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MF News Direct plan investors eventually come back to advisors: FIFA - Final Mile study

Direct plan investors eventually come back to advisors: FIFA - Final Mile study

The study finds that many investors prefer compensating their advisors through embedded products.
Nishant Patnaik Feb 13, 2018

A study on investor behaviour sponsored by Foundation of Independent Financial Advisors (FIFA) and carried out by Final Mile, a behavioural research company, finds that direct plan investors eventually come back to their advisors once they encounter complexities in mutual fund investments.

The study examined the willingness of investors to pay for advisory services. “In a cold state (i.e., not in the investment decision-making context) an overwhelming majority of investors preferred to invest directly (cheaper option) rather than invest with their advisor/distributor. In a hot state, (i.e., in the investment decision-making context) their preferences reversed and an overwhelming majority chose to retain their advisor/distributor and compensate for the services,” the study found.

The study said distributors need not panic when/if the customer opts for the direct option; while experiencing the inevitable difficulty in choosing mutual funds and performing transactions the customer is likely to return. “When customers evaluate the ‘sticker shock’ in the context of investment decision-making, they are more likely to stick with the advisor,” the study said.

Another key finding of the study is related to the compensation structure of advisors. Though many investors understand that their advisors receive commission from AMCs, they do not mind paying their distributors for their services as long as such compensation is embedded in the product. “AMCs are sharing their profits with distributors. One advantage of this mental model for investors is that it eliminates the cognitive dissonance associated with fee negotiation from negatively impacting the affective trust relationship between the investor and distributor. This explains the preference for embedded products among retail investors in spite of the availability of the cheaper, direct investment option since January 2013,” the study notes.

However, when investors have been told to pay such a fee separately, the willingness to pay dropped dramatically. This is because the investor considers the advisor fee to be ‘zero’ in embedded products; it shifts from ‘zero’ to a more ‘salient amount’ in the fee based model, creating dissonance, and making the loss seem larger than it is when linked to the total amount invested.

This unwillingness to pay separately is compounded by the fact that advice is credence good, a service whose value is difficult to gauge even after benefiting from it. Hence, investors find it difficult to arrive at a fair price for advisory services, the study noted.

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7 Comments
Prashant · 9 months ago
That clearly means that direct plans are just to make money for AMCs and not let anyone earn in between but duoe the investors in the garb of saying that investors decide for their own money.

Shame shame shame
Chandrakant Ramanlal Patel · 9 months ago
Many investor's under impression that purchasing mutual funds from banks need not to pay Advisory charges as, we ask for professional services. They feels they purchased units directly, even banks promote there business by saying it's direct.I believed, Banks don't promote the funds on basis of investors goles, nor do they care about specified themes or any knowledge abouts investor's attitudes. We, advisors after long enough to build relation with investor to understanding the types of investors as well as investment. But due to misunderstanding of both plans ( regular & direct ), investors has to bears on real time of market scenario.
Anil · 9 months ago
As long as the fees of AMC, distribution expenses and GST are embedded in the NAV, no investor feels concerned about all these expenses . The problem did arise when two products are created of the same scheme and complex KYC and transaction standards are reset. From a huge basket of products its not possible for a small investor to select and execute a transaction on regular basis.

Can a patient be advised not to go to hospital or a doctor for treatment by making it available online and on website? Similarly Govt may save teachers salary by advising primary school students to study online?.

Such an absurd thinking of governance needs to be corrected in the interest of small investor, poor patient and a school student.
d D SADHANKAR · 9 months ago
Basically the idea of separating advice and distribution is a result of negative rather pervert thinking. Has anybody thought of separating doctor s diagnosis and treatment or engineers plan and execution. Simply lunatic.
Rampant Mis selling by Banks, LIC Agents and selling of other products under the garb of mutual fund (ULIPS) is by far bigger menace. Why these so called intellectual economists are silent towards them.Let their grand wisdom be utilized there.
Mansing Shamrao (Mane) Patil · 9 months ago
It is investors behavior they think that the Direct plan NAV is Little higher than regular plan NAV so they gate more return but they do not understand or ignore that a good adviser generate more return in long term by proper asset allocations and proper scheme selections. Secondly on service part they can save more on energy time and money by taking help from Advisors which can not be counted in money term. Day by day service part is gating more and more complicated due to various policy changes frequently. such as KYC change norms , Aadhaar linking, Loan against portfolio, De-mat ?Non de-mat exit load, .....etc.. ..like this many more operation factors hardly know the conman investors
Narayan Kini · 9 months ago
I have first hand experience in this regard. Most learned clients of mine who were running their portfolio directly for more than 3 years have come to me. As portfolio grows larger and gets cluttered, they tend to get confused and realise the need to have a trusted advisor despite knowing the cost involved in regular options.

I endorse the out come of this survey. Self medication some times work ...... not always !!
S T Patil · 8 months ago
Caption is misleading. I was constrained to become a Direct Investor on account unprofessional conduct of few Advisors which adversely affected my interests and furthered their personal interests. I am not going back to any advisor.
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