Who says direct is a lower cost model anyway?


If indeed AMCs can operate an offline direct model at a cost cheaper than the commissions they pay to distributors, they would have done so long ago

Foundation of Independent Financial Advisors (FIFA) had represented to capital market regulator SEBI (Securities and Exchange Board of India) on 10th August, when it first heard of the regulator’s intention to consider a direct share class.

Reproduced below is the text of its well-reasoned case urging SEBI not to bring in a direct share class, which FIFA believes will further weaken retail investors access to investment advice, as such a move can potentially further reduce an already shrinking IFA (independent financial advisors) community. FIFA also urged SEBI to follow a more consultative and participative approach before announcing such large structural changes.

Now that SEBI has gone ahead with its decision, FIFA believes that at the very least, if SEBI is indeed taking a leaf out of the insurance industry—where a low cost direct channel has been introduced let them be consistent and announce that a low cost direct share class will be available only for direct online transactions like what we see in the insurance industry.

If an investor prefers offline mode, he will be using the AMC’s (asset management company) sales and service infrastructure, which does cost a lot of money for the AMC to maintain. If that be the case, costs of an AMC servicing direct investors in the offline mode may be higher than what they pay as commissions to distributors which means there are really no cost savings that actually accrue in the direct mode.

A low cost offline direct model does not exist. If indeed AMCs can operate an offline direct model at a cost cheaper than the commissions they pay to distributors, they would have done so long ago. There would then be no distributors in this business. The fact that distributors exist and that AMCs have not built a direct retail sales force demonstrates that there are no cost savings in the direct mode so where is the question of passing on cost savings to a direct investor when no savings exist?

FIFA therefore believes that if SEBI has made up its mind to introduce a direct share class despite the reservations expressed against such a move it should be restricted to only online direct transactions where perhaps a case exists of a lower operating cost model.