Coin is the largest direct mutual fund platform in the country, launched about 18 months back with over Rs 3500 crores of investments on the platform and tens of crores of Rupees as commissions saved. While this is a moment for us to celebrate, I wonder if there are potential side effects of direct MF on the future of MF industry. Putting down what was running on my mind.
Make no mistakes, direct plans are the best thing to have happened for those who take investment decisions on their own. It fits very well into what we are trying to build as a business - the best possible place for people with the intent to invest, execute or learn how to. But wait, how many such people are actually out there in India? Must be sounding like an oxymoron coming from me.
Indian behavior when it comes to financial products is very weird. We bargain, research, and look for deals wherever possible, but as soon as it is about financial products, we believe in what is sold to us. Maybe we believe because we are sold greed, make grand plans of what we would do with the ROI (Return on Investment), and then maybe psychologically don’t want to take the effort to see if it is really true or not.
I guess we will all agree that financial products in India are sold and not really discovered - sold by the Insurance agent, Bank manager, MF distributor, wealth manager, investment advisor, etc. We would all also agree that what is sold the hardest is usually what earns the most revenue for the person selling. One of the reasons for the popularity of mutual funds and Insurance policies over other products is because distributors, IFAs (Independent financial advisors), insurance agents, etc saw a sustainable business model selling them and earning through upfront and trail commissions for as long as the client is invested. The best bit about these products are that client doesn’t really get to know how much was paid as commissions (yes it is on the statements, but <5% ever read those statements sent on email).
This is also the reason why ETFs, Government Securities, SGB (Sovereign Gold Bonds), Corporate Bonds, NPS, term insurance, etc haven’t gained popularity while being great products - they don’t yield as much revenue to the person selling them.
AMFI (Association of mutual funds in India) has said that over Rs 7000 crores was paid as commissions in FY 17/18, a majority of that through equity mutual funds where Indian retail invests. Even though their data says that there has been a shift to direct from retail (around 16% of AUM in direct), I am guessing this would be an insignificant number as this shift would likely be from a small group of wealthy Indians who have access to advisers. And we all know the wealth disparity in India, so the AUM data showing the shift may not really be the correct indicator. Most retail would still be in regular plans if I’d to fathom a guess. But this might change with the advent of the likes of Paytm money, ET money, and others with deep pockets who will go out and advertise that firstly there is someone who makes money off your investments and that you can get rid of that and save by going direct. The bargain hunting retail Indian is bound to question the person who sold the mutual funds if it is direct or regular, and if regular, how much money are you making of me? What could happen next is a very important question the MF industry needs to ask?
Logic says that people who sell financial products will slowly stop selling mutual funds, and will move to selling Insurance products. Insurance is sold as an investment product in India and not really as life insurance, strangely. Ideally, mutual funds should be used for investments and life insurance to get that essential life cover using a term policy.
There are toxic policies today where 50% of the first-year premium can be earned as commissions by the person selling, and most of these are between 5 to 20-year policies, so no one would even know what commissions or even remember who sold the policy by the end of tenure. There also exists a tax arbitrage currently with the introduction of LTCG on mutual funds, while the returns from insurance, both short and long term are tax-free. This tax arbitrage is going to help make buying insurance products over mutual funds sound like a better sell when someone pitches to you next - which isn’t. If this switch were to happen, it would be detrimental to the MF industry.
Also, interacting with clients who have invested on Coin, I have seen that clients investment activity generally tends to drop and some even exit out completely when a distributor/agent/advisor is not selling them an investment idea - especially during periods when markets are not doing well. So the movement of clients who don’t really understand investing to direct mutual funds on apps vs having people sell/advice on mutual funds can be a double whammy - drop in investments/AUM from both new and existing clients.
An ideal end state would be if an adviser (RIA) can charge a % fee against the client’s overall assets + % on profits above a benchmark return, and not through commissions selling a product. This would mean the incentives are aligned right for both the parties. But this can happen only if -
- Commissions earned from selling insurance drops to similar levels as selling mutual fund. IRDAI (Insurance regulator) also introduces and promotes direct plans where no commission can be made selling an insurance investment product.
- Clients actually paying the advisory fees. People don’t mind what is taken as commissions without them knowing, but have a problem paying even a fraction on their own. This has been a first-hand experience with Coin where we used to charge Rs 50/month previously. Clients saving lakhs of rupees in commission that they were paying before but having a problem paying Rs 50/month for a platform that allowed them to save those commissions. RIAs have to be able to earn for this model to sustain.
Robo-advisory or programs replacing humans as RIAs are touted to be the next big thing. I don’t think India is ready for it yet, actually these platforms haven’t really been disruptive/successful in developed markets as well. There are a few reasons for this, firstly such platforms can’t sell greed - the main reason financial products get sold in the first place. Secondly, asking a few questions for which the client might give a wrong answer and using that to calibrate the risk appetite of the client for his investment portfolio is wrong (for example, what will you do with your investment if stock market falls tomorrow. I have done this for 20 years, I can’t answer that question correctly). Thirdly, people don’t read emails, SMS, push notifications, how does the Robo get the client to sit tight or act when there is a need to?
So yeah, while the MF industry is celebrating the size/AUM of the market, I think it has to take cognizance of the potential disruption with the advent of platforms that will over market the benefits of direct mutual funds to the masses. If the commission/tax arbitrage between mutual funds and Insurance products aren’t brought under control, and if clients aren’t educated that it is good to pay an RIA to use services who can help take right decisions, direct MF might be good for a small group of DIY (do it yourself) customers, but not for the MF industry in the long run.
