Sebi has floated a discussion paper which endorses minimum
qualification or work experience for MF distributors; a Cafemutual survey of
financial advisers shows mixed results
You’ve heard of him. You’ve read about him. He’s the guy you
go to when you want to invest. Your mutual fund (MF) house needs him as well.
The capital markets regulator, Securities and Exchange Board of India (Sebi),
has been watching him too and now it wants to regulate him. He is your MF
distributor. And this time around, he doesn’t seem to like all this attention;
there’s a bit of a storm in his tea cup.
Having his MF commission income being disclosed publicly as
per a Sebi diktat—and much against his wishes—followed by the distributor due
diligence that could end up being a very tedious affair, comes a Sebi concept
paper on the proposed investment adviser guidelines. The paper says that to be
an investment adviser, a distributor must either have a minimum qualification,
say a masters in business administration (MBA) or a chartered accountancy (CA)
or “an equivalent degree” or he should have 10 years of work experience. Though
the qualification that Sebi has suggested are merely draft guidelines for which
public opinion has been invited, will agents meet this criteria?
Lack of qualification
According to a recent survey conducted by Cafemutual, an
independent forum of MF professionals, most of the distributors would not make
the cut based on qualification. Cafemutual conducted a survey of 1,505
independent financial advisers (IFA) across 30 cities in August-September. The
survey showed that 65% of the distributors surveyed were just graduates, while
only 7% of them were MBAs and 2% were CAs. Strangely, 6% of the distributors
surveyed did not go beyond high school.
Work experience counts
But there is some comfort if their work experience gets
counted. Around 33% of the IFAs surveyed have a work experience of more than 10
years in selling MFs, financial products and/or advising their clients. Another
33% of the IFAs surveyed have been in this business for a period of 6-10 years.
“You cannot discount work experience. Of course, qualification is important
because it reflects that you know more than just a graduate, but work
experience is very important as it demonstrates that you have been through
various market cycles. This shows endurance and knowledge of how we recommend
portfolios that survive market volatility”, says Hemant Rustagi, chief
executive officer at Wiseinvest Advisors Pvt. Ltd, a Mumbai-based financial
planning firm.
Though 34% of the IFAs surveyed had work experience of up to
five years, most IFAs feel it’s their work experience that really comes in
handy to help their clients navigate market volatility, and not a high
education qualification. Says Pranav Muzumdar, chief executive officer,
Mangsidhesh Investments Pvt. Ltd, a Mumbai-based financial planning firm: “As
the survey shows that most agents have been around for five years, it shows
that the IFA segment has matured over the years. That said, how well IFAs can
read the market is more important than just educational qualification.”
Reduced commissions
Muzumdar adds that if Sebi wants MFs to penetrate in rural
areas, the minimum qualification and work experience rules for distributors
should be relaxed. “I don’t think that an MBA or someone who has a 10-year work
experience will be willing to settle down in rural India and sell MFs,
especially when commissions are also on a decline,” he says.
He adds that reduced commissions across product categories
add to the burden on distributors, pointing out to the reduced commission in
selling post office schemes. Last month, the government eliminated the 1%
commission on Public Provident Fund and 0.5% commission on the Senior Citizens
Savings Scheme that was paid to agents. Commissions on other schemes have been
reduced to 0.5%, down from 1% earlier. “Agents have to wait for hours at post
offices because of the post office’s shoddy services and facilities, to ensure
that their client’s money gets invested. A drop in commissions certainly
doesn’t help,” he adds.
Should agents charge a fee from clients?
A drop in commissions also compels agents to charge
customers. But are agents confident of charging their customers or willing?
“Not really,” says Amar Pandit, a Mumbai-based financial planner and chief
executive officer of My Financial Advisor, a financial planning firm. Pandit
says that most distributors are not confident to charge their clients because
they fear competition might offer freebies to their clients and poach them. “A
majority of distributors don’t charge their clients. But customers must
understand that they must pay because at the end of the day, there are no free
lunches. If they want services, they should pay,” he says.
Asked whether they would charge their clients a fee, 25% of
the respondents said that most or some of their clients were willing to pay a
fee. “Hopefully, this number should go up. Economic compulsions have forced
them to go to their clients and charge fees. Since entry loads were abolished,
their earnings have gone down and that has forced them to look for alternative
avenues. One logical alternative is to go to clients and ask them to cough up
fees,” says Prem Khatri, founder and CEO of Cafemutual. Khatri adds that
industry, its trade body or the markets regulator are better equipped to spread
this message rather than the distributors telling their clients because “it may
reduce their credibility”.
One of the reasons behind Sebi’s imposition of a transaction
charge (Rs. 150 for a first-time MF investors and Rs. 100 for existing MF
investors) was that it felt that distributors must be compensated in some way
to help the MF industry grow and penetrate beyond large cities. “It
(transaction fee) is some way to compensate the distributors, who may have lost
interest in the distribution of MF products. The idea is that distributors have
to be incentivized,” Sebi chairman U.K. Sinha had said in July. Of the money
that the investor invests in the MF, the fund house deducts the transaction
charge and pays it to the distributor. The balance gets invested in the
markets.
However, agents were given an option to either “opt in” or
“opt out” of charging the transaction fee. In other words, distributors can
either choose to receive or not to receive the transaction charge. Of the
44,000 distributors that have so far complied with the know-your-distributor
(KYD) norms, a mandatory procedure that agents were asked to follow failing
which will make them ineligible to receive MF commissions, only 7,000 agents (or
16%) have opted in, as per data provided by the Association of Mutual Funds of
India (Amfi), the MF industry’s trade body. Rest of them have opted to not
charge transaction fee.
Willing to sell MFs
Khatri says: “A lot of IFAs have quit distributing MFs as
only about 44,000 IFAs out of some 83,000 IFAs have met their KYD norms.
However, one remarkable thing that our survey has thrown up is that MFs are
considered to be the best investment product on account of their advantages
such as low cost, transparency, professionalism and their ability to deliver
returns. Even IFAs who have not yet done their KYD requirements have told us.”
Apart from surveying distributors from across the country,
Cafemutual also conducted two group discussions each in Mumbai, New Delhi and
Patna inviting distributors to talk on the industry, its issues and its future.
One group discussion in each of these three cities comprised only of
distributors who have not yet done their KYDs; presumably those who have
stopped selling MFs. Khatri says that these distributors were almost unanimous
in praising the MF product.
The survey adds that most IFAs perceive that their clients
mostly demand equity funds more than debt funds. Ranked in their order of
preference as to what distributors think their clients prefer, equity funds and
equity-linked saving schemes top the list, followed by fixed-maturity plans and
debt funds. Sector funds are at the bottom of the list.
As the much-awaited distributor regulations start to take
shape, it remains to be seen how the distinction between an “adviser” or an
“execution only” distributor happens and how well, or otherwise, the transition
of a distributor happens from the latter to the former.
Source: http://www.livemint.com/2011/12/11215016/The-inside-story-of-mutual-fun.html?h=B
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