Advisor Speak
The biggest flaw in direct plans
Ashish & Manish Goel, Vista Wealth, Delhi


Ashish and Manish make two key points: (1) In the face of relentless media bashing of distributors and highlighting lower costs of direct plans, why is the MF industry through AMFI, not trying to restore a semblance of balance in media coverage, by highlighting the important role of a distributor in guiding investors towards sensible investing decisions? (2) Why is the pricing of direct plans being done in a manner that makes advised investors subsidize direct investors? Why are direct plans being made to look much cheaper when in fact they are not? Why should advised investors effectively pay for the entire direct sales and servicing costs of AMCs, when they are not availing the direct plans? The biggest flaw in direct plans is that the industry is being unfair to the advised investor - who is the person who brought the industry to the size it finds itself at today.

When we wrote our last article earlier this month on Wealth Forum (Click Here) on creating an ecosystem for a workforce for MF sales and distribution, we were appreciated by many for our positive ideas, but were also given feedback by some friends that we are always only writing with a positive stance, and don't comment on some of the negative aspects that IFAs are facing - the biggest among them being direct plans.

Direct plans are a big challenge, and the challenge will only get bigger. As distributors, we feel the pain of an unfair regime that has been thrust down upon us. This article is however not only about documenting the pain - but about finding solutions that can bring a level playing field back into the market. And, we are not just speaking as distributors - we are speaking on behalf of advised investors, who are being asked unfairly to cross subsidize direct investors, for no fault of theirs. Surely, the industry cannot treat one set of its investors badly, only to favour another set of its investors.

The pain of an unfair regime

Before we start on our main subject, let us share the feeling that we distributors have. There is a big problem with direct plans at two levels : they are unfair to distributors, and perhaps more importantly, they are unfair to advised investors. The number of advised investors in the country is many time larger than the number of direct investors. Yet, we think nothing of how unfair we are to them.

The entire spotlight - be it media, or regulator or AMCs or AMFI - is on distribution expenses and how much cheaper direct plans are, because distribution expenses have been reduced from them. There is a clear slant in all media coverage that portrays distributors in poor light, and it is indeed sad that no AMC nor AMFI has ever come out with a single statement affirming the value of distributors and their relevance in the mutual fund eco-system. If we are indeed as valuable to AMCs as we are told in private, why is AMFI not even attempting to talk to media and help them understand our role, and therefore seek more balanced media coverage? The industry remaining a mute spectator to distributor bashing by media is not a sign of healthy partnership.


It was heartening to see Mr. Brijesh Dalmia's article on Wealth Forum (Click Here) on 24 May 2015 which covers very valid observations which are generally felt by IFA's across India.

Situation on ground

We at DFDA have a number of IFAs who are facing the challenge from direct in their own cities, and who share their experiences in our forum. From what we can see, there are 2 issues - the physical challenge and the psychological challenge.

The physical challenge

The physical challenge represents the actual loss of business where clients convert existing holdings into direct plans, and where they invest fresh money into direct plans instead of continuing to give business to their existing distributors. That is very painful. Let me give you just one example from our own office: we have a client who we started a relationship with 10 years ago, with a SIP of Rs.1000 per month. Over the last 10 years, the monthly SIP has grown to Rs.80,000 and his portfolio with us grew to over Rs. 80 lakhs. Over these 10 years, due to constant interactions with us, he became very knowledgeable and well informed. Now, due to constant media attention on direct plans, he came to us one day and said that he wished to transfer all his AuM into direct plans because the annual savings were quite huge. He also pointed out how much more he will save in the next 10 years, if he were to shift now, as media was advising. For any distributor, to lose business from an established relationship, only because the product we are selling has suddenly become a higher cost alternative after the advent of direct plans, is very painful. To lose AuM that you accumulated over 10 years because even that is now available in a cheaper mode, is doubly painful. And, for us not to be either able to compete on price or not to be able to offer a cheaper alternative, is hugely damaging to morale. If a distributor tries to passback to remain competitive, he is violating code of conduct and can invite disciplinary action. If he wants his clients to invest in direct plans, he doesn't get data feeds, and therefore cannot service the client.

The psychological challenge

This brings me to the bigger issue than the physical challenge - which is the psychological challenge. Most distributors have lost some business so far to direct plans - but the damage to them is psychologically far greater than the physical damage of actual business loss as of today. When direct plans were introduced, we were told it will largely impact only institutional business - which we strongly disagreed at that time only. Please read our old article in Wealth Forum dated 23 August 2012 (Click Here). Its two years now since direct plans have been introduced, and what we are seeing is that they are making deep inroads into the HNI business as well as retail business.

The gap in pricing of direct and regular plans is only widening with each passing year, making our business less and less competitive, for no fault of ours. Media attention on direct plans and the widening gap is only increasing, and today, much of media attention on mutual funds revolves around how investors can avail lower cost options. This is heightening the threat perception in every distributor, as he doesn't know which of his clients is going to walk into his office today, with a copy of a media article on direct plans, asking for how he can benefit from them.

Insensitivity towards distributors

There is an immense feeling of betrayal that IFAs have - of being betrayed by AMCs, by AMFI and by the regulator. You introduce a cheaper option, but don't allow us to compete on price. We offer direct plans, but you don't allow us to service them because you don't give us data feeds. The pricing gap goes on widening, but there is nothing we can do to compete, unless we violate the code of conduct. You introduce convenient ways to transact through tech friendly apps and portals, but all of them carry direct as the default option. You allow investors to switch existing assets into direct plans, but don't allow the other way around.

Why due diligence is only for advised investors ?

When an investor comes to a distributor, the distributor is supposed to ensure product suitability, which means some form of risk profiling is to be done, on the basis of which appropriate products are offered to the investor. This is meant as a means of protecting investors against mis-selling, which is the way it should be. But, when the same investor walks into an AMC branch, suddenly we believe that he needs no protection. He discusses products with an AMC front desk person, who freely recommends schemes without any risk profiling, without any suitability test - but that is absolutely fine! An AMC front desk person has 50 schemes from his own AMC to sell, and can choose to sell any to this direct client, without bothering to establish product suitability. Why these double standards? And more importantly, why deny a direct investor a basic investor protection that he is offered when he goes to a distributor? Why does AMFI not mandate that the same due diligence processes be carried out at every AMC front desk, before any direct application is accepted? Is it AMFI's belief that mis-selling can happen only when a human being is employed by a distributor, but all humans employed by AMCs are incapable of such acts?

The feeling of being betrayed

Distributors on the ground feel that AMCs, AMFI and the regulator are completely insensitive to the issues that they are facing, and are turning a blind eye to the problems on ground. The psychological impact of this feeling is far greater than what the numbers currently show about migration of assets to direct plans. The feeling of being betrayed is very strong, and unless we see sincere commitment from AMCs to address some of these issues, this emotion will only grow stronger. AMCs must seriously ask themselves whether this is what they call as partnership?

The most unfair of them all : short-changing the advised investor

The most unfair aspect of direct plans is the manner in which they are being priced. This, to my mind, is at the root of the entire problem. If we want to restore some balance in the market, AMCs must correct this first. If we want to be fair to advised investors - who have helped build the MF industry to where it is today, the industry must first be fair to them.

Current Formula Direct ER = Funds TER - Distribution Expense

Correct Formula Direct ER = Funds TER - Distribution Expense + Direct Distributing Expense

The pricing of direct plans today is that you take the regular plan TER and subtract distributor commissions that have been debited to the scheme, to arrive at a lower TER, ex distributor commissions. The logic of this is that if an investor does not opt for a distributor's service, he must be spared the costs associated with that service.

Well, that's one part of the logic - and there are no issues with it. But what about the costs associated with attracting and servicing direct clients? Shouldn't direct plans reflect the cost of attracting and servicing direct clients - just as regular plans reflect the distribution cost - where the distributor is paid to attract and service his clients?

AMCs to look at their last 2 years and answer these questions:

  1. Haven't most of the large AMCs significantly stepped up direct sales headcount? Are those costs reflected in direct plan NAVs?

  2. Haven't most large AMCs significantly ramped up call centre teams and service teams to service direct clients? Are those costs reflected in direct plan NAVs?

  3. Haven't most large AMCs significantly enhanced their websites and web presence to attract investors? Are those costs reflected in direct plan NAVs?

  4. Haven't most large AMCs ramped up physical branch network and spruced up their branches to make them more welcoming? For whose benefit was this done : to serve the same distributors who were with you for the last 10-20 years or to attract a new set of investors who you hope will walk into your spanking new branches and give you business? Are these branch costs reflected in direct plan NAVs?

In addition to above points we want AMCs to open separate distribution branches (15 X 10 ft.) and put all existing branch expense to direct funds expenses along with publicity done via any mode including social media, TV advertising, hoarding, news paper ads etc. as distributors don't need these ads to support their business.

Why is a direct investor being subsidized by an advised investor?

The truth is that all these costs finally get into sales and marketing costs which are debited to the scheme, and which determine the regular plan TER. From the regular plan TER, you deduct distributor commissions to arrive at direct plan TER. Effectively therefore, distributors are cross subsidising the entire direct sales and service effort of AMCs, and are paying the price for it by seeing wider and wider gaps in pricing of both plans.

If an investor choses to go direct, you must waive off the cost of distribution. But, what about the cost associated with bringing him in as a direct client and the ongoing cost of servicing him as a direct client? Why should that cost not be borne by him? Why is an advisor's client being asked to subsidize a direct client? Is this fair on an advised client? If costs relating to direct business were properly allocated to direct plans, the TER of regular plans will come down and that of direct plans will go up. That will reflect costs according to channel chosen, with no set of investors subsidizing the other set.

Such a move will also bring fair play into the market. If AMCs are actually able to attract and serve clients at a cost lower than what they pay to us distributors, then let them charge that cost for direct plans - one that does not involve any cross subsidies. If their direct acquisition and servicing costs are higher than what they pay us, well, let it reflect in the NAV of direct plans. When an investor chooses a channel, he pays the costs associated with that channel. That was the logic of SEBI's decision - but that logic has been implemented in a hopelessly flawed manner due to inept drafting of the regulation and insensitive approach from the industry thereafter.


We are not asking for direct plans to be removed - like I mentioned earlier, there is a regulatory desire, which we must abide by. But, here are some measures that AMFI must introduce, if it is keen to address the immense feeling of betrayal among distributors:

  1. Set up a committee immediately to review pricing of direct plans, with a view to introducing guidelines that will allow costs of both channels to be correctly captured and appropriately reflected in the NAVs of regular and direct plans. AMFI must understand that every day of delay in doing this means that an advised client is being unfairly asked to subsidize a direct client. Both are clients of the industry. Both deserve fair play from the industry. And, at the cost of repetition, we must highlight, that it is the advised client who has helped build the industry to where it is today. The industry's first priority should be towards him/her.

  2. Take away the restriction on pass backs - allow distributors to use pricing as a marketing option.

  3. Allow distributors full rights to sell all AMC products - regular as well as direct plans - and give them data feeds for all sales. Let more distribution models come up, using this flexibility in product choice.

  4. Provide us distributors friendly technology solutions as mentioned below

    1. Support NSE CAMS supported MFSS/ NMF II which is paid platform and do not have direct option

    2. Help distributor on technology to develop application to easy investing online

    3. Make distributor friendly website which can route online purchase easily

    4. Application like myCAMS should be revamped ring fencing distributors interest or rights.

If AMFI takes quick action on these 4 aspects, it will go a long way in restoring some balance into the market place which has otherwise become an extremely unfair market - unfair to distributors and unfair to advised investors. Ignoring the unfairness will only aggravate the psychological challenges that we have spelt out and will increase the physical challenges of more business unfairly going direct - which means lower and lower distribution support to take mutual funds to every corner of the country. And, apart from lack of distribution support, AMFI and AMCs will do well to seriously think of how they will face advised investors when they ask fund houses why they should continue subsidizing direct investors.

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