Should You Go For Direct Or Advisory Model Of Investing? Why Should You Choose An Independent Advisor Like Wealth Central Over Your Bankers Or Direct Model Advisors?

While direct model of investing is relatively cheaper, it does not come with the advantage of constant expert guidance and consulting that the advisory model does.

SEBI introduced the direct model of investing around 5 years ago. The model was meant as a low-cost alternative to the regular model – the advisory model. How was it a low cost alternative? Advisors earn a commission on the investment and by allowing you to invest directly, the middlemen commission charges are eliminated.

Does this make a significant difference? When direct model investing was introduced, the differential in costs was expected to be between 0.75 to 1.25% annually because that was the approximate payout in the form of commissions. However, in real time, especially after the reduction of expenses ratio in 2018 and 2019, the cost differential is significantly lower than that in many funds. Some funds charge a „one time transaction fee? or add a silent charge on a monthly basis. Others have made regular funds less expensive since the scheme was introduced. In most cases, therefore, the difference in costs is much lower than advertised and is only around 0.5 to 0.6%.

The direct model of investment is meant for someone who understands how the market works and is well-versed in investment options. If you do not have either the knowledge or the time to monitor the performance of your investments, the advisory model would be better suited.

There are also direct model advisors who advise on investments for a fixed monthly charge. While their attractive graphs that extend over 20 or 30 long years show that investors would save 1% more, there have been many instances of investors earning an additional 3% with the regular advisory model simply because the investors made more informed decisions; and the interests of the investors became the interests of the advisors. It is not difficult to understand how the sincerity and the efficiency in monitoring your investments would be done by someone who gets paid a fixed amount versus someone who gets paid a commission based on your wealth creation.

While you have to bear the cost of commission paid to the advisors, you now have someone who has your financial goals as their objective as well and are constantly monitoring your investments for you. If you have a well informed advisory team, then the service that the advisors provide, and the overall returns that you reap from following their investment advice might well be worth the marginal increase in costs to the layman investor!