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    Know your mutual fund adviser: Here's how you can judge a distributor or adviser

    Synopsis

    Few trust such advice because there is always the shadow of commission-focussed selling looming. There are advisers who give real, earnest advice but it’s hard for savers to figure out who is actually operating in this manner and who is not.

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    Those who are yet to take the first step will often never do so unless facilitated by a distributor or adviser.
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    By Dhirendra Kumar

    In the entire chain of mutual fund investing, from the asset management company which creates and runs the fund to the saver who uses that fund to invest savings, nothing is more central and yet more in flux than the entities who sell mutual funds to investors. As fashions have changed over the years, the term used for these entities has evolved from agent to distributor to adviser. There's a clear rise in the level of respectability that the three terms imply. There's also a set of Sebi rules which distinguish between advisers and distributors, even though the entities themselves can't decide which is better business.

    For investors as well as the sellers, the biggest change from the distant past is that it is possible to completely bypass this layer and interact directly with the mutual fund to invest. There's nothing unusual in this, as internet-based commerce where producers transact directly with the final consumers has become widespread in many industries. What makes mutual funds-and most consumer financial services-different is that a certain level of advice is an integral part of the product.

    In fact, it is not just a part of the product but is a precursor to it. Someone should ideally be giving you broad-based personal finance advice which should incorporate guidance on whichever type of asset is most suitable to you. In fact, that's pretty much the theory of how personal finance should work. However, you all know that there's a big 'however' in here. Relatively few investors trust such advice because there is always the dark shadow of commission-focussed selling looming above the advice. There are many advisers who give real, earnest advice but it's hard for savers to figure out who is actually operating in this manner and who is not.

    Interestingly, as with most contentious issues nowadays, Twitter has become a battlefield between various sides in this struggle. Over the last few days, I've been watching one little arena like this. There's an extremely popular Twitter handle called @dmuthuk, a financial planner named D. Muthukrishnan. From his tweets, it's apparent that he used to be a mutual fund distributor and while now he is mostly an investor in his own right, he has much to say about the way mutual fund distribution works, and very little of it complimentary.

    Bypassing mutual fund distributors and going direct saves about 0.7% per annum for investors, something that compounds to a meaningful difference over a few years. The question for investors is whether the distributor/adviser services adds more than that. There is no doubt that they can do so. In fact, as Muthukrishnan says, the key seems to be whether the adviser can cajole or inspire the investors to stay invested and go on investing in bad times. This is the opposite of the standard operating procedure of taking the investor on a grand tour of one risky fund after another. His advice on vetting an adviser is quite interesting. If someone approaches you to sell mutual funds, ask them how much of their own money has stayed invested in a stable fashion, say for five+ years. Ask for proof. This is actually very good advice. As Nassim Nicholas Taleb also recommends, the thing to say to a financial adviser is 'keep quiet and show me your own portfolio.'

    However, I have a small but significant caveat to add, one which is contrary to the general anti-distributor sentiment. Sophisticated and knowledgeable investors, or at least those who imagine themselves to be so, probably have no need for step-by-step advice. However, those who are yet to take the first step will often never do so unless facilitated by a distributor or adviser. Even if the advice is not the best possible, an overwhelming number of MF investors have become investors because of this. The first step is the hardest and at that point help matters.

    One of the problems of the new situation is that there's no viable business model left for getting the small investor into MF investing. That problem needs a solution, and immediately.

    (The writer is CEO, Value Research)
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    10 Comments on this Story

    Praveen Gorthi31 days ago
    First depend on advisors to keep a pool. Once you have sufficient corpus then change the game saying direct funds / low cost funds are good for investment. Now AMFI also advertises same way .. What a business tactic.. Ambani should also join the race now..
    Gerard Colaco31 days ago
    Do you really think you or anyone else, is capable of enlightening an investor how to judge a distributor? What are your credentials for this? Do you even understand investment, much less mutual fund investment?
    For years, you were tirelessly repeating that there is scope in India for active fund management, at the atrocious costs of 2.5% to 3% per annum for actively managed equity funds.
    All this time, the world shifted from active funds to low-cost, no-load, passively managed index funds. So, it was very entertaining to see you recently admit sheepishly that investors would do well to invest in index funds in India.
    And the poor goats who followed your earlier advice and opted for long-term investment in actively managed equity funds in India have seen fabulous underperformance across the board for more than the last five years.
    Suggest you read COMMON SENSE ON MUTUAL FUNDS by John C Bogle. If you have read it, suggest you read it again! If you've read it twice, read it thrice. If you've read it thrice..... it doesn't show!
    Brajendra Tripathy31 days ago
    Mercenaries like this man, milk mutual funds to run their own media houses and act like saints before investors. Hypocrit should ask himself whether he visits a doctor or thoroughly depends on telemedicine... Plz dont believe this wacko!!
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