Direct Plan Mutual Fund Investors & Advisor’s Alpha

With the markets just skyrocketing in 2017, many investors of Direct Plan Mutual Funds faced a tough time in Feb 2018. Budget 2018 and days after that were and are still mayhem. But if media & my personal experience is to be believed, the direct plan mutual fund investors panicked and are still in shock. They are all alone. FB/Telegram groups, transaction platforms or DIY Gurus are not able to help.

And, above all, they do not know the importance of Advisor’s Alpha.

A leading newspaper reported on 15 Feb 2018, that many advisors & planners received calls from direct plan mutual fund investors to inquire  about what to do now? Even I have also received a lot of queries from existing investors and some random ones too. Clearly, a situation of fear prevails.

Some have transacted in Direct Plan Mutual Fund through websites, which call them robo-advisors, but they only advise before buying.

Many used Quora or DIY Blogs or FB or Telegram Groups where so-called DIY (do-it-yourself) gurus, are answering questions without knowing the personal situations.

(This article contains many images from Carl Richards Behavior Gap. A tribute to him)

The problem faced by direct plan mutual fund investors is that at times when you need to consult an expert you have none.

Many direct investors just to save some money or maybe overconfident started investing in equity markets without engaging a professional help. You could be one of them.

Another latest report is from FinalMile-FIFA which says “Direct Plan Mutual Fund investors return to their Distributors/Advisors in long run”. Why? Keep reading for this study in the detail.

DIY means self-sufficient – A myth

Well, it is very difficult to manage your own finances. It is not one or 2 SIPs or just buying a term plan. You actually plan for 0-50 years plus while earning for say 15-20 years. You deal with ever changing situations & host of risky products.

Clearly, if you do not have knowledge or time you can simply outsource to a Financial Advisors.

This is same as outsourcing to an airline when you have to travel. Do you really start reading pilot training manual before flying? Or just pay for the ticket and enjoy the travel?

Outsourcing does not mean dependency.

Why DIY does not work in Financial Planning

Many of these DIY gurus are so overconfident that they have provided “retirement sheets, financial planning formats, portfolio making & valuation sheets etc”. There website or blogs are full of manuals & videos to DIY entire financial planning.

At your local chemist you an get mostly all surgical tools. YouTube is full of videos. Now if videos or checklists could have performed surgeries, then why do we need surgeons?

These DIY gurus claim to make “things simple” in the complex world. Reality is “things are already simple”.

They make these things complex when they make readers over-confident of their abilities, convince them that they can say money by following these robo-templates or advice.

And yes, everyone wants to save money. So they can lure you by telling to save 1% every year and forgo 4%.

Problem is Financial planning is long many decade process. It is also not a machine driven process like driving a car. It varies person to person. Also, the markets & situations keep changing.

So after 20 years, it is very easy to say “sorry, my sheet/calculator was not meant for you” or” “it was general in nature”.

Markets like these are testing time. Your real behavior comes out when you see, your hard earned money losing thousands everyday morning.

• You wonder are you on a right track?
• Do my investments need a turn?
• Were my calculations right?
• Am I in a right asset or investment?

I am alone or one of many? Can somebody guide?

When do you need an advisor?

Majority of you will say- before taking a financial decision or a plan.

Partially right… because you need one after investments are done or plan is implemented.

The prevailing equity markets situation like today is a testimony to why you need a companion. Behavior prudence is one such requirement.

Studies have proved that investors face more than 20 Behavioral Biases. These are like genes in your cells. These are thoughts wandering in your brain. And these thoughts lead to actions which may destroy your financials.

I was reading on Quora – How this young man followed so-called gurus, lost all his parents money, became suicidal and is now begging money – just because of no guidance or following the guidance of ill-intentioned people. (it’s a long, depressing read. So tread cautiously)

Now the FinalMile-FIFA study on Direct Plan Mutual Fund Investors

The study examined the willingness of investors to pay for advisory services.

“In a cold state (when everything is fine) an overwhelming majority of investors preferred to invest directly (cheaper option) rather than invest with their advisor/distributor.”

In a hot state, (like the current equity markets) their preferences reversed and an overwhelming majority chose to retain their advisor/distributor and compensate for the services,” the study found.

So why not engaging a financial planner or advisor from the initial days?

Behavior Gap & Advisor Alpha for Direct Plan Mutual Fund Investors

These are 2 terms which you must be aware and understand.

Behavior Gap

Simply investing in Sensex has given 14% approx CAGR since inception. Investments in Large-cap Funds means returns is 16% approx. Definitely investing in a well-made portfolio has given more returns keeping other things constant.

Question is-  How many of us have got these returns?

Very few. Because there is a risk in investments. And either we lacked participation or messed up due to the behavioral flaw. There is a GAP what markets have given and what investors have made in real life.

See this graph of US markets for 2017. The graph calculates the gap between market returns and investor returns for different category of products.

Advisor’s Alpha

Markets & categories of investment run on their own returns track. An advisor can help you gain these by identifying your risk areas and making you invest.

Studies have proved that Advisor’s value can be calculated by excess returns he is able to make in a  portfolio under his purview. How Much?

More than 4% in most cases!

And, we worry to save 0.5% or 1% that we pay to advisors. God Bless DIY Gurus who work day & night to rip your Advisor’s Alpha- Which is YOUR Gain.

Share your views here and I wait to see what is your take.

Do forward this article to your friend, family and especially to DIY gurus in case you know somebody.

(Any investor or fellow advisor wants to see complete reports mentioned in this article can contact me. I will happy to provide the reports on email)