July 7, 2020
We all invest in financial products to fund our financial goals. Some might do this on their own and some might take the help of financial intermediaries (like agents, planners and advisers). Whatever mode one follows, the cost of investing can have a large bearing on your overall returns in the years to come. While benefits from investments will accrue over a longer time and are uncertain, the costs are more or less certain. Hence, having a broad understanding of the costs/expenses is very important.
The costs of investing can be broadly divided into product costs and intermediary costs.
Financial products like Bank Fixed deposits, savings account and government savings schemes (typically postal savings) do not reduce their costs if approached directly by you. However, one can have substantially lower costs for Corporate/NBFC FDs, Mutual Funds, insurance plans and equity transactions through discount brokerage firms if done directly. Within this direct option, we might have specific plans in insurance and mutual funds products which have lower costs than others without much change in benefits.
These costs might be like the brokerage you pay to the broker/agent (one time or annually- generally embedded within the product) or the fees one pays (one time or annually) to a fee only Financial Planner.
Let me explain this with numbers for your benefit. Rakesh Pinto has a total financial wealth of Rs 1 crore. He deploys Rs 75 lakhs in Assured return schemes (based on conservative risk profile) like FD’s, PPF and other government schemes. The remaining (25%) investments are done in equity mutual funds. The costs would be as follows:
1. Consulting an agent or done oneself through a broker’s online platform: Rs 50,000/-p.a. (product cost Rs 25,000 p.a. and agents/brokers earnings Rs 25,000 p.a.)
2. Consulting a Fee only Financial Planner: Rs 41,250/-p.a.(product cost Rs 16,250 p.a. and planners’ fees Rs 25,000 p.a.).
With the above numbers, it is clear that partnering a fee only financial planner does not increase the costs (actually decreases the costs) of investing which is the traditional thinking. The benefits would be much more if the portfolio sizes are larger or the proportion of the market linked portfolio is larger.
The above Expenses/Costs have been derived based on the general expenses charged by mutual funds. These are as follows: Regular active equity funds annual expenses 2% p.a., direct active equity funds 1% p.a., direct passive equity funds 0.25% p.a., direct active and passive equally split portfolio 0.65% p.a., FD and government savings schemes no reduction in costs and Annual fees of a Fee only Financial Planner is Rs 25,000/- (for a Rs 1 crore portfolio). We have left other financial product costs like direct equity and PMS for the sake of simplicity.
The regular option of equity funds is generally advised by financial agents/bankers/brokers. The extra expense over the direct option is their earnings. So, it could be noted that the advice from your agent/broker or the online platform is not coming free.
Direct modes of investing in mutual funds/passive funds are generally advised by Fee only Financial Planners who charge an annual fee. They would also help in building a direct equity/ETF portfolio as part of equity allocation to bring down the annual costs still more. The costs of investing would still go down if recommended to buy insurance plans directly online as online insurance plan expenses are much lower.
While lower costs of investing are the obvious benefit in partnering with a fee only Financial Planner, the other kicker is the unbiased financial advice. A fee only financial planner would also help a client to avoid costly mistakes (this is the cost of investing based on one’s partial knowledge) and hunt for tax efficient products thereby increasing the benefits of this partnership.
However, there could be an argument that one can research and invest directly in active and passive options at much lower costs without the support of a fee only financial planner. It is quite possible. But one should be able to devote their quality time and effort in managing this. And quality time and effort do not come free. It will eat into one’s family or professional time. Costly mistakes done in this strategy can make this quite expensive affair (time and money lost) for many people.
I leave the choice to manage one’s wealth to the reader. Always know that any choice made has a cost to be paid. Don’t be penny wise and pound foolish!!
Wishing you all a safe and exciting investment experience.
1. It is very important to consult a Professional Planner/Investment Adviser while implementing any of the above ideas.
2. The above are mere suggestions and not Investment Advice as individual cases might differ.