Note: Brief quotes may not cover various nuances or the language may not be precise. Occasionally they misquote what I actually said. So please take them with a pinch of salt. Also I may or may not agree with the entire article
"If the fee structure is completely flawed, then the advice is guaranteed to be completely flawed. The % of AUA fee structure is completely flawed and it is not possible to overcome those flaws.
The most common 1% p.a. of AUA fee structure is intended to get the client into an engagement when the client is relatively young, and their net worth is low. Hence the relatively young client will not be able to realize that by the age of 60, they will be paying 33% of their annual household budget as annual fees to the RIA. Such an RIA is hoping that by the time the client realizes this, it will be too disruptive for the client to end the engagement with the RIA.
Even a lower fee like 0.1% p.a. of AUA is deeply flawed. If the AUA is defined as the entire net worth of the client, then the client will be tempted to hide their fixed deposits, PF, PPF and real estate from the RIA so as to reduce the fees. This will ensure that the RIA will not have sufficient information to make sensible saving, asset allocation and investment recommendations. To fix that flaw, if the AUA is defined as excluding fixed deposits, PF, PPF and real estate, then the RIA will be tempted to recommend minimizing fixed deposits, VPF, PPF and real estate, so as to increase the RIAs fees.
Any % of AUA fee (including one that has multiple slabs) becomes more appealing for the RIA as the client gets older and has a higher AUA. This tempts the RIA to ensure that clients cannot terminate the engagement. To do this, the RIA will be tempted to create a very complicated portfolio e.g. with an unnecessarily large number of funds / bonds / PMS / AIFs etc. Such a portfolio will result in very high product fees and taxes. The RIA will also be tempted to trigger all mutual fund transactions and discourage the client from learning to do so. This will ensure that the client is dependent on the RIA for all investments / redemptions."
Published in FreeFinCal in September 2024
"Inflation is a hidden and blunt tax imposed by the government on people. It is blunt because though the government causes it, the government cannot precisely control it"... “This is caused by people not understanding the difference between nominal returns (for example, FDs pay seven per cent pre-tax interest) and real returns (after subtracting six per cent inflation, FDs pay one per cent pre-tax interest). Applying a 30 per cent tax rate, the nominal returns on FDs drops to 4.9 per cent and after subtracting six per cent inflation, the real returns are negative 1.1 per cent,” says AvinashLuthria, SEBI registered investment advisor (RIA), Fiduciaries.in, an investment management firm.
Published in Business World in June 2024; The online version of the article is an excerpt from the full print version of the article
For older quotes, see the 'Quotes - Archive' page