Give primacy to product suitability, then evaluate cost

While it’s okay to save money on mode of investing, don’t scrimp on paying for sound advice

Today, a host of providers of financial products and services advertise their “free” offerings. Since they are commercial enterprises, the question that arises is: How do they make money?

The reality is that most sellers follow a mixed model. Some of their products and services are free while they charge for the rest. The free offerings are meant to attract and retain customers.

“The business model usually is to transition customers from the segments where they don't pay to those where they pay,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Broking-cum-mutual fund platforms

Zerodha, India’s leading brokerage firm, charges zero brokerage for stocks purchased on delivery basis. Customers also don’t pay a commission to purchase direct plans of mutual funds (MFS). But if a customer does intraday trading in equity, currency, or commodity, or in futures and options, Zerodha charges ~20 or 0.03 per cent (whichever is lower) per executed order. Some other discount brokers also follow a similar model. The traders provide the bulk of their revenue.

Many MF platforms today (like Groww, Paytm Money, Etmoney) offer direct plans on which they make no money. “They treat MFS as a loss leader — a product that the seller gives away for free, or at a very low cost — as it helps in customer acquisition. The seller hopes customers will buy other paid products from their platform,” says Srikanth Meenakshi, founding partner and head, platform and technologies, Primeinvestor.in.

The paid offerings of these platforms could include robo advisory, fixed deposits, loans, and insurance.

Real estate broking

Nobroker.in, which has eliminated the broker from realty transactions, offers its basic services free of cost. “You can post the details of your property for buying, selling, or renting. Property buyers can get in touch with sellers, and tenants with landlords, directly without going through an intermediary,” says Amit Agarwal, chief executive officer and co-founder, Nobroker.in.

If a customer needs a valueadded service, such as a phone relationship manager, or some other service, she pays for it. These charges range from ~1,000 to ~4,000.

Loans

One player that offers advice to retail clients on a variety of loans is Andromeda. “We help customers borrow at the lowest possible cost without charging them any fee,” says V Swaminathan, executive chairman, Andromeda and Apnapaisa. It monetises its services by charging lenders a fee for the loans the platform facilitates.

Buy now, pay later

Buy now pay later (BNPL) is a form of credit that is suited to customers who have a low credit score or insufficient credit history due to which they are unable to get a credit card. “The model is similar to that of a credit card, but requires much less documentation,” says Mahesh Shukla, founder and chief executive officer, Payme India.

Two models of BNPL are popular. The first is BNPL at the check-out point or point of sale. Here, you first need to obtain a credit limit from a lender. At the check-out stage, if you choose BNPL, you will get a zero-interest period of 15 to 30 days. You can make a one-shot payment at the end of this period. You can also convert your payments into equated monthly instalments (EMIS). Sometimes, if you are not able to pay at the end of the interest-free period, it is possible to convert to EMIS even at this later date.

The second, usually chosen for high ticket size purchases, is a pure Emi-based model. The cost to the customer is zero. “Usually, the original equipment manufacturer (OEM) or the merchant passes on the discount on the product to the lender. The discount substitutes for the interest the lender would have earned,” says Yashoraj Tyagi, chief business officer and chief technology officer, CASHE.

In other words, the discount the buyer would have enjoyed if she had paid the cost upfront goes to the lender.

In the first model, if the customer is not able to pay the dues on time, she pays interest, which could be as high as 0-26 per cent annualised. Similar penal interest rates apply to customers who fail to pay their EMIS on time. “Your credit score also gets impacted,” says Dhawan.

What should customers do?

As far as investing is concerned, investors must try to save on costs by using discount brokers, or by investing in direct plans of MFS. “The mechanism of investing is the smaller, more commoditised part. The more important aspect is the products investors select. Unless they are proficient, they should not try to save cost on the advice required for proper portfolio construction and product selection,” says Meenakshi.

In the case of brokers, avoid keeping excess money in your trading account. The return this money would have earned you will instead go to your broker.

When availing any product or service — free or paid — give primacy to whether it is suited for you. “The core proposition being offered must be relevant. Only then should you think about whether it’s a good deal,” says Dhawan.

Intraday trading in stocks or trading in futures and options is risky and can cause large losses due to leverage. “There is also the risk of getting addicted due to the dopamine rush such trading activities offer,” says Avinash Luthria, a Sebi-registered investment advisor and founder, Fiduciaries.

According to Luthria, in the financial world, a higher-cost product is often not better than a lower-cost product. The former just tend to be hard-sold more because they offer higher commissions to intermediaries. On the other hand, investors need to reach out themselves for lower-cost products based on their own knowledge, or based on good advice.