to Direct Plans. Our compelling reason is to align our business model to client’s interest always. Earlier we were giving credit to the client for commissions then we had to change the model due to RIA regulation and could not adjust commissions in the fee charged to the client. Direct Plans remove the slightest doubt about conflict of interest as there are no commissions paid to us. We become ‘Fiduciary’ in a true sense. The benefit for clients is not only complete alignment of the advisory model with their interest but also the added value of higher returns on Direct Plans.

Mitraz was contemplating adopting Direct Plans for quite some time but could not do that as transaction data feeds were not available to the advisers. SEBI directed Mutual Fund AMCs and R&T to start sharing the transaction data feeds with Registered Investment Advisers earlier this year. This removed a major hurdle and paved the way for Direct Plans adoption. The other major enabler for Direct Plans adoption was the support of our Mutual Fund platform provider iFast Financial, India. If they had not taken the effort to make the Direct Plans available on their platform, then it would have been almost impossible for Mitraz to transition from Regular Plans. Mitraz changed the fee model from this Financial Year (April 2016) onwards to switch to Direct Funds for our clients. Our clients have been quite enthusiastic about this change in the business model and the transition to Direct Plans has been relatively smooth.

Caution for Direct plans

The Advisers who have been thinking of adopting Direct Plans need to ensure the following:

  1. Business Model that is not dependent on Mutual Fund Commissions.
  2. Client base who is either used to or amenable to paying fees.
  3. Platform or mechanism to buy Direct Plans and receiving transaction feeds for portfolio updates and actions.

In general, there has been a debate about RIA regulation and SEBI registration by practicing advisers. The combination of RIA license with Direct Plans satisfies the compliance requirement of being a ‘fiduciary’ to the client. It also helps convince a client that the adviser will not engage in any misspelling that is contrary to the interest of the client.

So get started on the exciting journey of advisory with Direct Plans!


12 Thoughts to “Why I transitioned my Entire Client Base to Direct Plans”

  1. It needs true guts to transform into Fiduciary. You are blessed. Your clients are lucky to have you.
    My best wishes and greetings to Mitraz.

  2. Avatar Bhargavi says:

    can you pl share a bit about how to get clients to pay fees, how to set the fee structure and also how to handle clients who do not pay the fees the following year – i.e, if you can talk about the marketing and administrative aspects of fee-based advisory, it will be helpful.

    • Anup Bansal Anup Bansal says:

      Hi Bhargavi, our experience has been that articulation of value being provided through the advice is an important factor for fee based practice. You can also show comparison of your direct fees Vs. indirect fees (through commissions) that the client pays. With Direct Funds a simple comparison may be

      Regular Fund Charges – TER – 2.25 % (Indirect)
      Direct Fund Charges – Direct Advisory Fees – 1.25% (Example) + TER – 1.25% + Platform – 0.25% = 2.75%

      So with additional 0.5 – 1% charges Client gets Advice on Mutual Funds. This is a Win-Win!

      Typical structures that may be set are Fixed, AUM based.

      A TDS kind of model for Fee helps the collection. iFast Wrap Platform helps us in this regard as they collect the fee every quarter from the investments.

      I am not too sure of the specific question about Marketing and Administrative aspects. You may call me to discuss that. Thanks!

  3. Avatar Balvir Chawla says:

    But what about the fees charged by the advisor and what happens to the difference then.
    I think that would provide the better picture

  4. Avatar Sachiv Nijhawan says:

    Very well written.

  5. Avatar ASHOK kr sahewal says:

    That’s great.

  6. Avatar Mohit Kumar says:

    Hi Anup Can u more Elaborate how u r charging fee from client? wat r ur fee ? wats charges of Ifast Platform charges.

  7. Anup Bansal Anup Bansal says:

    Hi Mohit, We are charging AUA based fee in the range of 0.5% – 1.5% depending upon the investment level of the client. Most of the fee is collected through iFast Wrap platform every quarter. Balance is invoiced to the client and paid directly by the client. iFast platform charges start from 0.5% and go down progressively to 0.1%.

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