We are living in times when transparency is the buzzword in the financial services industry. Yet, the industry is equally responsible for the widespread misselling, which has only undermined the vital trust that should exist between consumers and the industry. During the jury meeting of the Annual Outlook Money Awards, the discussion with the jury members revolved around focusing on where product manufacturers placed the customers. After all, we are a consumer-centric magazine devoted wholly to the benefit of the financial consumer.

A frequent mention to the word transparency in the discussion got one of the jury members to correct the rest when he explained that the transparency that we were discussing was actually a mandatory disclosure. I came out wiser from that meeting. So, while disclosure is the mere reporting of facts—the delivery of information, transparency offers context and some meaning to those facts. Confusing one with the other can lead you into hot water, and will always run the danger of being understood as bad practice.

The transparency quotient has gone up post Sebi’s recent move to ask AMCs to make the commission paid by them to a distributor clearly indicated in the account statement that the customer will get. Not just that, the account statement will also mention the expense ratio of both the regular and the direct plans of the scheme that the investor has invested in. While all of this is now a matter of disclosure, the detailing of expenses on regular plans that are sold by the distributor and the direct plan that is directly sold by the AMCs can cause confusion among investors.

Naturally, the expense on direct plans is lower than that on regular plans and is a way to entice investors to go direct, especially when both these have identical underlying investments. Now here’s the paradox that I anticipate—transparency could trigger distortions of facts and be counterproductive. Investors may just view expenses and the commission that their distributors earn and completely forget the services that are rendered to them. This will result in many investors only viewing costs incurred by them without realising how much a wrong decision to invest in a particular fund over another one purely based on costs can impact their finances.

Does all of this mean you should never monitor costs and charges? No. But it’s important to give your distributor a sense that there are judgment-free boundaries behind which you are free to experiment. Another takeaway is this: even if you do not have data on what a distributor earns on what you invest through him, you should still use discretion about the service he is offering you and how much value it is adding to your investments. Remember, the distributor is like any seller—his commission will always be embedded in the product. But what you need to ask yourself is— are you getting what you had gone to him for in the first place? Look no further if the answer is yes.


nk@outlookindia.com