I anticipate some changes to take place in next 5 years or so. Though I cannot precisely time, I strongly feel this is the way forward.
As a first step, expense ratios of mutual funds would come down. This would lead to reduction in income for mutual fund companies and advisors. As an investor, it is good for you because the return goes up to the extent of cost reduction.
As a next stop, expense ratio would further come down leading to zero commission income for us. We would be asked to become RIA (Registered Investment Advisor) and charge you a fee. Those who pay fee would continue to get advice and service. Those who cannot or do not want to pay need to take care of their affairs on their own.
Actively managed funds are broadly doing well now because mutual funds are still not a very significant percentage of total market size. At some point, due to growth in their size, they will become THE market. Once they become the market, they cannot outperform markets. As an investor, you may then want to own passive funds. Passive funds simply invest in broader indices like Nifty 50 or Nifty 500 for a very low cost. ETFs (Exchange Traded Funds) listed in stock exchanges would also come into being which also can be owned at very low cost.
The expense ratio paid is worth now because of the alpha (excess returns over benchmarks). When alpha is no longer there, cost cannot be justified.
Not only costs would come down, the returns also would be down. When there is no alpha you get only market returns. This would have huge impact on the entire eco system of investors, asset management companies, advisors and distributors.
It is our responsibility to advice you on the above as and when we feel the time is ripe. As I said, I see it happening within 5 years or so.
We would then tell you whether to only own passive funds or some combination of active, passive and ETFs.
These changes would not be limited only to equity but for hybrid products like MIPs and balanced funds as well.
For those of you who would continue to be with us when our revenue model changes from commission to fee, our advice and services would continue as usual.
This is the way forward.
There is nothing you need to do now on this communication. It is just to keep you updated on the changing landscape in coming years.
When the time for change come, we would handhold you.
Despite any changes, we would continue to assist you in reaching your financial goals, financial independence, building and managing wealth.
Whether it is active or passive, funds or ETFs, commission or fee our focus would be on you and your behaviour. In any form, we would continue to focus on right behaviour of discipline, patience and staying the course.
Have a nice weekend.