March 13, 2013

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

Lovaii Navlakhi
Founder & CEO, International Money Matters Pvt. Ltd

Financial Planners/Advisors please answer these questions for yourself before you get on to the article

  • Has your client started asking about the Direct Plan indirectly?
  • Or has he asked you the benefit in investing in mutual funds through you when there is a direct plan option which offers him the same mutual fund with a better return?
  • Or is he unaware of this option altogether?


Whatever your answer to this, do you know the implications of the Direct Plan and the benefits it has for your client?

Investing directly through the AMC with no intermediary has been possible since 2007. In those days the benefit of investing through a Direct Plan was that the investors did not pay entry loads. As you know the entry loads were mainly the costs that an AMC incurred on paying commission to the intermediary community – distributors, agents, banks and independent financial advisors like us, which the AMC used to pass onto the client in form of entry loads typically 2% to 2.5% on equity funds and lower for debt funds. Hence logically when an investor is coming to the AMC directly these costs are not there and hence an AMC should not be charging the client.

From August 2009, entry loads for everyone was abolished and the distinction or benefit between direct route and intermediary route was no longer there.

Now from 1st January 2013, this distinction has come back.

AMCs have been typically charging distribution fee, in the form of trail fees of 0.30 to 0.50 per cent a year (on occasion higher), which comes out of the net asset value irrespective of the mode of investment – direct or regular through an intermediary. It is unfair that direct investors be charged this annual fee and that has been remedied now by SEBI. According to SEBI’s directive, AMCs will offer the direct plan with a NAV that is separate from the normal plan’s NAV as the expense ratio of the Direct Plan is lower than regular plans which are sold through distributors, agents and advisors.Direct PlanSo any investor who wishes to deal directly with the AMC without any intermediary can do so through the Direct Plan at a lower cost and thereby maximise his return.

Industry estimates put the difference in expenses of the two plans – direct plan and regular plan anywhere between 0.5% to 1% p.a. for equity funds, 0.1% to 0.4% p.a. for debt funds and 0.05% to 0.15% p.a. for liquid funds. Hence Direct plans are likely to give a return higher by that much year on year when compared to regular plans; and with compounding over a long period of time, this difference could be significant

Is this benefit big enough for clients to want to forego your services?

Certainly yes – if your client is a large corporation, company or a bank with considerable funds both in equity and debt schemes. Such types of clients usually use liquid mutual funds to park their surplus cash. As such investments are high in value; even a few basis points reduction in costs makes a difference to the overall returns.

A number of such investors have already shifted to the direct plan facility preferring to hire/employ someone with knowledge to recommend schemes rather than go through an advisor and pay for his commissions.

But for retail investors, going the Direct route is advantageous only if they are financially savvy, have the time to research schemes, keep an eye on the markets and take timely decisions. After all, getting returns on mutual funds is not just a function of expense ratios. The selection of the scheme plays a very vital role in the same. If an investor doesn’t have the expertise, skill or knowledge to be able to select a scheme that has been consistent in giving good returns and is suitable to his objectives then the lower expense ratio is not going to be of much use when his returns are poor.

Further, the service that an investor was getting from an advisor by investing through him, will no longer be available. The advisor will no longer have access to this information and therefore data quality checks, portfolio updates and reviews, redemptions, capital gains calculations and other such important information cannot be maintained, updated or provided to the client. However it is possible for the client to forward his investment details and the advisor feeding these details manually but it would be very time consuming, cumbersome, costly and a fraught with errors process.

Another significant hindrance to an investor going solo is the inconvenience of dealing individually with each fund house. Unlike stocks, mutual funds do not share any common platform where investors may transact and monitor their investments. So to keep track of each investment with a different fund house, collating the data manually will be quite painful a task.

Thus it is in the benefit of your client to stay invested through you rather than opt for direct plans. So you should bring it up with him in your next meeting and tell him why it makes more sense for him to continue with you.

However, all things said and done, this is a transitionary phase. Ultimately, we are moving towards a fee based model as at some point in the interest of the investor the business model will be all open and transparent with focus on quality of advice and service provided by our community.  You can face the music with a morose face, or get up and dance, auntyji!


Authored by,

Lovaii Navlakhi

Founder & Managing Director
International Money Matters Pvt. Ltd

25 Thoughts to “Direct Plans are not a threat to genuine Financial Planners/Advisors”

  1. Pattu says:

    Retail investors can go the direct way and still consult a planner regarding investments. I would expect a 'good' planner to advice precisely this. It is the obligation of a dutiful planner to recommend any move which will be benefecial to the client. No point talking about financial literacy otherwise. But then again I am being naive. One has to consider the differences between a fee-only planner and a fee-based planner.

  2. Aditya Karnik commented on Facebook :

    In fact I look this as an opportunity. If one has HNIs, ultra HNIs clients or SMEs, MSMEs (For liquid plans) then by suggesting direct plan and making them aware of the lesser cost, one can charge fees. I don't think anyone would mind me paying if I am keeping his/her interest above everything else.

  3. business_lnk says:

    The only reason for going to Direct Plans is "GETTING MORE RETURNS" Once you break this by adopting non traditional plans like BLTP – Business Link Transfer Plan which will generate returns more than SIP / STP [which are the only plans can be adopted by retail investor]. and will convince the Investor that you can give better return than Direct SIP/STP.

    BLTP is an Investment Mechanism runnint just like STP but at Distributors end[Running on fix date of every month as we do in STP].

    In this Mechanism Software will tell you how much is to be transfered from debt to equity fund on BLTP Date.

    Return differance is higher by 1.5 times as we generate in SIP/STP.

    You need not to wory about Clawback of STCG at client end because this plan is design in such a way so you will not face any Clawback or STCG  [which is the main hurdle in case of PE Based Asset Allocation where you are facing huge Clawback up to 88% of your Income].

    In this Plan Both Investor and Distributors are in win win situation.

    Investor will geberate Highest TAX FREE Accumulation and Distributor will also Earn his upfront income almost 2 times compared to SIP/STP in longer duration.

    For more details you may go to BLTP Product Information

  4. abhinav0115 says:

    Thanks to Mr. Lovaii and Network FP for this extremely informative article. After this new development, I individually reached out to all my clients and informed the pros and cons of going direct. 

    I will completely go with the views expressed here. Direct plans, though better on returns, do present a difficulty to ordinary investor in terms of managing paperwork, tracking performance, redemptions, etc. Even when a person signs up with online platforms like Fundsindia, the ease of convenience in transacting weighs several times over a few percentage points saved by going direct. 

    But all said, this is a great initiative by SEBI and remains to be seen how many investors opt for direct plans. As a financial planner, I think its my duty to inform clients of this option for their investments with me, and educate them on the pros and cons that come with direct investing, and then leave the choice on them.

  5. jaishirali says:

    Most investors still flinch at paying fees for advice and this fee cannot be related to the investment amount. An investor would take advice supposedly for Rs 50,000 and extrapolate it to a direct investment of Rs 5 lakhs or some higher amount, whether that decision is good or bad. We seem to be to keen to imitate Western economies with mutual fund penetration of over 60%, when our figures are at one – tenth or less of that amount and folios are getting emptied with every passing day. I agree with Lovai that we have to live with circumstances, but given the constantly changing rules which make it seem that the regulator is running this business, I would not be surprised if advice fees are capped or tinkered with, sooner or later. This seems to be one business where the customer cribs non-stop, even if he is fleeced every day by his vegetable vendor !

  6. Pramod Bajaj says:

    I won't mind offering direct plans to my clients which will be win-win situation as I can demand higher fees from clients. However AMCs are not providing Data Feeds to Distributors for Direct plan and in the absence of which it will be difficult to serve those customers. I strongly feel that AMCs should change this policy and start providing Data feeds to distributors irrespective of the plan type.

  7. Peter Hamp-Adams on Linkedin commented

    I am not sure where the figures lead to – apart from the obvious conclusion that advisers are not necessarily being paid excessively in India – but that is probably a gross oversimplificaiton on my part! But I confess that I lack sufficient in depth knowledge of your marketplace to be a source of wisdom for the reader. So if I may I would rather ask another question. Is the product provider paying the adviser for his advice to the client?

    Where advice is tied to the sale of a product then there is a difficult road to follow for the adviser. Its called a potential conflict of interests. The marketplace has its own way of determining equity as between clients and what they pay – where the client pays the adviser. if I am rich I can pay for expensive advice – but as it is socially desirable to encourage people from all economic groups to self assist their provision for retirment or family protection then the marketplace should provide a lower entry cost option – which is destributed "off the shelf – and with very few options"

    There the product provider can pay for his distirubtion by paying the adviser a salary – provided its not going to lead to client impoverishment – due to penalties etc. But like I say perhaps I have missed the point of your posting due to lack of knoweldge on my part!

  8. Brijesh Upadhyaya on Facebook commented

    Absolutely right its just one more option. Investor need handholding from financial advisor to make right deicision

  9. Nothing to wrong with direct plan. Ultimately planner/advisor get the fees on respective advise/plan. There will be only problem in servicing part. Always client to bother regarding statement on time of review.  

  10. Nothing to wrong with direct plan. Ultimately planner/advisor get the fees on respective advise/plan. There will be only problem in servicing part. Always client to bother regarding statement on time of review.

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