The Financial services industry has always struggled with the fee structure. Even now most of the fees is built into the product sale and is not a separate fee. This is sometimes good and sometimes bad – for the customer and for the advisor.

When a client has a fairly constant no activity portfolio -which is ideal a built in fee makes more sense for both the adviser and the client. However if a client needs to make a lot of changes – start a new sip, open new accounts, transmission, transfer, change of address, it makes sense for the adviser to charge for each activity separately (like some of them are doing). However, most clients exhibit a mix of inactivity and some activity. Also the bigger clients with say Rs. 5 crore portfolio subsidize the smaller clients with a smallish portfolio of say Rs. 30 lakhs. Also when a client has a bigger amount invested in debt and debt oriented funds, he is better off with a built in costs.

At a portfolio of say Rs. 1 crore it might make sense for a well-informed customer to go to a fee based RIA – who normally charge in the 1% per annum range as a first time fee, and then the amount of fee %age drops.

Why does an Amc charge on a %age basis, while we expect the portfolio adviser to charge a fixed fee? Well, it is not clear. However, the work of managing money seems to be more complicated. The Adviser advises you on asset allocation, goal based withdrawal, goal based investing, making a will, pushing you to create an investment philosophy statement, monitoring your portfolio (or asking you to do it yourself by teaching you the parameters), – this seems to be far more individual driven. So for scaling this, one needs more people, software, etc. and hence this is fee and time based.

However fund management is far more generic, and is hence scalable on a flat fee based on a %age of money being invested. So an amc will charge a %age based fee, but an advisor will charge on a combination of time spent and effort required. This may finally be expressed as a %age of aum, but the amount is not derived like that.

With a bunch of ETF, Index funds, quant funds, one can hope that – the scale of fees by amc will only drop. However there is not much scope for the fees of a RIA to drop far below 1% for customers with less than Rs. 1 crore.

For customers who do not wish to pay fees AND find the amc charges high, there is always the route that they can buy the shares from the market. Of course ETF is unlikely to get cheaper than this in India. We have reached the American fee levels, but are yet to reach the American Aum levels. Do not expect the fund management charges to fall in India – the aums have to go up substantially.

Almost none of the amc have been passing on the benefits of scale to the customer. If you see the Profit and Loss account of the amc you will realize that the top 5 are EXTREMELY profitable, the next 5 profitable, and the ones below the top 15 are not doing that well. This is fairly obvious – the marginal cost of increasing aum above say Rs.350,000 crores is very close to nil. So the incremental aum is contributing to the profits – without any cost increase. Remember BEP Sales? aka Break Even Point sales?