In the 31-Oct-18 portfolio report to clients, we had mentioned that Aroha will be introducing a fixed fee (from the next financial year ie 2019-20) in addition to the usual performance based fee all clients are subject to presently. We did give a brief explanation for the introduction of the fixed fee – nevertheless, we felt we should take the opportunity of a blog to expand upon the rationale and the implications such a fixed fee will have upon your portfolios and our business.

At the outset, I must mention that by introducing a fixed fee, Aroha is going back on one of its promises it had made to itself – ie to charge only for performance. The rationale was that, world over, client portfolio outcomes net of intermediary (such as us) fees have not performed any better than the benchmarks these portfolios are set to measure up against. To ensure that Aroha’s net impact on client portfolios remains positive, we undertook to charge our clients only for out-performance, with an additional restriction of always keeping a portion of our fees at risk in client portfolios. This was to give a true skin in the game shape to the adviser-client relationship and ensure that we get paid only for long term out-performance. This skin in the game approach has proven itself over the last 5 years of our operations (especially the last 18 months or so) where benchmarks returns have raced ahead and our retained fees embedded in client portfolios have significantly shrunk. Clients resultantly have benefitted enormously from this claw back feature.

While there remains no doubt that only long term out-performance must be rewarded, what we did not realize when incorporating our business, is the increased regulatory cost we were likely to incur. At the point of registration with SEBI, we were charged 1 lakh Rs for a 5 year term for our license. Since then, SEBI has jacked up the license fee to 5 lakh Rs for a 5 year term – that too only for Corporate Investment Advisers. Individual Investment Advisers have to pay a fee of only 10,000 Rs for a similar 5 year license. Of-course other intermediaries (with fiduciary standards not applicable to them) such as individual mutual Fund distributors have even lower renewal fees of Rs 1500/- only. It is strange that SEBI pursues a fee structure so onerous for Corporate Investment Advisers – in protest I wrote a letter to SEBI – the subject of which is my blog Letter to SEBI : 30-Sep-2018

We reckoned that with of our principles of pay only for performance and skin in the game combined with onerous SEBI regulatory expenses and all the other fixed costs we incur, Aroha Capital could pretty much go out of business – which of-course is bad for us – but more importantly bad for our customers who have engaged with us for the long-term. We needed to bring in a fixed fee that while meeting the minimum expenses of Aroha Capital, should be fair and not exacting on customer portfolios. We came up with the idea that a fee of 0.25% of the portfolio value with a cap at Rs 25,000/- would be reasonable. Customers with portfolio values less than Rs 1 cr would land up paying 0.25% of their portfolio values as a fixed fee while those with portfolio values more than Rs 1 cr, would pay us a flat Rs 25,000/- irrespective of the size of their portfolios. While a 0.25% is by itself an extremely small charge (as compared to the typical 1% to 2% that distributors of mutual funds make), it fairly rewards those with portfolios larger than 1 cr Rs in that there is a cap on the amount at Rs 25,000/- . The logic behind the cap is that we only want to recover our costs and nothing more. The rest of our compensation MUST come from out-performance in client portfolios – the fee structure of which continues to remain the same..

We made it a point to announce the introduction of this fixed fee 4 months before the start of the next financial year – so that customers would have enough time to decide for themselves whether they should continue to engage with Aroha or discontinue the relationship from the next financial year when the fixed fee comes into effect. While performance and cost should remain primary considerations for customers when choosing their intermediary (such as us), there must also be some consideration to what are the regulatory standards the intermediary is being held to. Investment Advisers (such as us) are held to a fiduciary standard – a standard significantly higher than that applicable to brokers and distributors who are held to a suitability standard. More on the fiduciary standard can be found in our blog – The Fiduciary Standard : 30-Jun-16. Surely there is some value to this fiduciary standard that customers are benefiting from.

To delve deeper, an intermediary held to a fiduciary standard would typically be a fee only adviser The market is however rife with investment advisers who have distribution arms (it is allowed by SEBI) – at a so called arms-length. Some take distributer licenses in the names of their spouses or close relatives. Aroha Capital remains a fee only adviser. We have no other sources of income other than what our clients pay us directly. As a consequence we are motivated to keep costs low for our clients – a direct example of which is our aggressive promotion of DIRECT mutual fund plans as against REGULAR plans. Do go through this article – the indirect cost of direct plans - from one of India’s top robo-advisers who are essentially distributors. The entire article pre-supposes that just by buying direct plans, the customer does not have access to an adviser. Are not customers of Aroha Capital benefiting from low cost DIRECT plans while at the same time benefiting from investment advice that follows fiduciary standards? The entire distributor community conveniently ignores the presence of fiduciaries such as us who provide fee only advice while recommending direct plans. Ironically, as described above it is fiduciaries such as us who pay the highest license fee to SEBI – while distributors though incentivized to increase cost to customers, have significantly lower regulatory costs.