In the entire chain of mutual fund investing, from the Asset Management Company which creates and runs the fund to the saver who uses that fund to invest savings, nothing is more central and yet more in flux than the entities (persons or organisations) who sell mutual funds to investors. As fashions have changed over the years, the term used for these entities has evolved from agent to distributor to advisor. There's a clear rise in the level of respectability that the three terms imply. There's also a set of SEBI rules which clearly distinguish between advisors and distributors, even though the entities themselves have a hard time deciding which is a better business.
For investors as well as the sellers, the biggest change from the distant past is that it is possible to completely bypass this layer and interact directly with the mutual fund to invest. There's nothing unusual in this, as internet-based commerce where producers transact directly with the final consumers has become widespread in many industries. What makes mutual funds - and most consumer financial services - different is that a certain level of advice is an integral part of the product.
In fact, it's not just a part of the product but is a precursor to it. Someone should ideally be giving you broad-based personal finance advice which should incorporate guidance on whichever type of asset is most suitable to you. In fact, that's pretty much the theory of how personal finance should work. However, you all know that there's a big 'however' in here. Relatively few investors trust such advice because there is always the dark shadow of commission-focussed selling looming above the advice. There are many advisors who give real, earnest advice but it's hard for savers to figure out who is actually operating in this manner and who is not.
Interestingly, as with most contentious issues nowadays, Twitter has become a battlefield between the various sides in this struggle. Over the last few days, I've been watching one little arena like this. There's an extremely popular Twitter handle called @dmuthuk, a financial planner named D. Muthukrishnan. From his tweets, it's apparent that he used to be a mutual fund distributor and while now he is mostly an investor in his own right, he has much to say about the way mutual fund distribution works, and very little of it complimentary.
Bypassing mutual fund distributors and going direct saves about 0.7% per annum for investors, something that compounds to a meaningful difference over a few years. The question for investors is whether the distributor/advisor services adds more than that. There is no doubt that they can do so. In fact, as Muthukrishnan says, the key seems to be whether the advisor can cajole or inspire the investors to stay invested and go on investing in bad times. This is the opposite of the standard operating procedure of taking the investor on a grand tour of one risky fund after another. His advice on vetting an advisor is quite interesting. If someone approaches you to sell mutual funds, ask them how much of their own money has stayed invested in a stable fashion, say for five plus years. Ask for proof. This is actually very good advice. As Nassim Nicholas Taleb also recommends, the thing to say to a financial advisor is 'keep quiet and show me your own portfolio.'
However, I have a small but significant caveat to add, one which is contrary to the general anti-distributor sentiment that prevails online. Sophisticated and knowledgeable investors, or at least those who imagine themselves to be so, probably have no need for step-by-step advice. However, those who are yet to take the first step will often never do so unless prodded and facilitated by a distributor or an advisor. Even if the advice is not the best possible, an overwhelming number of mutual fund investors have become investors because of this. The first step is the hardest and at that point help matters.
One of the problems of the new situation is that there's no viable business model left for getting the small investor into mutual fund investing. That's a problem that needs a solution, and an immediate one.