1. Should a DIY (Do-It-Yourself) investor engage with a Fee-Only Financial (Advice-Only) Planner such as you?
- Strangely, the more knowledgeable that you are about personal investing, the more that this specific engagement is a good fit for you. And the less knowledgeable that you are about personal investing, the less that this specific engagement is a good fit for you
- A significant majority of my clients were quite knowledgeable about personal finance and investing, even before they contacted me
- The suggestions above deal with an initial engagement of six-months. They do not deal with the more subjective question of whether or not you will gain from continuing the engagement beyond the initial six-months
2. Are there any objective factors to indicate that you as an adviser may be more competent than I am?
- I have been as an investor for 15 years including a decade as a Partner and one of the five members of the founding team at a top 5-10 independent Indian Private Equity & Venture Capital fund
- Further, I have a two-year full-time (i.e. the flagship course) MBA in Finance from Indian Institute of Management Bangalore (IIMB) and I have been a practitioner / student of finance and investing for more than three decades. This provides me with an advantage in understanding theoretical aspects of finance e.g. why it is a myth that equity is safe in the long-term or why smart-beta is just smart-marketing
- Finally, all my working hours are focused on financial planning and investing. So, I can focus on aspects that my clients don't focus on e.g. mitigating 'sequence of return risk' during retirement
3. Are there really only 13 established Advice-Only Financial Planners in India?
- This short list is the only authoritative list (since 2014) of established Advice-Only Financial Planners in India, including myself. For legacy reasons from 2014, this list uses the over simplified term 'Fee-Only' but this list means 'Advice-Only'. Accordingly there is an asterisk marked against two names in the list because they are not 'Advice-Only'
- This is an almost exhaustive list of Advice-Only Financial Planners in India including established and approximately a dozen newer Advice-Only Financial Planners
- If an RIA is not listed on either of these two lists, it is most likely because they are not an Advice-Only Financial Planner. For example, these two lists exclude RIAs whose fees are a percentage of the client's assets under management. Further there are many nuances about fees that a layman may not understand but these lists filter for
4. Is it possible for us to have a productive engagement without ever meeting face-to-face?
- Almost all established Advice-Only Financial Planners in India conduct their work almost entirely over calls and email i.e. it is an approach that has worked for thousands of clients of these established Advice-Only Financial Planners
- The About page mentions that I am the 'First and only Fee-Only (Advice-Only) RIA in India with prior (buy-side) investment work-experience' and the 'First and only Fee-Only (Advice-Only) RIA in India with a two-year, full-time (i.e. flagship course) MBA from a top-3 (/ top-4) IIM'
- The description mentioned above is very important for only around 0.1% of potential clients of Advice-Only Financial Planners. If you are in this sub-set, then other aspects may be less important
- More tangibly, a large proportion of my clients chose not to do a one-time video-call i.e. the engagement was entirely over audio-calls
5. But most experts say that active mutual funds are better than index funds. How can all of them be wrong?
- These are a few excepts from my article in Mint on this topic
- Free online MF databases do not show data for many active MFs that performed poorly and, hence, got merged into better performing active MFs of the same fund house. Hence, any analysis on such data is useless. The S&P Indices Versus Active funds (SPIVA) India report is the only one that uses correct statistics. It shows that the average active MF does not beat the index. Further, publicly available research from S&P shows that knowing which schemes outperformed during the previous five years will not help you select schemes that will outperform during the coming five years. Accordingly, no investment adviser can help you select active MFs that will outperform the index in the future.
- Let’s understand why almost no one recommends index funds. Fund houses make significant profits on active MFs. And fund houses lose money on the Nifty 50 index fund (Direct Plan) which has fees of 0.1% per annum. Hence, any rational fund house would push the highly profitable active MFs and not push the loss-making Nifty 50 index funds. Further, the distributor commission of around 0.1% per annum on the Nifty 50 index fund (regular plan) is one-tenth of the 1% commission on many active funds (regular plans). Hence, any rational distributor will recommend active MFs and not index funds. Finally, only a trivially small number of all other commentators about funds understand the SPIVA India report. This is primarily because it requires a deep understanding of statistics to correctly understand the SPIVA India report which is prepared over three months. Also, as Upton Sinclair said, “It is difficult to get a man to understand something, when his salary depends on his not understanding it."
- This is a more detailed article in Business Standard which will download as a PDF file
- This is another article which explains the data in detail
6. What if I am not convinced that index funds make more sense than active mutual funds?
- These is an except from my article in Mint on this topic
- Active MF mangers are often quoted saying that index funds (which charge 0.1% per annum) are for investors who are new to MFs while active MFs (which charge 1-2% per annum) are for sophisticated investors. This is intended to feed your ego if you use active MFs and deflate your ego if you use index funds. It also aims to hide the reality which is exactly the opposite. It is the investors new to MFs who select high-fee active MFs, while sophisticated investors use low-cost index funds.
- Some of my clients are completely convinced about index funds while others are largely convinced about index funds (but are not completely convinced about it)
- If you are currently completely convinced that you only want to invest in active mutual funds, then it does not make sense to even do an introductory call with me
- If you are currently equally convinced by index funds and active mutual funds, then you could read the articles mentioned in the previous FAQ and subsequently do an introductory call
- By the time you have to make a final decision whether to formally enter into an engagement (i.e. not now), it makes sense to enter into a formal engagement only if you are largely convinced about index funds (it is ok if you are not completely convinced about index funds)