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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Commission Disclosure

Posted by Muthu on September 28, 2016

From coming October onwards, every six months, the CAS (Consolidated Account Statement) will carry the expense ratio of the funds and absolute amount of commission paid to the advisor.

You are aware that we do not charge you any fees.  You also know that we are compensated for our advice and services through trail commission. This trail commission is paid out of the expense ratio of the scheme and is adjusted against the NAV. Both expense ratio and trail commission vary from fund to fund and type of assets (Equity, Debt and Liquid). Last year, we earned 0.87% from the assets we manage.

This year we expect our revenue to be around 0.9% of the assets we manage. Please note that this is gross revenue. Out of this we pay  service tax of 15% (including cess).All our expenses like rent, salaries, software, subscriptions, fuel, telephone, broadband, stationery etc. are paid out of the amount available to us after paying service tax. The balance is our income for providing ongoing advice and services. Like all of you, we also pay income tax on our income.

Please note that the return you see in your portfolio is after accounting for expense ratio (which includes our commission).

There is a difference in expense ratio if you go through an advisor or direct. This difference also varies from fund to fund and type of assets. Roughly the difference is between 0.6% to 0.8%.

Last year I wrote a piece on why you need an advisor. I’m reproducing the same below.

“Few years ago, some of you wanted to stop your SIPs or exit mutual funds completely. You were frustrated with lack of results in your portfolio. We counselled you with various examples and data; the need to stay the course. You are now reaping the benefits of the same.

Through our periodical writing, daily sms etc. we keep reinforcing the value of long term orientation, patience and discipline. Many of you have told me that these serve us good pointers to continue the journey with focus and discipline.

We don’t let you chase hot funds or recent performers, invest in the current sectoral or thematic fads; but completely stay focussed on the chosen portfolio. This ensures that you avoid typical mistakes people make in a bull market.

You are aware how many mistakes you’ve avoided in your personal finance by listening to us. These mistakes, if done, would have had huge financial and emotional costs. We add significant value to you by ensuring that you don’t do things which can hurt you.

You’ve understood and internalised the power of compounding, time and equity. This has ensured that you’re in the path to achieve financial independence and create huge wealth. Some of you have already achieved financial independence by under taking the journey with us for last many years.

By making you to focus on SIPs for decades of your working life, we’ve eliminated completely the need of timing the market. Not only that the beauty of SIP is that, you buy more in bear markets and buy less in bull markets. This is against the crowd behaviour of buying more in bull markets and selling in bear markets. This has ensured you would end up in the small percentage of successful investors.

One key learning all of you have now is that all asset classes are cyclical. There is no such thing as permanent bull market in any asset class. What is important is that after adjusting for inflation, which asset class delivers better return over long run.

None of you invest for 3 or 5 years. The bare minimum tenure you have is 10 years and many of you are fine with 20 years or more. Some of you have even accepted the concept of multi-generational savings and investing. You don’t know how rare this trait is. Since most of you are first time investors and got exposed only to our philosophy and views; you’ve accepted this as a standard view. The unfortunate truth is most of the investors are not lucky to get this right view even after decades.

Once you choose the path; we do our best repeatedly to ensure that you stay the course without any digressions. ‘Doing nothing’ is most powerful after a right path and investments are chosen. Most investors keep tinkering with their investments and move away from the path carried away by greed or fear. Ensuring that you do nothing with the chosen path and investment is one of our key jobs.

Shaping the behaviour, acting as a coach and hand holding during tough times are some of the things we always do for you.

You may wonder why I’m writing all these. I’m aware that you see value in what we do and that is why you have chosen to be with us. Our blog is now read by thousands of investors and hundreds of advisors. I want this message to reach them so that these investors find right advisors and stick with them. For advisors, this would serve as a positive reinforcement on the value they bring to the table.

I take this opportunity to thank you for being our clients and want to reaffirm you that we would continue to add value to you as we always do.”

Going by a recent note from SEBI (Securities Exchange Board of India), over next 3 years or so, all mutual fund advisors may need to become RIAs (Registered Investment Advisors) and earn income only through clients. I assume that this means that we may not receive any commission after next few years and we need to charge you a fee for our advice and services.

Till we migrate to RIA model at appropriate time (over next few years), request you to stay with us in the current model.

Thanking you in advance for your continued trust and support.

6 Responses to “Commission Disclosure”

  1. Venkateswaran Muthukrishnan said

    Good one, Muthu. You have pre-empted the debate of direct or advisor very well.

  2. Abhay Choudhari said

    Fantastic communication Sir….I am also a financial advisor. We must also add return enhancements provided by a well researched portfolio (doing statistical analysis, portfolio analysis, having a mixture of growth and value funds, avoiding sectoral/thematic funds which are only meant for advisors who have timing skills, consistent alpha generation with low standard deviation, sticking with the chosen funds for a minimum of 3-4 years, keeping portfolio turnover of funds at less than 20%) can add a minimum of 3-4% annualized returns to client portfolios. Rebalancing at market extremes (shifting atleast profits from equity to debt), advisors must have skills to analyze market valuations (combination of trailing P/E Ratio, P/B Ratio, Market Cap To GDP Ratio, Dividend Yield of major indices, credit growth, 10 year Bond Yields of Major economies) and similarly putting major additional money to work at extremes of these valuation indicators can enhance returns by another 2-3%. Ability to analyse global macroeconomic news, keeping clients away from media particularly CNBC TV18 are significant value additions. The greatest value addition is that clients with financial advisors save minimum 2 times more as researched recently by SunLife Financial of Canada, after all who keeps calling them to keep increasing their SIP’s, put more money to work at good market levels (latest one being Feb 2016). Skilled advisors like us will have no problem to move to RIA model (I have decided to charge 1.5% per annum for equity assets and 0.5% per annum for debt assets). Till that time will continue in the current model like you. Most of my clients do ask our remuneration and ask for fees so as the need arises will go ahead with that. Skilled financial advisors will have a great future in India. Major skills required are very good communication and interpersonal skills, excellent knowledge of finance, ability to keep on learning, zero ego, learning from the gurus, honesty, ethics and a good personality. Competition for people like us is going to reduce in the future as unskilled people leave the industry. I am targeting 1000 crores in assets in the next 10 years.

  3. Madikeri Abu said

    One’s you choose the path…. “Once” you choose the path?

  4. It is good in ome way that client will get to know how much we were charging him being with us and paid by AMC. Now when we switch to RIA model after 3 years. Client will not be shocked to pay this much atleast.
    Change is the only thing which is permanent. Lets see what is going to happen in future.
    I think we may face resistance from HNI client’s.

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