Hey, if you happen to meet the Sebi chief, please ask him what is the expiry date of the mutual fund industry.’’ This SMS has been doing the rounds among mutual fund players for sometime. The message is revealing on two counts: one, it tells you how bitter the industry is about the regulator and the changes it has introduced in the recent past. Two, it also smacks of a sense of resignation on the part of the MF industry, which manages over Rs 6.75 lakh crore on behalf of both institutional and individual investors. Incredible it may sound, but sadly the brightest investment minds that can weather the ups and downs of the stock market don’t seem to find answers to the troubles faced by the industry.
“Nobody is questioning the intentions of Sebi. Indeed, we have to keep the interests of investors in mind if we have to attract them. But the entry load ban was something the industry was not prepared for. It came [too] soon and the industry or the distribution force didn’t have time to adapt,’’ says a senior mutual fund manager, who prefers not to be named. “Ever since C B Bhave has taken over as the chairman of Sebi, he has initiated a lot of changes in regulations, be it documentation, expense, benchmarking, disclosure... The industry didn’t object to any of them, but the entry load ban was something it just couldn’t cope with.’’
Sebi banned entry load (upfront commission paid to mutual fund distributors) on mutual fund investments in August last year. This has hit the industry hard, as many independent financial advisors (IFAs) abandoned MF schemes overnight and switched to selling unit-linked insurance plans (Ulips) from insurance companies because of the attractive commissions on them. Ulips used to offer very high commissions (up to 40-50%) on the first year premium at that time.
“The regulator wanted these distributors who were acting like a medical shop to become doctors overnight. The idea was that you offer investors good advice and earn a fee, but the idea just didn’t take off,’’ says another mutual fund head on condition of anonymity. “Probably, it is the Indian mindset. Most people want everything free or at a steep discount. Probably, distributors aren’t good enough to demand a fee. In short, most MF advisors figured out that getting their clients to cut another cheque for the advice is not going to happen anytime soon and they just fled from the scene,’’ he adds.
According to industry players, there were around 40,000 IFAs active in the country before the upfront commissions were banned by Sebi. The number of active IFAs has reduced to 3,000 since then, they claim. “If the trend continues, it would be terrible for the industry,’’ says Surajit Misra, EVP & national head-mutual hunds, Bajaj Capital. “Unlike banking or insurance, the mutual fund industry is yet to become a brand people are comfortable with. So, you need someone to convince the investor to put money in a mutual fund scheme.’’
Sure, the MF industry has a point there. However, critics point out that the industry is hiding behind the entry load ban and not willing to take the blame for creating a sales force, predominantly concentrated on tier I and II cities, which was happy churning the portfolios of their existing clients without bothering to bring new investors into the system. “I agree the industry is literally at a crossroad. But we should also share some blame for the situation,’’ says the marketing head of a leading mutual fund house. “We were pampering our distributors and forgot to remind them that the industry would survive only with long-term money from investors. We were happy if we got some inflows every month. It just didn’t matter if the distributor was taking the money out from one fund and putting it in another.’’
He has point. The argument against the entry load ban is this: insurance companies can still pamper their agents, but the MF industry can’t do the same. And gone are the days when MFs would fly their prized distributors to exotic foreign locales for a holiday for bringing in more money.
Nobody could blunt the criticism from fund houses better than the Sebi chief himself. In a gathering of fund house honchos last month, the market regulator clarified that he didn’t have any false notion that anybody would serve investors free. “All we were saying is that let the investor decide what he wants to pay for the service. You don’t decide how much he should pay,’’ he told the audience. As if sensing the skepticism of the industry, he also said that the fund houses should try to communicate better with investors if they want to justify the rationale behind the industry’s existence. Bhave also ridiculed the industry’s obsession with the asset under management (AUM) figure, which funds try to boost by chasing institutional money. Perhaps, he was hinting that the salvation for the industry lay in going back to its original mandate of collecting money from lay investors and managing it for them.
However, dumbstruck MF officials didn't seem pleased with Bhave's utterances at the meet. Many of them said sarcastically that, perhaps, they better start selling Ulips since the demise of MF industry was only a matter of time. Sadly, they don't have that choice anymore. Ulips are not that lucrative now. Once again, they would blame Bhave. His battle with theIRDA has resulted in some key changes in Ulips — the commissions are lower, and the insurance cover and lock-in period have gone up.
Some feeble optimistic voices can be heard from the industry these days. One set of people is still concentrating on how to get the distribution force back into the game. One of the main suggestions — the AMFI has made a representation to Sebi in this regard — is to include the service fee in the MF application form.
“We all agree in principle with what Sebi is saying about letting the investor decide what he wants to pay for the advice. Since the implementation of it has not been smooth, we have to find a practical way to solve the problem. We have proposed that let there be a column in the application form where the investor can write what he wants to pay for the advice,'' says AP Kurien, chairman, AMFI. “We can have a cap on the fee. Let it be X% and we can put that in bold letters so that it will catch investors' attention.''
Bajaj's Misra also thinks that is the only way out of the tricky situation. “The idea of writing two cheques is just not happening. It will take a lot of time. The one way out is to include the fee in the application form itself,'' he says.
Another set of people has already started speaking about increasing the awareness about MFs among individual investors, especially those in smaller cities as tier I cities — particularly the four metros — account for around 80% of the money managed by MFs. They also propose educating the distribution force so that it offers better advice and is in a position to demand a fee from investors. “We are focusing on advisors. We want them to offer effective personalised advice to investors so that they won't hesitate to pay for the advice. We are also focusing more on the retail investors. We are educating our advisors about bringing in more investors who want to invest for the long term,'' says A Balasubramanian, CEO, Birla Sun Life MF.
Source: http://timesofindia.indiatimes.com/biz/india-business/MFs-Look-For-Life-Beyond-Entry-Load-Ban/articleshow/6184976.cms
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