Should you choose a Direct or Regular plan in an MF?

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They do not have tie-ups with product promoters and do not get commissions or derive any other remuneration from them. They suggest commission free products, which in MFs are called Direct Plans.

Commission-free products

They get paid a fee by the client for their advice. This helps these advisors to remain unbiased, work in the best interest of their clients and recommend what they need to invest in. Commission-free products incur lower expenses from MFs.

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So, which option is better for the clients -- investing through distributors in Commissionable products (Regular Plans) or seeking advice from advisors and investing in non-commissionable products (Direct Plans)?

The answer is nuanced.

Regular Plans

Going to distributors and opting for Regular Plans may look costly. But they will help invest the amount and offer back-office and reporting services. A good distributor would suggest products suited to one’s goals, tenure, risk profile, diversification needs and so on.

This arrangement works wonderfully well if one needs basic assistance in choosing investments and managing them on an ongoing basis and no planning or comprehensive advice is needed. Most times, one will be able to invest even small sums with distributors.

If the needs of a client is for drawing up a comprehensive financial blueprint and ongoing advice then they need a Registered Investment Advisor (RIA). The RIA will engage with the client deeply, collect comprehensive data and come up with strategies for achieving goals. They also take into account asset allocation in line with the client’s personal situation, risk bearing capacity, liquidity needs, tenure, taxation, income needs and so on. Such an RIA will charge a fee for the plan and advisory.

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RIAs would suggest investment in non-commissionable products, which saves on the annual costs for the clients. As mentioned earlier, this makes the RIAs verifiably conflict-free and unbiased in their advice as they do not receive any remuneration from anyone except their client.

Product costs

In case of distributors, product costs will be higher with Regular Plans. In case of advisors who invest through Direct Plans, product cost is lower but there is a fee to be paid to the advisor for comprehensive plan and advice s/he delivers.

From the aforementioned discussion, it would be clear that the propositions themselves are quite different between a distributor and an advisor.

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The choice of a distributor or advisor would depend on the level of engagement and advisory needs of the client. But going purely by the costs alone, there may not be too much difference as what one saves by way of product costs in Direct Plans is offset by fees the advisor charges.

Then there is an argument that investors can do Direct Plans on their own bypassing both distributors and RIAs. In the Do-it-Yourself (DIY) method, it is assumed that one may know how to choose the right products and invest in them.

It is deceptive and comes from a false sense of confidence. While one can save on cost this way, the portfolio may be ill suited to their needs, may result in concentration risks and higher risks in products chosen, not optimised for taxation, liquidity, tenure and so on. Finally, the returns themselves, after adjusting for costs, may be lower due to wrong choices made.

Hence, while in DIY the costs can be lower, the consequences of unadvised action can be cripplingly detrimental.

Investors should not get carried away just by the costs alone and choose what works well in their specific situation. After all, no one wants to win the battle and lose the war!