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There's a new business model in town - and it involves vilifying your trusty Mutual Fund Independent Financial Advisor (IFA) and espousing direct plans of Mutual Funds instead. And it's very dangerous.

For those who aren't aware, direct plans of Mutual Funds cut out the middleman (your Advisor) and give you a side route to invest "directly" into their schemes; in effect, saving you approximately 0.5 per cent to 0.75 per cent per annum of your money by taking away your Advisor's commission income.

Some of these new platforms are aiming to charge a very nominal fee directly from clients in lieu of the saved commissions. But it's likely that the quantum of fees commanded by these models will prove to be inadequate to build robust Advisory platforms that involve a Human Advisor interacting with their clients. In effect, these platforms will by and large, dispense "robo advice" - the efficacy of which remains suspect, to say the least. Ask yourself: if markets fell by 30%, and your robo advisor sent you an email telling you to "hang in there", would you?

While the cost saving certainly does warrant consideration, it's vital to weigh it side by side with what you'll be losing out on by taking the direct route. If you're a very savvy investor who is able to take rational, neatly evaluated investment decisions, direct plans would work nicely for you. If, on the other hand, you're a first-time investor or someone who doesn't understand equity and debt markets very well, they can be very dangerous. What's more, many these tech-enabled, unadvised platforms that are "selling" direct plans of Mutual Funds, aren't even precise in their calculations of the actual cost savings of going direct!

The President of a large AMC whom I met with recently, echoed this view; stating his concerns related to "unadvised, first time direct clients". In other words, if you're a first-time entrant into Mutual Funds, chances are you're investing for all the wrong reasons - short term, past performance being paramount. Hearsay being second. When you couple both these fallacious investment hooks with the fact that markets are already at an all-time high, there's a good chance that unadvised clients who are opting for direct plans of Mutual Funds right now (especially those going in hook, line, and sinker with lump sum investments instead of SIP's or STP's) are in for some serious heartache in the times to come. Many of these first timers are used to the passive comfort of FD's and traditional insurance products, and may end reacting impulsively if markets fall suddenly and tumultuously, as they've been known to do without provocation. Having lost money and having had a bitter initial experience, they'll likely become 'anti-spokespeople' for Mutual Funds. This does not bode well for the industry.

Ironically, many of these direct plan investors who believe it worthwhile to wring out the last half a percent from their moneys by going direct, seemingly have no qualms in handing out between 30 percent and 50 percent of their first-year premiums to their insurance agents. Cognitive dissonance at play, perhaps?

The recent NAV capitulation witnessed within some debt schemes of Taurus Mutual Fund further drives home the point that first-time investors require the support of a trusted Advisor, even when investing into seemingly low risk categories of Mutual Funds.

If you're a first-time investor (or an erratic one), make sure you aren't unadvised - the decision to go Direct or Regular is secondary, and depends upon what business model your Advisor chooses to follow. Whether through fees or commissions, your Adviser needs to make enough money to make advising you actively worth his or her while. Cutting out an active, human adviser who is entrusted with overseeing your portfolio in favor of free of cost (or near free of cost), off the rack advice could cost you very dearly in the long run.

"This article was contributed by Guest author, Aniruddha Bose, Editorial Consultant with BW Businessworld and was posted on www.businessworld.in.”

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