Talking Point. An alternative model for MF expenses

SEBI’s discussion paper on investment advisory came in October to create a robust investment advisory and financial planning community.

Towards this objective, SEBI wants all mutual fund distributors, accountants, legal advisors/estate planners, pension consultants offering incidental investment advice or financial planning to register as an investment advisor with SEBI within three years of the issue of the regulation.

So far, the experience towards this objective has been dissatisfactory with only 2,500 practising financial planners in India and only 500 registered as investment advisors under 2013 SEBI regulations. Currently, retail investors are served primarily by 45,000 mutual fund distributors.

Today, there are five crore investors in India. We need at least 250,000 qualified advisors in three years to ensure that Indian retail investors are never denied access to quality advice.

Most importantly, it is all about investors’ perception of value addition by the advisor and the price he pays for it.

Globally, in the financial planning profession, charging a fixed fee is an uphill task as it has low accountability for the outcome. Investors usually prefer a variable performance-linked fee.

People who register as investment advisors will never add value to the investor if they use regular plans of mutual funds, as they have distribution, incidental advisory, and servicing costs built in.

If they charge additional fee, it will also tantamount to duplication of ongoing fee, which won’t be acceptable to the investor.

Investment advisors currently end up using direct plans offered by mutual funds, which are originally meant for a handful of qualified investors who wish to go directly to the mutual fund without the intervention of an intermediary. Neither is the difference in pricing of direct plans and regular plans adequate to interest the investors nor do the distributors aspire to upgrade themselves as investment advisors. As an example, a mutual fund distributor is able to earn a commission from the mutual fund on a regular plan which is much higher than the fee that an investment advisor is able to charge on an AUA linked fee, even after seeking investors’ permission to invest their funds in a direct plan.

This is because the expense ratios of direct plans are still reasonably high as asset managers like to load up the cost of servicing the direct investor (infrastructure, people, technology) into these plans.

Introducing an advisory plan in mutual funds can be one of the ways of building a robust investment advisory profession.

The asset manager will simply charge a fund management fee, which would be comparable to an institutional plan.

We believe whichever country has seen the robust development of an investment advisory has introduced an advisory share class, as it is known in the US.

SEBI could also undertake a nationwide public awareness campaign educating investors on the benefits of dealing with a professional investment advisor.

To raise the professional standard of investment advisors in India, they can be awarded a rating by an independent agency, which would illustrate to the investor the competence/skill level of the advisor. Digital media can be used to connect with the youth and showcase them the bright prospects of building a career as an investment advisory professional.

India has the potential to create a large, successful investment advisory community. But, sending retail investors directly to asset managers without proper independent advice is too dangerous and not an option really. Hence, the only solution is to create an ecosystem for building the investment advisory profession and encouraging the existing set of intermediaries to voluntarily shift to the advisory model.

The writer is Vice Chairman & Managing Director, Bajaj Capital

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