Advise is Cheap, Advisory is Not
Twitter for the financial community has been a fine place for exchange of ideas and thoughts. While the #fintwit community is not very large, it’s decent enough to generate interesting conversations around the world of finance.
For all the talk of we not being part of a herd, if you were to just scroll around with an open mind, you would see that talk is cheap and action is missing. The bigger the number of followers, the rarer he or she will openly challenge a fellow fintwit. let sleeping dogs lie as the Iodim goes.
While we laugh at others who we feel are stupid enough not to recognize the reality, Once in a while I feel if we are in a echo chamber ourselves. We have our strong beliefs and no matter the evidence we will continue to stick with our beliefs while either ignoring facts that challenge our assumptions or worse show us to be wrong.
One of the fantastic writers I have come across in the Indian fintwit community is @PassiveFool. I love reading his long newsletter filled with thoughts most of which I agree with or make sense. But once in a way, he takes the logic way too far and one that makes no sense at least from where I come from. His latest tweet thread was one example and I retweeted disagreeing with him.
One of the negatives of twitter is the limitation of words, so let me break down why I think he is wrong in the long form here
The first tweet has two numbers – one the amount of money HDFC makes from Prashant Jain funds and second the under-performance in the same period vs the Large Cap Index. Both these numbers are correct I believe but yet provide the wrong context.
The 700 Crores HDFC makes is not because of various reasons including the fact that they have been able to build a very strong distributorship who are willing to side with the fund manager despite the bad days he is seeing currently.
But here is the thing – what if you looked at the same data in 2015 (5 years comparison vs Nifty Total Returns). To compare, I shall use HDFC Top 200 fund – the fund that is no more in existence today but the prima donna for HDFC for a really long time and one Prashant has been managing
While Nifty delivered (including reinvestment of Dividends) a absolute return of 70%, HDFC Top 200 outperformed it by delivering 92%. In other words, if the same question was asked at the beginning of 2015, there would not be a tweet saying that HDFC was earning despite underperformance. Lets move to the next tweet that gathered my attention
Again, the data is correct. 80% or so of the Assets that are coming into the asset management firms are coming from distributors but are they getting scammed? Scam to me is a word that is better used when investments are suggested where there is low probability of getting the principal back, let alone interest.
I don’t know if mutual funds calculate the total returns they have generated across clients – kind of Lifetime Customer Value – but if they do, I am pretty sure it’s strongly positive. Investors have made more money compared to what they have invested.
Cost is a very relative term. Active funds are expensive compared to Passive Funds. But are they the only choices investors have when they wish to decide where to invest their excess savings?
Regular funds are expensive because there is a cost involved with having a research team and the support around it compared to copying the Index where the research is outsourced. A Portfolio Management Service company for example needs to have a AUM of at least 100 Crore to breakeven. The breakeven for Mutual Funds is way higher. Someone has to pay.
I am in complete agreement here and have written it multiple times as well. But Cost is just one part of the equation – the other part being service. I have blogged about how I started out as a Fixed Deposit Canvasser when I first started testing the financial services business. I got sidetracked by the Secondary markets and did not go the Mutual Fund Distributor route.
But a MFD is not someone who just tweets about the good things you can achieve by investing. Most MFD’s are literally putting their neck on the line for the meager commissions they get for the work they put in. What work you may wonder does a MFD do – all he needs to do is select the best performing fund and have his client invest and voila, its done.
The reality though is quite different. Most clients expect the advisor to be available and not just on a telephone call but physically at least in the beginning when the relationship is still getting built and trust getting established.
Since Portfolio Yoga started its advisory services, I have talked to a lot of prospective clients. Some felt that the service was worth the price, some did not. But everyone had their share of questions which they wanted answers for. Investing is not like buying potatoes where the worst thing that can happen is that you bought rotten potatoes.
The trend towards passive in the United States has been gathering steam enormously in recent times. But is it even right to compare what advisors are able to do there versus advisors here. Let’s take a look.
The guys at Ritholtz have been great proponents of Passive in their various blog posts and books. They offer to their clients investment advisory services through Comprehensive Portfolio Management. With more than a Million followers, the CEO is a star on his own. So, who do they serve and how much do they charge?
Their minimum for getting started is $1,000,000. Not much different from what our Portfolio Management Firms though here it’s because of SEBI mandate and there it is not. In other words, if you are not having that much money to give them to manage, they aren’t really interested in you.
But if you think about it, this makes sense. It’s all nice to talk about the small investor, but who will bear the cost of helping him reach his goals and provide him the pep talk he requires when markets melt down like it did in March.
The fee they charge for the Financial Planning & Consulting (and one they are able to auto-debit) ranges from 1.25% to 0.35% based on the Investment Amount (higher the Investment, lower the scale). The asset weighted fee for Regular Mutual Funds in India is around 2%. This is higher than 1.25% but on the other hand, you can invest a small amount and still call up your advisor distributor whenever you feel overburdened by everything that is happening around the world and want to change your fund.
For long I was in the same camp of Passive – why are guys so stupid I have felt and many a time verablly blurted out. But the problem as I see is that I was seeing from where I stand – me being someone who is in the Industry for 20+ years and understands it much more than someone whose only financial investment before this was a Fixed Deposit (or a LIC scheme his Uncle sold him).
It takes enormous efforts to help him understand the nuances of finance and how over the long term, it can help build a reasonable nest for himself. The alternative as I wrote to Regular Funds is not Index Funds but Fixed Deposits or Real Estate or anything else where he either understands the product or is sold the product by someone who is angling for a fat commission. If anything, selling Mutual Funds is one of the toughest jobs and one that really doesn’t pay well either.
Index funds are great – but you reach that stage of Nirvana after having exhausted every other path. Most don’t get to reach that stage of enlightenment right at the start unless they are really fascinated by the world of finance and investing.
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