The Do-It-Yourself (DIY) world of finance is much closer than we thought. On March 18, 2016, Securities and Exchange Board of India (Sebi), the capital market regulator gave more power into the hands of the mutual fund investor to make better decisions. Now funds will disclose information about the tenure of the fund manager as well as the holdings of the portfolio in the Scheme Information Document along with name, designation and remuneration received by all employees who receive an annual income of Rs 60 lakh or above working with the mutual fund.
But the killer blow comes in the part where the amount of actual commission paid by AMCs to the distributors or the agent will be fully disclosed in the consolidated account statement given to the investor. The commission will also include all the foreign trips or gifts or rewards received by the agent.
Abhimanyu Sofat, co-founder of advisesure.com, a financial advisory company feels that transparency is a good sign but investors will not look at numbers or commissions that agents are getting in good markets. “All these disclosures and salaries that fund managers are making will be ignored as long as the fund is outperforming. Advisors or intermediaries will face problems during bad market periods when funds under perform. And there will be some explanation that will be required from the financial advisor”, he says. He feels that the DIY customers are very few in numbers and the rest of the market needs advice.
The DIY models of Motif Investing and Betterment in the USA are in a position to service investors who want to do investment as a DIY model that exactly suits their individual profiles. Here people are ready to pay high fees as advice. Sofat feels that advisors in India will have to give a lot of value addition if they need to survive in this market.
But the biggest problem for the Indian mutual fund agent is not his low commissions but the high commissions received by insurance agents. Mutual funds and insurance companies compete for the same set of investors and traditionally insurance agents have always made more commissions than mutual fund advisors.
Their commission ranges from anywhere between 35 to 60 percent. But the bulk of the commissions for insurance agents are off balance-sheet items which include gifts and foreign trips. Now IRDA has decided to cut the foreign trips or all other items that are off balance-sheet but the 35 percent commissions received by insurance agents can go up significantly.
“There is a huge regulatory arbitrage that has been created in the system where insurance industry is at an advantage. Their agents get more commission and they come with the lowest possible transparency”, says Rajesh Krishnamoorthy Managing Director, iFAST Financial India, a platform for financial advisors.
His point is simple. From a customer point of view he welcomes the disclosures. But the fact that there is only one product with a high level of transparency while the other products like insurance and bonds have a long way to go. There the quality of the product is inversely proportional to the commission paid. What he means is that agents selling BBB rated corporate fixed deposits will get higher commission as compared to AAA fixed deposits or bonds. Insurance is one of the most opaque financial products with no accountability where insurance agents make anywhere from 35 to 60 percent in terms of commissions.
His argument is that Sebi’s proposal is on the right track but it is very important that other regulators follow on the same line as it will harm the overall market for financial products.
Krishanamoorthy’s argument touches a raw nerve for the mutual fund agent who has been selling a superior product at low commissions. And now when his fees are disclosed to his clients he is going to feel all the more insecure.
But then Krishnamoorthy also agrees that a fast moving regulator can also help the mutual fund agent to change his business model at a faster pace. Sebi wants the mutual fund investor to move to the direct plan and become an advisor to the new investor. Over a period the new investor will become a seasoned investor and he will move to the direct plan. If an investor who understands the basics of investing and cost structures in a mutual fund will eventually be in a position to get into a DIY model. Investors are learning fast and they will ride the DIY model faster than most financial advisors can imagine.
There is growing awareness amongst consumers about the huge commissions received by insurance agents and some of them are already questioning their agents about the commission fees. These investors want to take their finances into their own hands. They won’t mind paying for advice but they want to know the fees that have gone as commission. “There are people who will always pay for good advice; and in the present era of transparency, we are more than happy to move our customers to direct plans and advice them for a fee”, says Sofat.