Are you losing your sleep over ‘Direct’ investments?

10 Mar 2014

Its a little over a year that direct plans have been in existence. Some fund experts believe that direct plans may result in the IFA community ceasing to exist, and have written recently about this prognosis. Rather than have outside experts comment on the impact of direct on the IFA business, we turned to an inside expert – the Straight Talking Brijesh Dalmia. He has seen how his own business has been impacted over the last year and has also interacted with numerous IFAs and understood the actual impact on them. Here is how he perceives the impact of direct plans on IFA business.

Recently, I was sitting with my family physician and we were having a casual discussion about new trends and how technology is shaping the medical industry. He said – ‘Robots are making way big time into surgery. New machines are making it so easy to diagnose illness. Medicines are now being sold online though with some restrictions’, etc. etc.

Excited, I went a level up and asked him – ‘What if tomorrow there will be websites which will ask patients to fill their illness in a questionnaire format and computer will search their database to suggest medicines to cure the illness of its user. These websites can do it for free or for a fraction of what you charge. If this happens, what will doctors do ? How will you earn your livelihood?’

The doctor laughed and said ‘What nonsense! If you are troubled with some ailment, you will seek a computer’s advice or come to me ?’

He went on – ‘Each illness is unique and patients want personalised treatment and physical check up. They will never take online advice and treat themselves. It may happen for some small and routine illness like cold, headache or stomach ache. Even in such cases, they would prefer an advice of an expert doctor. And if some patients do it directly, it won’t impact my practice since there are hundreds and thousands others who will still prefer to take my advice. Patients don’t mind paying a bit more if they get personalised advice, treatment and hand holding.’

Brilliant answer. What a conviction.

I could relate this incident a lot with what is happening in the mutual fund industry right now. A lot of IFA’s are concerned about the impact of ‘direct’ investments. They feel their business is at risk and they may have to search for alternative business. Media is also not helping their cause as they find several write-ups suggesting that ‘direct’ will one day take over the mutual fund industry completely and IFA’s will be forced to exit.

What Nonsense !!

Impact of Direct in the mutual fund Industry

Direct investments did impact but only those intermediaries who were mostly into liquid business having corporates as their clients. Most of the industry assets are in liquid and a high percentage of these assets are now in Direct. When you see the composition of total ‘Direct’ business in mutual funds it looks high but it gives a wrong indication since most of it is due to high composition of direct investment in liquid funds. It really doesn’t affect retail IFA’s that much.

Impact of Direct on IFA

Am I saying there will be no impact of ‘Direct’ on IFA’s ?

No, I am not saying that. All I am saying is that the impact will be minimal or not alarming at all, specially for IFA’s. Think about this. During the course of our business we anyways lose some clients because some clients die, some relocate, some redeem due to fulfilment of objective, some switch advisors, etc. Going forward ‘Direct’ will be one more reason why we will lose clients but it will not be a meaningful percentage of our business.

We simply have to provision the impact of ‘Direct’ into our business. So, let’s say you will lose 2 clients a year due to ‘Direct’. The solution is to add 2 more clients. Yes, when a client moves into ‘Direct’, he will move his existing AUM also (which was accumulated over the years through hard work of an IFA). It will hurt but one has to make a bit more effort to replenish it with fresh business. If you think it is easier said than done, answer this – ‘How much AUM did you lose since the beginning of direct investments. In most cases, it would be less than 5-10% of aum. This is not significant.

The Brighter side

The tendency is always to look at the negative side. Why not look into the positives that ‘Direct’ brings in.

  1. Many IFA’s feared that trail commission on mutual funds may go away. My sense is that trail is going to stay and stay for a long time. This is because an investor now has an option to go direct or go through a distributor. If he does not find value by investing through a distributor he can always move to a lower cost structure by going though the ‘Direct’ route. Since this choice is there with investors now, there is no need to do away with trail commissions.
  2. We are also witnessing an environment where AMC’s are beginning to offer higher trails depending upon the quality of business. Even a 10 bps increase in trail can offset the loss due to some clients moving direct. Don’t you think this is a big positive?

Investors need many products / services

Consider this. An investor needs various types of services. He also invests in many different products other than mutual fund – like life insurance, general insurance, post office, fixed deposits, bonds, stocks, etc. An investor does not want to deal with several distributors for his needs. Mutual funds constitute just a portion of his total investments. Investors also need day to day servicing on various issues. As far as a distributor provides him good services and deals in multiple products, the impact of a little higher cost in mutual funds will not be much for him and he may like to continue with his existing advisor / distributor.

Ask Yourself

How many of your investors even spoke to you about ‘direct’?

How many clients (or AUM) you have lost in the last 1 year due to ‘Direct’?

If the answer is 2% or 5% or 10%, it’s not much. Why are you concerned? However, if you have lost more than 20% or 30%, you really need to sit back and think if you have a good relationship with your clients or not. Are you providing proper solutions to your clients or not? Anyways, there are not many IFA’s who have lost more than 5-10% of their clients or AUM due to ‘Direct’.

For IFA’s 0.50% is a lifeline and so we are concerned that direct can eat this lifeline, but for investors 0.50% is not that big. They don’t think it that way. Yes, 0.50% over 10-20 years can make a difference in returns for the client but there is so much service requirement, advice requirement, hand holding requirement without which most clients will find it difficult to travel the distance. Clients consider the value they are getting from their IFA’s rather than saving 0.50% cost.

Finally,

Don’t lose your sleep over some newspaper articles or views of some experts who simply have to say or write something because they have to write every day. It’s your life, it’s your business. As far as you have control on your business, you are safe.

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