Tell investors, advice is worth paying for

Do your prospects ask you why they should not go for direct plan? After all, direct plan returns are higher than regular plan returns!

An analysis MF performance data shows that for a monthly SIP of Rs.10,000 in a multicap fund, the amount accumulated at the end of a 5-year period through direct plan was Rs.13,888 higher than the money accumulated through regular plans (Source: Value Research). This means that an investor pays around Rs.2778 annually as distributor commission if he invests through the regular route.

We spoke to a few industry experts to understand what makes more sense for investors: Regular plans or direct plans.

An advisor - be it an IFA following distribution model or a fee only RIA - not only guides the investor in scheme selection, he also handles all the operational work. Pune IFA Amit Bivalkar, Sapient Wealth shares that be it updating KYC as per latest norms, minor to major transfer, inheritance transfer and transaction processes, an advisor provides a wide array of services to his clients. Moreover, with the recent revision in expense ratios, the differential between regular and direct plans is likely to reduce, subsequently; the excess return earned by direct plan investors will be lower.  

 “Advice is worth paying for,” says Ashutosh Bishnoi, MD & CEO Mahindra MF. While direct plan of a scheme will make more return than its regular plan, the excess return comes at a high risk, feels Ashutosh. An average investor needs guidance on scheme selection and handholding during volatile markets because incorrect scheme selection or an exit due to temporary underperformance could seriously affect investor returns. He feels that direct plans are more suited for sophisticated investors with deep market expertise.

Akhil Chaturvedi, Head – sales & distribution, Motilal Oswal AMC also has similar views. He feels that investors will earn these higher returns only if they can hold their nerve during volatile times and react sensibly. Since only a few sophisticated investors can do it, it is important for average investors to have advisors for achieving their financial goals.  

Mumbai RIA Suresh Sadagopan, Ladder7 Financial Advisories believes that the idea behind direct plan was to give investors the freedom to pay for advice and source product at low cost (RIA) or directly pay for product (distributor). Currently, only about 1-2% of the investors have the necessary market and product understanding required to invest directly. For the vast majority of the investors, it is ideal to seek some investment advice as investment products are complex and the cost of wrong investment decision can be steep. 

Considering an investor starts a monthly SIP of Rs. 10,000 for a period of 5 years, Value research has calculated the average returns of all the funds in each category.

Difference in returns between regular and direct plan of various equity-oriented schemes

Source – Value Research

Note - This amount may increase or decrease based on trail commission offered by individual funds.