Variable Load Structure for Mutual Funds - Simple Equation

Variable Load Structure for Mutual Funds

Harish Rao - Saturday, February 21, 2009 10:48 AM

The Securities and Exchange Board of India (SEBI) is mulling introduction of a variable load structure for mutual funds in India. This is a game changing initiative which can have several ramifications for investment management in general and mutual funds in particular.

SEBI has by and large been an excellent regulator. Most regulations, atleast concerning Mutual Funds, have been extremely investor friendly. Against this background, SEBI's move to introduce a variable fee structure for investors and advisors makes for interesting analysis.

Based on the limited coverage in the press, this is what I make of SEBI's proposal:

  • a. The load chargeable would have to be agreed to by BOTH, the investor and the advisor, and would have to be mentioned in the application form.
  • b. The load mentioned would have to be within the prescribed limit of 6% for a scheme.
  • c. Investors can also choose to compensate the advisor with a separate cheque while paying the AMC the amount without any load.
  • d. Nowhere in any of the press clippings I have seen, has there been a mention of the default load, i.e., the load levied if there is no mention of it in the application form. Or if any application form does not have this data, would it get rejected as a ‘Not In Good Order' (NIGO) application.

What are the potential ramifications ?

  • a. Advisors will have to inform investors of the loads and expenses and the need to sign off together.
  • b. ‘Good' advisors can use this opportunity to emphasise their value-add and hence ask for a higher load. This should not be difficult as they charge much higher fees for insurance advice.
  • c. ‘Savvy' investors can use this opportunity to demand more from their advisors or even lower the load for investments.
  • d. All of this would inevitably lead to a ‘Moment-of-truth' between advisor and investor. This is crunch time and advisors better prepare for the same.
  • e. Different FEE and FREE models will develop and in the end an amalgam of thought processes will coalesce to produce a smoothly working model for the advisor and investor.
  • f. However, fee discovery can prove to be a prickly affair. Only confident advisors can pull off a fee based model in the face of a downturn.

Moot points :

  • 1. How will the large distributors - Banks, Brokerage Houses etc - standardize this amongst their teams.
  • 2. Will a Relationship Manager's compensation be linked to the load sign-off. Logically, it has to be. So what is the sales story now?
  • 3. Will there be a strata of privileged clients with preferential loads?
  • 4. Will commoditised advice be dispensed for the low load clients?
  • 5. Will rebating be back? Or can we expect to see these signs in your favourite broker office : ‘Invest in our ELSS before May 31, 2009 and pay no load' or ‘No-load in all new SIPs. Hurry, limited period offer'.
  • 6. What will IFAs do? Have a standard plank or charge what the wallet can pay?
  • 7. Will Clients use this opportunity to hold the advisor responsible for a sizeable erosion in his equity portfolio.
  • 8. Will some IFAs give up on Mutual Funds altogether and go for low hanging fruit - the Jeevan Aasthas and other such insurance schemes.
  • 9. What is the guidance that Association of Mutual Funds in India (AMFI) will provide in such policy formulation?

However, this has once again shown that SEBI has cost control and transparency in mind. SEBI is indeed several notches above its Insurance counterpart, when it comes to empowerment of the investor in every stage of investment. Howsoever noble SEBI's intentions may be, this is bound to cause some heartburn amongst the advisory community. Mutual Funds charge a fraction of what Insurance companies charge and hence are much less remunerative. The oft quoted aphorism ‘the Indian investing community is not mature' is soon going to be tested.

SEBI has kept a deadline of March 6, 2009 seeking suggestions on this new initiative.

Do you have any ideas, suggestions and thoughts on this? Please do share it in this blog. This is a topic worth discussing threadbare.

 

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49 Comment

From Srikanth Bhagavat

February 21, 2009 2:20 PM
I have been in the bsiness of Adisory for a few years now, and observed how many of the participants work. Many investors are most happy signing a blank form and letting the distributor fill in the rest of the information. Henceforth, in all likelyhood, the laod column would also be left blank for the distributor to 'fill up'. Banks have various forms such as account information forms, risk profile questionnaires etc which are required to be filled in by investor clients. Most often, relationship managers 'fill' them on behalf of clients, and 'oblige them'. IRDA requires that advisors obtain a sign off from clients when they buy a ULIP product, that 'they have understood all the terms and conditions of the policy'. Most often, I have foind that they remain as ignorant whether they have signed on such a declaration or not. In the INdian situation, where the investor is not sufficinetly literate on investment matters, the danger is large that the unscupulous distributor will still fill in a number of his choice, and take investors for a ride. Those with scruples, will remain the less wealthier! On a different note, I think the concept is good, but our markets are just not ready for it. Investor nor advisor. It will be very bad timing. In bear markets, such as this one, such a move will destroy much of the distributor community that is so vital to mutual fund penetration in India.Positive sentiments are required to make such moves work. Investors in India are used to receiving 'free' advice and by nature, are averse to paying for anything intangible. They will learn, but after getting burnt! Overall, I would say that SEBI is on the right track, but wrong time.

From Dipankar Pattnaik

February 21, 2009 3:52 PM
I have been in business for last 5 years. We have always tried to offer the best to the clients and we have also doled out free advises. The point is whether good advisors will be able to charge better fees. That may not happen always. If one had the choice of paying for it and not paying for it, many would rather not pay. If someone has been a client in the past, we have an obligation to service the client. Sometimes we service a client anticipating that the client would realise that he/she needs an advisor. Hence the client knows whether one goes direct or not, the servicing may not be too much of a hassle. The question we would rather be addressing is how to improve the quality of the advisors. That, to my mind is a very important issue. The business needs better quality and not cheap people as advisors. This entire market is evolving and I am sure the regulation would look into the quality aspect.

From Harish Rao

February 21, 2009 8:50 PM

Srikanth - Great observations. Maybe SEBI could have introduced the concept of A and B classes. The former have a high front-end load and low 12(b)1 (the US equivalent of trail) fees. The latter is no entry load, but cascading CDSC and higher 12(b)1 fees. Class A favours the long term investor, as the recurring expenses are lower. If SEBI presented a A vs B choice, such a delicate impasse could have been resolved.

Dipankar - Taking off from what Srikanth mentioned, there seems to be two issues. A) will investor pay for advice and B) will the honest/quality advisor suffer in the hubris. Looks like in the short term, it could be chaotic; but should even out over time.

As regards quality, the market and not the regulator will be the sieve that filters.

From Types Of Mutual Funds

February 22, 2009 6:11 AM

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From Srini

February 22, 2009 8:35 AM
Dear Harish, Iam an Advisor by profession for the past 5 years after having served for 10 years in the Mf industry. With regard to Sebi's Variable Load, the Regulator has put in a proposal asking us whether you want Proposal A or B. It never asks you whether you have any other valid option (suggestions are invited only on the said subject) that only indicates that they are ready to implement it. But as you have well said this is going to bring in under cutting and passouts in a big way. This apart Investors will be taken for a ride by unscrouplous advisors. As Mr. Srikanth has pointed out big MNC banks which have PMS for mutual fund investments will jolly well charge their clients fees that will obviously be on the higher side of 5% (this time even debt funds and liquid funds) and that goes to say why they have all welcomed such a move by Sebi. The Regulator says he is here to help the small investors, but these kind of propoals will hamper the growth of the mutual fund industry in a very big way. It can even kill certain category of the distribution community. Sebi Mutual Fund Advisory Committee which has brought out the Vraiable Load Proposal has good representation from the Investor Association, AMC's (5 of them not a single one has made any statement on this Variable Load nor have even taken the advice of the distribution community), Amfi and Sebi officials. There is no representation from the Distribution Community. Who will then put across the views of the Distributors? Dont say that the AMC's will do it they are more bothered about the police man (here sebi) and will never say No to its action. So the distribution community should REJECT THIS PROPOSAL and send email against it to Sebi. Let them have mutual discussion before taking a decision, till then the decision of Sebi will be ARBITARY and will also act against the interest of the investors. There is already an DIRECT option to the "knowledgable investors", why then sebi is trying to implement this Variable Load. Is there an hidden agenda in it??? Let Sebi have a open discussion by inviting various category of distribution community and hear them before taking a call.

From Amit Trivedi

February 22, 2009 10:18 AM
Hi harish, I agree, this is the "moment of truth". As Srini has correctly pointed out, SEBI has asked comments on how to implement and not on whether to implement. Interesting times ahead!

From Harish Rao

February 22, 2009 10:23 AM

Srini - A passionate response. Unscruplous advisors have always had no long term franchise. They will continue to exist, whatever be the structure. And continue to fail.  

PMS is no smoke screen for the bigger advisors. Believe me, they are hurting big time, with investors questioning fees and refusing draw-downs.

As for 'Direct' investing, can anyone from the AMC community who is reading this blog, please give an indication of just how much of Retail AUM is direct. ( AMC employees can use a pseudonym - Deep Throat or Obama Mama etc to protect their identity !!!)

BTW, Srini, nowhere in my post have I mentioned that undercutting will return in a big way. I have merely remarked that the door is open now.

From Harish Rao

February 22, 2009 10:29 AM

Amit - If it is How and not Why, then it is an Operational issue and not a Strategic one. Tough Love from Sebi.

From Ramesh Bhat

February 22, 2009 11:32 AM
Mr. Harish, Won’t this cause the following impact for the Investors:- 1. The advisors may mis-sell the Debt fund schemes to the investor with a load of 1% or above when there is no load for the same now. Which may affect a credibility of a Good and genuine IFA. 2. Won’t the MNC banks and PMS guys who takes POA from the clients play a trick of putting the maximum 6% and enjoy more commission

From Harish Rao

February 22, 2009 11:49 AM

Mr. Bhat : To quote Mr.Damodaran, "Sunlight is the best disinfectant". Tricksters will be hopelessly exposed. Not easy to plug in a 6% charge. Better prepare a tombstone now, for those that do it (on the sly). PMS, Real Estate Funds etc are no easy cover up. Investors are demanding info on current portfolio value and the road ahead.

As for debt funds, it will be interesting to see what charge could be there.

From Parthasarathy Devarajan

February 22, 2009 11:52 AM
I think this is a bad idea - I like to spend much of the time with my clients understanding their financial and family situation rather than having to haggle about load. Compared to world standards for loaded funds, 2.25% is not worth breaking anyone's head about. I did an analysis on my usual 5-fund portfolio for an investment of 10K per month (85% equity funds and 15% debt fund) from Jan 1996 to Dec 2004 (8 years). An investment of 9.6 lacs during that period would have grown to 36-odd lacs if no load was paid on any investment. If load was charged, the market value would have been lesser by approx. 1 lac. in that same period. That's not too much to pay for good advice, so it's not worth complicating relationships between the client and the advisor. I mean, think about it - they have at most been paying 2.25% on any MF scheme till now. Which client will really agree to pay more, if at all? And the moment you talk about writing personal cheques, it leads to a lot of distrust between the advisor and client. Most of my clients are on a long term path (at least 15 year plans) and if these haggling sessions take up most of our time, either the distributor will lose interest or the client will look elsewhere. Essentially, what this will create is transaction based agents (the very problem that SEBI is trying to fix, I presume) - whoever can offer to take the least load will get to submit the application. And if this continues year after year, then who has really worked in the interests of the client. At the end of the day, the client will end up with a mess of various schemes with no particular asset allocation plan in place and no one the wiser! Yes, introducing class A/B type of paradigm will clear some confusion. In fact, I was recommending that even DIRECT mode be treated as a different class. Those who want to go direct can start a new folio altogether, so that whenever any transactions are done under a folio marked with an ARN code, there's no confusion in anyone's mind about what the advisor/client intend to do.

From Srini

February 22, 2009 12:02 PM
Dear Harish, As per Sebi's own admission in the said Variable Load proposal, the Direct investing is around 4-5% (i hear frm the industry that the majority of it is into short term plans). I have made use of undercutting in correlation with 'Good' advisors and rebating. I will be too happy to hear from you the AMC point of view too (put yourself into your old shoe and answer it, but try to be neutral). Also your view on the Advisory Committee's proposal without hearing the distribution communities view? Srini

From Balaji.K

February 22, 2009 1:21 PM
Hi Harish : I have been in the business for the last 1 year after having served close to 14 years in one MNC AMC. I furnish my feedback : In India, neither the investors nor the advisors are 100% matured. " 80 - 20 Rule applies here also " . To my understanding, only 20% of the investors and advisors are reasonably matured. In this situation, if variable load structure is implemented, it will create unnecessary confusion / dispute among 80% of the investors / advisors. Instead of giving free hand to both investors and advisors to decide upon the load, let SEBI come out with 3 types of load. ( Plan A - 3% ; Plan B - 2% and Plan C - 1%). Of course, for ' Savvy ' investors, the NO LOAD option is always there. Variable load structure gives free hand for some RMs to charge entry load of 2 - 3 % even in income / STIP / liquid funds if they are short of their revenue target.

From Harish Rao

February 22, 2009 1:24 PM

Deva - A pity if the transactional model triumphed over the advisory one. Maybe it would have been better if SEBI presented just a A or B class and made it more convenient for an investor to choose. The admin work for MF R&T or TA teams would also be less complicated. Maybe price discovery would evolve over time. Real Estate consultants have some sort of 1% - 2%+  capital value or a 1-2 month rental fee structure, which has evolved over time.

Srini : If it is just 4-5% then it shows the advisory model is still robust. I would assume AMCs articulated distributor concerns and aspirations to SEBI. A tragedy if it wasn't the case. The distribution community must ofcourse make itself heard. Please use all the pressure points in the system : SEBI itself, AMCs, Distribution Newsletters, IFA platforms, Press etc.

From S G Mistry

February 22, 2009 3:28 PM
Dear Sir, 1. There is a threshold of Rs. 10 lakhs per ticket / per investment, above which the variable entry load regulation will apply. I would like to byfurcate in three stgaes like 10 Lacs, 5 Lacs & 2.5 Lacs for Metro City, Semi Urban/Urban & specifics Rural area respectively should apply. Reason behind for this suggestion, in today's market scenario there is every now & then, in market 95% of so called financial advisors are selling or pushing only ULIP Plans and this is completely a miss selling, which everybody knows. like for three year term, double in three years, tax benefits, 25 to 50% return etc. If I feel uncomforatble to advice this type of plan, I have very good option to advice term plan / MF SIP combination to investor. certainly there is very less remuneration / much efforts / less understanding among public. Inspite of that, If i get 1% to 3% more remuneration on sip, it should be a motivational factor for advisor & It's a very less than ULIP. Also there is service element also affect in long term. In my opinion it's a very good move by SEBI but there is also fear that big corporate broker may misuse of this norms. They will advertise like that Invest before this date & No Load with this scheme & this practice will eliminate small advisor from system. 2. There should be a 1% Entry load on Equity Scheme & 0.50% on Debt Scheme (Except Liquid Scheme) on Direct Investment. Procurement of this load amount totally / or partly - should go to the Investor Education Fund. Whole Mutual Fund Industry including AMFI / SEBI should put maximum efforts to popularise Mutual Fund scheme with broad understanding in their regional language. I have seen that, there is well educated people like doctors/teachers/ have no more knowledge about mf schemes. There is common understanding that MF means Equity Market Scheme. They also say that I have also 3 year MF Scheme, which is in reality a ULIP Scheme. Nobody knows that there is difference between Life Ins Co. & Mutual Fund AMC. 3. There should be higher trail from AMC, subject to fixed Exp. Ratio. But what about Sub-Broker status. Regarding a Entrly Load column in Application Forms, I strongly suggest that advisor should oraly informs investor that there should be this much load will be charged. not necessary of signature of Investor to confirm load in writing at application level point. but, after receiving the account statement of the scheme, in this account statement ( transaction slip part ) there should be a specific column for confirmation from Investor that load has been charged is ok & there after brokerage should released. 4. Much clarification require for load SIP transaction, if separate cheque option for commission are allowed as said by sebi. 5. There should be a difference in full time professional advisor & part time advisor, direct or sub-broker, how many amc they are representing, how much infrastructure they have? This all factor affect to serious advisor. So, SEBI should also consider this factor also.

From umakalyanam

February 22, 2009 3:51 PM
Sir, We have been in the business for past 10 years. During this dry market to promote mutual fund only is becoming tight, and we are convincing people to go for SIP, which in this variable load has no direction. If sebi is interested in the investors , then actually what was prevailing was the best scheme , because this variable load is not going to be as transperant as they visualise.

From Harish Rao

February 22, 2009 4:13 PM

Balaji : Let me be a contrarian in this. If 80-20 is true, then AMCs and Distributors should focus on the 20% which is giving 80% of the AUM and sell the variable concept to them. This 20% is savvy enough to quickly know the new rules of the game.

Mr. Mistry : Trifurcation on various levels only adds to complexity, doesn't it? The Investor Education Fund is a good idea, as always. Increasing trail has its constraints - remember there is a TER which covers everything - AMC fees, brokerage, TA fees etc.

I agree, the investor should be made aware of the load levied. It should be prominently displayed in the account statement and informed in every purchase confirmation - sms, e-statement etc.

Umakalyanam : I agree with you on the dry/tight market. As regards transparency, I am more optimistic. As Balaji said, it is a 80-20 business; at least the more savvy investors will ensure discipline.

From Harish Rao

February 22, 2009 4:18 PM

@All : AMFI and AMCs are supposed to enforce a Model Code of Conduct. This Code now needs to be changed to reflect the new dynamics of the game. Any advisor / organisation found violating the code needs to be stripped of his/her/their ARN. Utopian? A few suspect it is. I hope not.

From Chandrasekaran S R

February 22, 2009 7:34 PM
The Proposal for Variable Entry Load in a Country like India is highly Impractical and would most certainly kill the growth of the Mutual Funds Industry. Also this has been proposed without even discussing the subject with one of the stake holders, i.e., the Distributors of the MFs. Considering various aspects, this proposal deserves to be rejected in total. Hence we REJECT THIS PROPOSAL ENTIRELY S.R. Chandrasekaran Sai Securities & Consultants Private Limited ARN 3533

From v.srinivasan

February 22, 2009 11:31 PM
Respected chandrasekar sir, I too agree with your views.I think we will have to ask for first the meaning for Distributors. Whether this word is associated with Mutual fund or for anyother thing. What for AMFI is conducting the test ? Renewal of licence fees etc ? Whether it is a ethical practice to decide entry load without taking some suggestions from Mutual fund Associations people. In mutual fund association some people or even more qulified and experienced people are available there suggestions at times will definetely will work out better than the board decision. Now the position of the Distributors is like , Who is to bell the cat. with regards, v.srinivasan. ARN 0668

From partha iyengar

February 23, 2009 12:25 AM
I have a different take on the variable fee structure. Why only mutual funds? Every advisor can actually charge fees for across all asset classes. Thought would share my experience on this: I very strongly believe and practice the fee based non-discretionary portfolio model[across all asset classes]. Of course,I should admit that I have taken the road less travelled only recently[since 2006 onwards].But it has been a wonderful experience. The clients are ready to pay not just fees for the financial planning model but also gives higher allocation of their portfolio to be managed, once they are convinced that the advisor has: 1. domain expertise,gives a realistic picture on global trends in economy, market and returns expectations across all asset classes. 2. educate and empower the clients to focus on reaching their goals[rather than chasing returns]in the most cost effective manner. Unfortunately, in this mad rush for garnering more AUMs and higher revenues coupled with complete lack of domain expertise, we[the financial services industry]have lost the trust of the clients in the last 18 months. I don't believe in the excuse of 'once in a life time event'. If we had been on top of the events that were unfolding, we could have prevented the huge downside in client's portfolio by re-balancing portfolios. At least, this would have minimized the downside for the clients.If not that, we could have at least prepared our clients for the worst ever downturn through constant communication [news, views, reports, etc.]. Some clients choose not to listen. That's fine. In fact, the lack of trust has what has undone all of us now. Its going to take a long time to restore trust among clients and following are my suggestions: 1. we should stop peddling products 2. focus more on moving up the value chain by increasing our domain expertise and skill sets across the industry. 3. educate and empower clients to focus on goals rather than on returns. 4. gradually transition from transaction model to fee only model. I thought it would be interesting to leave you all with by posting an interesting article that appeared in the latest edition of FPA. It talks about moving from the product distribution mindset to focusing on 'life'. Not products. Not performance. The key take away of the article is that 'adding value by focusing on life stage transitions of investors' is what is going to help the advisors to acquire, retain and charge fees consistently. Note the take on 'free financial planning'. Please find below the link to the article: http://www.fpajournal.org/CurrentIssue/TableofContents/TheNextWateringHole/

From Naresh Lalvani

February 23, 2009 10:19 AM
With variable load for Brokers/Distributors , I regret to inform you are only adding to confusion in a BEAR MARKET. In the current method which prevails, I don't feel the pinch of 2 or 2.25% debit in my purchase value as I issue only one payment. If you are going to ask me To issue 2 payments, Physiologically i Will think 200 times before going in. If u r asking me to depend on FUND HOUSE ADVICE- SORRY I WILL NOT. U r asking me to ask a BARBER IF A BALD MAN NEEDS A HAIR CUT, THE ANSWER U KNOW VERY WELL WILL BE YES. All Fund Houses will say all their FUNDS ARE BEST. More over being in EXPORT BIZ, I am not going to break my head & start my own homework in STOCKS/MF. If my AGENT gives me an additional DEBIT, I will ask him to GO FLY A KITE.Tell me one thing, WHAT WILL MOTIVATE SEBI OR MF HOUSES TO WORK IF I SUGGEST VARIABLE SALARIES. U FIRST IMPLEMENT THIS & THEN TRY TO THINK OF BROKERS/DISTRIBUTORS.........

From Harish Rao

February 23, 2009 10:52 AM

Gentlemen : If I may play Devil's Advocate - Why is there no issue or a fuss when ULIPs / Pension Plans etc charge much higher fees and expenses. And these charges do not come down even in a bear market.

From Harish Rao

February 23, 2009 11:10 AM

Partha : Thanks for the link. Wonderful article.

From Amit Trivedi

February 23, 2009 1:14 PM
Dear friends, Some of you have mentioned that SEBI should have asked for distributors' views. I think, by putting this in public domain, SEBI has actually done that. You have the chance and responsibility to put your side of the story. Use that opportunity. You can at least have the satisfaction that you tried in the right forum. Amit

From ARUN

February 24, 2009 10:36 AM
Dear Harish, i have gone through the article and various opinion expreseed by lot of people including Amith, I feel the IFA's will be paying the price for some big greedy distibutors who churned the money like nobody's business in the great bull run. I think cutting out 2 cheques from the client's cheque book would be little difficult, I think even AMFI and all the members of AMFI should sit together and atleast now take one stand rather than making 2 or 3 groups among themselves and decide which one is good for the industry to exist and also grow. If the AMC's itself does not exist then obviously we will not exist in the current format. I feel the proposed variable load is too early for our country.

From jinesh golcha

February 24, 2009 11:21 AM
hi, i think frustration is creeping up among the advisory community.i think the regulators are being influenced by the west and the way it functions.but the west is not always right...given the present scenario the west is moving back from privitising to nationalising...all in a days work. sooner if not later the regulators will understand that they will be making a grave mistake by blindly following the west... in order to ensure that a investor sticks around the exit loads should be made as high as between 3-6%if one exits before 1 year. data suggests that investors do not stay beyond 220 plus days on a average. so instead of getting to the root of the problem one is getting deviated from the follies of the industry. moreover indians have never understood the value of advice nor will they appreciate it in large number of cases...we love to touch and feel everthing we buy and with both these components missing in investment advice, things will get murkier as even the best ones will have trouble charging as investors will in most cases think he is overpaying... remember the richer you get the more miserly you become,so cost will be viewed with a microscopic view. investments that are currently going direct should be in a seperate portfolio with the lowest expense ratio possible below 0.5%, which is not present currently...amc should be magnanimous in rewarding the ones through this route...just reducing the entry load is an eyewash....

From Harish Rao

February 24, 2009 12:42 PM

Arun : I agree. Churning in the name of portfolio management and asset allocation is the biggest concern. Unfortunately, it is practised by greedy advisors and abetted by ignorant investors.

Jinesh : Your suggestion of a high exit-load is indeed a good one - albeit from an investor tenure point of view. But this begs an answer to the question - how does then an AMC pay the fee to the advisor. Anyway, most AMCs have fallen prey to the practice of upfronting all fees and paying commissions in advance even for SIPs.

I think SEBI as a regulator has been excellent from an investor's POV, and that is the way it should be. However, the insurance regulator has adopted a more manufacturer-advisor friendly stance. This has given rise to a scenario of unequal compensation for a similar asset class. This morning, a bank in Hyderabad asked my uncle to go in for a 5 year ULIP with great insurance cover, in lieu of his underperforming income fund. Perhaps the arbitrage for the advisor was too great.

From Harish Rao

February 24, 2009 12:44 PM

PS : My uncle will be over 80 when the 5 year ULIP is redeemed. I rest my case.

From KRISHNA DISTRICT MD ADVISORS WELFARE ASSOCIATION

February 24, 2009 1:59 PM
We on behalf of independent financial agents would like to bring the following few lines for favor of your kind consideration. We all the members are qualified in AMFI and bringing business for AMCs since 8years. Recently SEBI changed some guidelines of AMFI and also introduced Cross Selling by Banks and Corporate Agency Channel. This is introduced under influence of some bankers and also corporate companies without taking into account the difficulties members of Agency Channel. SEBI/AMFI have not discussed with Agency Channel Members.They have taken all the decisions unilaterally and introduced waiver of entry load to those who submit applications directly to AMCs. Under Bancassurance channel, SEBI has given corporate agency to bankers and also to some companies. In turn they are arranging AMFI certification under Mass Copying and also under their influence. A person who is not having any knowledge about sensex and also difference between equity and debt are getting AMFI certification so easily without any strain. All the banks have restricted the entry of AMFI agents and they have been monopolising and doing business with customers under cross-selling mode. So many AMFI qualified individual agents and their families who have been living under this profession on full time basis without any employments are surviving under this roof with so many problems. Because of the unilateral decision taken by SEBI, all the individual agents and their families are falling on streets. SEBI/AMFI have been not showing any employment for these agents and at the same time they are throwing all their families on streets. SEBI is giving shelter to Corporate Agents and Bancassurance Channel under their influence which is highly irregular. Banks are doing business and declaring profits every year in crores as per their budgets.When their income even after meeting the budgets is not sufficient for them and hence resorting to cross selling MF/Insurance and gaining additional revenues as per their plans, how can SEBI/AMFI expect individual agents to survive under so many problems without any proper earnings. We strongly protest this method of no entry load/variable entry load. In India, every citizen is having account with some or the other bank. Hence every citizen is under the control of one bank or the other who is having corporate agency. In some cases, in such case, customer is under the influence of the respective banker. Then what is the fate of individual agent? Hence we appeal to SEBI to restore the old procedure by eliminating Bancassurance channel and Corporate Agency channel, so that everything will be in order.Also AMFI exams have to be conducted strictly and systematically but not with influence of bankers/corporate channel. It has been observed that some bankers and corporate agents with support from AMCs have even gone to the extent of influencing AMFI to conduct exams in their premises like staff training centres,etc located in remote areas and hence get more of their staff get AMFI qualified. We would like to inform that Government is not going to get anything by providing business through Banks and Corporate Agency Channel and AMCs have been sponsoring foreign trips and extra commissions to DGMs,AGMs,BMs and staff working in Banks/Corporate Agents who have been already drawing salaries every month on month in permanent employment from respective banks/corporates.It is against to social and natural justice. With respect to variable entry load is concerned this is not good and not acceptable, as the customer will always prefer only "zero" entry load and finally cause damage to individual agents. In this regard, we would like to bring following to your notice for taking necessary action.It is AMFI qualified individual agents who have been giving good service and do less churning than Banks/Corporate Agents being working on full time basis even working on holidays as per customer's choice. Why only MF investments have to be done on a variable entry load basis? If regulators really want to protect investors in this regard, why can't such rule be implemented first in all financial instruments like ULIPs, Life Insurance Policies, where entry loads are even to the tune of 40% and so on? Why only variable entry load? Why can't FMC also be variable then? Corporate Agents, Bancassurance Channel, Big Agents get higher commissions and foreign trips which are higher than general entry load,i.e.2.25% and from where AMCs have been paying this additional incentives to them and also the foreign trips? Why can't SEBI act on such broader and deeper issues to protect investors in real sense? How much AMCs are getting from Entry Loads/FMCs/Exit Loads/NFO Charges and in turn how much they are paying to individual agents compared with Bancassurance & Corporate Channel. SEBI has been inviting comments on problems related Variable Entry Load,through your convenient channels without giving any opportunity to express their views by individual agents and taking your decisions unilaterally under the influence of Bankers and Corporate Agents. Under right to information act,we would like to know from SEBI,how they have been modifying these rules without any transparency. Ours is not a developed economy but a developing economy and hence financial experts opine Indian mutual fund industry is not mature enough to implement a variable load structure.It is the individual agent who have been serving investors even in remote areas without any extra remuneration and also on public holidays and Sundays for that what he/she gets is only 2.25% and also paying service tax and income tax from this amount only. As per an article in Business Standard dtd. 09/02/2009,"The customer and the agent can mutually agree to pay a load below the maximum permissible 6 per cent irrespective of the load stated by an asset management company (AMC)"Can SEBI/AMFI/Any AMC let us know in which equity/debt fund, an individual agent is getting 6% commission and if AMCs have been paying this to Bankers/Corporate Agents, from where they are paying and how they are paying and why is this descrimination between the channels? Let us also look at one simple buying pattern in our day to life. We all buy various products/services as customers from the market and will Government or(and) regulators like SEBI, RBI, TRAI, IRDA, etc ensure sellers collect product/service cost and trade margin separately from buyers? If this is how regulators or (and) Government expects trade to function, do you expect buyers to pay product/service cost alone and sellers forget to get trade margin? Which business can run on this earth successfully in this way? After going through SEBI's circulars/mails published in media by corporate agents/bankers/AMFI, it has been found that most of them would like to backstab the individual agents channel by colluding amongst themselves to strengthen only Bancassurance and Corporate Agency channel,which is against to natural and social justice under our constitution. SEBI should not compare mistakes done by one or two big bulls who have been working in metros and playing with clients under the influence of AMCs and Bankers&Corporates and take drastic measures and punish individual agents scattered in all over India with measures like variable entry load, no entry load for direct applications. Finally,we appeal to SEBI and Government of India to kindly take all these above factors into account,do favor to individual agents and to their families on humanitarian consideration. We request/propose not to introduce Varibale Entry Load and to stop No Entry Load unless otherwise and to give proper financial protection to individual agents. A necessary action from the concerned is highly appreciable Thanking You. Yours Sincerely, Secretary, The Krishna District Mutual Fund Advisors Welfare Association, Flat No.G1,Anil Towers,G.R Street Ayodhya Nagar, Vijayawada-520003, Krishna Dt. A.P.,India Mobile:94401-73735 / 98490-84526

From Harish Rao

February 24, 2009 2:37 PM

Dear Mr. Secretary : Thank you for such a passionate response. And congratulations on organising yourselves as a MFA Association.

First of all, this is not a SEBI mandated channel to gauge response. However, this is a forum wherein everyone with even divergent or dissenting views can air it with confidence. So we welcome your point of view. Your concerns are understandable.

As regards Banking Channel, all across the world, banks and large brokerage firms offer investment advisory services. It is perfectly normal for banks to bundle investment advice with their other services. In India - a nation of savers - where mutual fund and equity penetration is so low, we should welcome every channel which spreads the gospel of financial planning. It will be great if every post office or every school has an AMFI certified resource.

Sir, I for one believe in the Strength of One. Every individual IFA can make a difference and no institution can stop it. It is upto you to make use of institutions available. For eg, I have several ideas, but make use of an institution called 'LiveMint' to provide the platorm.

As regards your other concerns, please feel free to write to every single AMC and articulate your feelings. You deserve to be heard. It may also be a good idea to write to AMFI and SEBI. SEBI is a regulator that listens. ( I am reasonably sure that many AMCs are keenly following this blog).

All the very best, Sir.

From Srinivasan

February 24, 2009 6:43 PM
Dear Harish I am in this industry for more than a decade. We always harp on the factor that mutual fund as a industry always concerned only about corporate and HNIs and they rarely care for retail investors. They have failed to address these issues when Insurance industry was opened up and the net result today Insurance industry at such a short period had grown substantially. We as a distributor always have thrived by only addressing retail client's interests and in the process have built a very good relationship with them. Do all of us think a gentleman who invests 10000 Rs. will be able to understand, study and take a knowledgeable decision and is it feasible for the distributor to educate him throughly and then sit with him to negotiate his load. Even though the awareness to compensate the distributors directly for their goodwork is definitely growing, we do not believe the average investor will still be ready to pay directly from his packet any cost to the distributor. Since most of the distributors also do multiple products like insurance etc. we strongly believe this proposal will definitely help other sectors to grow at the cost of mutual funds.

From badrinivas

February 24, 2009 8:01 PM
Its too early for these measures....we keep hearing all the stats about how Equity as an asset class is under-penetrated in India.....& MFs have to be at the forefront of driving this penetration increase, using professional fund management process. That should be the primary driver for SEBI. Theres no point complicating life for all when there are lots of other reforms to be taken up (like firming up on UIN or any such identification, improving KYC, reforming PMS structures, more transaparency & audit on NAV computations & reporting, more restrictions /transparency on inter-scheme transfers, better disclosure on offer documents, etc...). As some have said, 2.25% is no high load by any international standard or even on a standalone yardstick. The psyche of the average Indian consumer is also important to this discussion - the Indian by nature just doesn't want to pay for anything (or rather wants to pay the least, if not zero). Thats why freebies /discount schemes are always popular. And this is true across the social /economic spectrum. I can tell having dealt with many of the new /emerging rich middle class, that there is very limited premium for quality of service attached by even the so called HNI. Cost considerations dominate. So, this measure will be more counter-productive. It will drive clients to the lowest cost advisor, & by the time clients /markets are able to distinguish the quality of advisors, the loss could be fairly heavy! These measures can wait for another day.

From Harish Rao

February 25, 2009 7:39 AM

Mr. Srinivasan : You are spot on about the corporate vs retail focus of AMCs. In the scramble for AUM, corporates have dictated product design and fee structure, thereby prompting SEBIs intervention. But I am not too sure if Insurance would not have done the same if the landscape was the same for them.

Badri : Absolutely right. A load of 2.25% is most reasonable (though an AMC has raised it to 3%). Also, I agree that advice is usually sought for the lowest cost, even by the wealthy.

From Somasundar

February 25, 2009 2:43 PM
SEBI's obsession with regulating the MF industry, and specially its distributors is rather amusing. The craze for aping the west is the worst part of it all. Remember, investors in the west have seen mutual funds for more than 20 years now. They must be equally amazed at its under performance too. So the cost of intermediation is not at all the issue here. It is more of education about risk, the need for perseverence and long term financial planning. Just because some banks and unscrupulous advisers have churned the portfolios, SEBI should not take such a negative view of the advisor community. Honest advisors still exist, Boss. Negotiating the commission with the investor is not only difficult but also very embarassing. Even if I agree for just 0.5%, my cheque will never come. After all, the service rendered is never visible. The positive effect of my honest advise will be realised only after 5 yrars ! Why pay for it now ?. And what will I charge for the endless misc services that I am expected to render. Sometimes, one employees's whole day is lost in picking up a change of bank mandate request. Of course, SEBI will say, charge him for thi also seperately. Is it possible ? Things are as it should be as on date. This new dictat is unwarranted. There are hundred other things waiting for SEBI's attention. For ex, why nil entry/exit load for investments above 2 crores ? So that the big fish makes all the profits ruining the long term common investors's future ? Why not a variable/negotiated fund management fees ? We are simply opening the proverbial pandora's box. Of course, SEBI is not going to listen to any of these opinions. Variable fees system will be law sooner than later. Thereby we would have killed an indistry that is a phenomenon of just 7-8 cities! The AMCs themselves do not seem to have a strong opinion on this. Let me assure you, they will be the worst hit in the next one year. Come on brothers, let us all specialise in Endowment policies of insurers, and ensure our livelihood - that is until IRDA steps in with their version of negotiated commission rates ! Despite all these, friends, CHEERS !

From Narendra

February 25, 2009 10:53 PM
Why life can go on as usual or unusual • It could be a great opportunity for a fee based financial planner to establish firmly. For others, it is just a question of being more transparent with the fees and service levels they can offer. It may also be possible to charge fee on both debt and equity and implement true asset allocation. • It’s quite possible that someone may try to undercut by offering rock bottom entry load. Question then would be what level of service/advice such a distributor can provide. If someone chooses a discount distributor no one can stop. There are always do-it-yourself types. • In any financial market there are frictions especially related to transactions and there are costs involved to overcome such frictions – a known fact and the basis for part of entry load. Would a high ranking employee or HNI have the time and bandwidth to handle those frictions herself? In which case the cost would be enormous because it will be her time and effort involved. I don’t think I will ever see a top manager standing in a queue at an AMC. If the investor uses a support staff for this work, over a period of time, support staff (personal or official) will gain information about the financial transactions and no investor would take such a risk when security is synonymous with confidentiality. • Investor would be more comfortable if she talks to someone - such as an advisor. I doubt very much if she would prefer to handle the money in solitary confinement Who will get affected most? • Fly by night operators, advisors who sell only NFOs and churners • Individuals camouflaged as advisors with rudimentary knowledge/ wherewithal to advice • Institutional distributors (because of high overheads). They necessarily have to become financial planners now. • Small distributors and sub-distributors (they cannot face competition) • ULIPs Who will get affected least? • Fee based financial planners • Relationship oriented Financial planners and advisors • Planners and advisors with client-centric attributes • PMS, Wealth Managers and Stock Brokers – no correlation What can help a financial planner/advisor in this situation • Increase the level of transparency. In a downward market, it can help. When the investor starts riding the tiger called greed it will be business as usual – load or no load. • Take your own medicine - diversify – there are still many asset classes with no/negligible oversight from CBB. • Automation – increase the productivity and reduce physical work – would the mutual fund industry rise to the occasion and would there be a single agency with good IT backbone to support the advisor community in removing the frictions at a very low cost? Can the advisor community demand such a facility? • Get a good tool that is cost effective to analyse funds. Such a tool can also reduce TAT and improve quality of advice. • Fund houses/advisors differentiating between actively managed and passively managed (Index) funds. An advisor would be justified in charging higher entry load on an actively managed fund with the notion that fund manager has the ability to beat the market. What about ULIP? The developing situation, if it reaches its logical end, in my opinion, would hurt the life insurance industry big time as a collateral damage. One of the major weapons any ULIP seller uses is the excel worksheet that compares the entry loads and charges of ULIP Vs Mutual Fund. This weapon would become utterly useless when variable entry load is introduced. What purpose will it serve to compare (40%, 5%, 5%, 1% ……) load with nil% load or variable load (1%,1%,1%...)? There would be definitely a loud clamour by all and sundry to make insurance industry also more transparent and rightly so.

From Harish Rao

February 26, 2009 7:52 AM

Som - I am sure your endowment policy threat was made only in jest. If carried out, I will surely help your family prepare your tombstone ! I just don't see Insurance being the most integral part of investment needs. And indeed if you can explain insurance charges, you can pull of anything.

Narendra - Superbly put. What a wonderful assessment. You have indeed enriched this blog. I agree that Insurance will be a collateral casualty.

This is where my disconnect with some in the  advisory community is : Insurance is sold as REALLY Long Term, otherwise your cascading expense table (40%, 5%, 5%, 1% etc) does not hold true, while Mutual Funds are in suspended animation (Jinesh mentioned the average tenure as 220 days). This is serious distortion of a wonderful asset class.

From M.Alagappan

February 27, 2009 5:38 PM
SEBI is unnecessarily confusing the existing system. At present the mutual fund industry is having two types of investment systems. One is Direct and another one is through ARN holding intermediaries. No prudent investor is bothered about parting 2 to 2.25% to the person who is doing service to him. Service doesnot end immediately on receiving the investment. It only starts from the day of receiving the investments. The services rendered are viz. effecting change of address, bank accounts, changing nomineeds, redeeming (Partial and full) and the like. In this field after sales free service is much. In some cases, switch does not give any remuneration to the intermediary. The intermediaries are contributing to the Government by way of Service Tax, Education Cess and Income Tax from the commission they earn. Why the SEBI wants to curtail all? No body knows the valid reason. Hence, there is no necessity to introduce VARIABLE ENTRY LOAD FOR MUTUAL FUNDS.

From Mohit Kumar

March 1, 2009 3:27 PM
This rule should be applied immediately. If a doctor can charge fees for the advice he rendered, advisor can also charge fees. No one goes to a compounder for advices. Good doctros are paid better while bad are paid less. So compounders will be out of system. Good advisors will florish big way. we forgot some facts of industry. Most of the investors particularly small investor just sign the application and rest is filled by the advisor. Even after the direct investment rule hardly any investor (less than 5%) comes directly to MF offices. Let all of you who have these type of investors have hand on your heart and continue to charge them 2.25% or less if you feel quality of your advises are poor or feel strongly in favour of investor. Whether we accept it or not, the passback is still rampant in the system, particularly either in medium to big ticket investment or at gross retail level. often, a distributor who is not willing to part with the commission loose out to one who does so. Often distributor who do passback to grab business negotiates a higher commission with fund houses and ensure his margin. They put pressue in MF margins and forces the fund houses to be in bribing mode(particularly the small fund houses faces the biggest heat)and also to keep those dstributors out who wants their margin in ethical ways. This practice will ensure elemination of first set of distributors (Hoewever, SEBI proposal never said that MF cannot give more to advisor than what entry load investor is willing to pay) If anyone thinks that there should be the old system and it is good for everyone, i propose one change. Let the fund house write on account statement how much they have paid to distributors for the investment investor have made. Noone will agree. If a fund house do not perform they are punished. If a distributor do not perform, or have advices poorly because he has poor skills; why he should not be questioned?? The fact is often distributor passes the poor performance of investmets to the markets and fund houses. If it is so, what is their role and what are they paid for?? Noone here spoke that the reason fund houses increased exit load on debt funds was to facilitate higher brokerage to distributors. Investor is not aware of it. Noone said that the reason SIP was sold big way sometime in past because distributors were paid upto Rs. 200- 5000/- per SIP. Noone said that they refused the bribery offer by fund houses(like foreign trips and what not). Noone is commenting on why recently a fund house was forced to increased entry load?? This fund house do not empanel each and sundry because of poor quality of distribution in india. This fund house was constantly mis represented in masses by those distributors who were not empanelled. Even people who are empanelled started asking more brokerage because other fund houses were paying them. What should this fund house do in this case. Either to pay brokerage over and above 2.25% entry load and take losses or pay it by increasing entry load or do some sort of accounting fraud and ensure this cost is passed on via NAVs?? It was corrupt fund houses who pay extra to distributors and distributors who do not want to sell because of low brokerage; which forced this fund to increase load. Is this in favour of investor?? This silence on these happenings in the indusrtry in this blog is amusing. Curretnly this industry is tilted in favour of distributors. There are fund houses with deep pockets who are using most of these distributors to to their advantage. I have seen, distributors with advising abilities are silent on this proposal and smiling. Fund houses are also silent because they know this abnormality favouring distributors will be corrected a bit with this rule. Poor Investors are silent because they are buried with losses they have in thier portfolio and they have been educated that bear market is the reason behind it. Lets accept, This rule is to seperate men from boys. Wake up distributors, now investor will question your abilities to handle his money. Wake up fund houses, once the distributor will feel the heat, they will sell good products to safeguard themself and you will not be able to survive if you do not perform. We saw enough of your greed and bribing. Wake up SEBI, your job is not over. If you do not create level playing field vis a vis insurance, this rule may kill this industry as there will be no one left to educate investors. Wake up investor, time has come to question because it is your hard earned money. Overall Great move by sebi and i will continue to advocate my stand here in future

From Harish Rao

March 1, 2009 5:02 PM

Mohit : I like the flourish and passion with which you have made your case. One of your interesting suggestions - print the brokerage prominently in the account statement is indeed bold. But you will be surprised to note that many IFAs and distributors are actually ok with this. Most IFAs are very confident about their relationships. It is just that the rules seem to have been changed in an inopportune time and way for many of them.

From Babu Krishnamoorthy

March 3, 2009 6:37 PM
At the outset, I would like to introduce myself as a Chartered Accountant *** Cost Accountant with over 15 years experience in the financial Services space of which the last 13 years have been with Pelican. My observations on the proposal of Variable Entry load is as follows : The logic noted in the consultative paper is laudable and certainly worthy of consideration, except for the following : Industry Perspective : The mutual Funds industry continues to be in its nascency, inspite of the entry of private MFs since 1993-94, almost 15 years of existence. The AUM of industry at large is less than Rs 500,000 Crores, a small fraction of the Banking industry while in the rest of the world, the MF AUM is many times of the Banking industry funds, i.e USA, UK , Europe etc. In the initial phase it is important to follow the philosophy of KISS ( keep things simple Stupid). A variable structure will further complicate the matter more from an investor perspective as it brings subjectivity in matter, which neither the investor nor the distributor is equipped to handle. Today a distributor is not only a sophisticated CFP qualified individual sitting in a posh office in Mumbai, it also encompasses a small AMFI qualified advisor is a remote tier 3 city like vellore, or dibrugarh. No growth oriented industry can work from its highest possible denominator, but from the lowest possible denominator and work in tandem to improve the whole set of customer experience. Only say 1 in 100 citizens today do any kind of mutual fund investments, this move would be counter productive and render the industry into significant unwanted confusion in the medium term. The mutual fund industry today has to depend on these small advisors in remote pockets of the country to do the leg work to save the MFs cost in setting up full fledged offices which would be costly and not efficient, but these advisors nor these customers would initially be sophisticated to understand the variable model and would render this lopsided in favour of one or the other. To achieve scale of growth and if mutual funds industry has to achieve its growth of over 50 % year on year, which the economy allows, it must be on objective terms, subjectivity will kill the industry’s ability to scale. Automatically when an industry scales, its internal competition will force better practices to be followed that will benefit the customer and his investment goals. Customer perspective : What does the customer want ? Is the customer wanting lower prices or is he wanting a better investment experience and returns. I believe the customer is asking for the latter, cost is one small aspect of this equation, the larger issue is to address a better investment experience and returns which I believe is happening over the past 10 years through the introduction of AMFI certification as well as better investor maturity. In most cases that I know the customer merely signs the application and infact the applications are actually filled up by the agent concerned, if the commission structure is left subjective , then unscrupulous element would add to the confusion at the expense of the investor which would be counter productive to the whole issue as well as open a pandora’s box on litigations which the SEBI will have to administer ( do we have the time and energy to spare when the industry as it is in its knees owing to the current global market). The best example of this is the customer experience in Chennai’s Auto rickshaw system. While all over the country these three wheel contraptions run with pre determined electronic meters which are caliberated and sealed. So the customer knows that he pays the charges displayed by the meter at the end of his journey. However in Tamilnadu, the meter is an obsolete equipment, on getting down from the railway station or the bus stand, the visitor is met by a group of autorikshaw drivers who quote a mindboggling 4-5 times of the normal fare of what the meter may have displayed, then the customer and the driver settle down to serious negotiations with lots of profanities thrown at each other from either, finally they settle down at 2 times The whole experience is painful as well as counter productive, finally the customer reaches his destination with a disturbed mind as well as unhappy feeling. While the unscrupulous elements within the auto drivers make hay due to this subjectivity. In this case, the TN govt’s laxity in enforcing the metered rickshaws has lead to this situation. ( please refer to anyone who is a resident at chennai if he is pleased arrangement that the customer –Driver negotiate their fare, I believe 100 % of us are opposed to it, however hopefully the new incumbent government will provide a succour to this practise). However is SEBI in its rightful senses would like to promote subjectivity in the back drop of this ? This will bring the issue that the smart investor will negotiate better and therefore get a better deal while the not so savy investor will negotiate lesser and as a result lose out. Isn’t it the DUTY of SEBI to protect the latter. Because the former is anyway smart enough to protect himself, while the latter needs the protection. For large investors already there is a system of Institutional investing category that provides them the efficiencies for their large investment ticket. I believe this sufficiently take care of the issue. More over for investors who do not see value in distributors, are free to go directly to the fund house and login their applications without any charge whatsoever. I BELIEVE THE CHALLENGE TODAY IS TO ENSURE THAT THE MUTUAL FUNDS INDUSTRY MUST GROW AND TAKE ITS RIGHTFUL PLACE AMONG THE CHOSEN OPTION OF INVESTMENT BASKET ALONGWITH BANK DEPOSITS AND OTHER OPTIONS, I FIRMLY BELIEVE THAT VARIABLE ENTRY LOAD WILL BRING IN SUBJECTIVITY WHICH NEITHER THE INVESTOR NOR THE DISTRIBUTOR IS EQUIPPED TO HANDLE. HAVING SAID THIS, I FIRMLY BELIEVE WE STILL NEED TO ADDRESS THE ISSUE A LITTLE DIFFERENTLY AS TO HOW TO IMPROVE CUSTOMER EXPERIENCE WHILST INVESTING IN MUTUAL FUNDS SO THAT THIS INVESTMENT ASSET CLASS GAINS IN POPULARITY. IN CONCLUSION , I BELIEVE THAT THE PROPOSAL ON VARIABLE ENTRY LOAD IS NOT WARRANTED CURRENTLY.

From Harish Rao

March 3, 2009 9:58 PM

Babu - Well said. Agreed, the MF industry is in its infancy still. Overseas, what really took the Mutual Fund industry to another level was Money Market funds with cheque writing and IRA/401(K) mandates to Mutual Funds. And they had the simpler Share Class system.

As regards penetration, I believe many AMCs are still content with low hanging fruit. So places like Vellore or Dibrugarh are just dots in a map.

Autos in Chennai - even God can't change it. It is a deeply entrenched patronage system with Police / Politicians / RTO / Thugs involved. Bad luck to all those that have to use it.

From Somasundar

March 4, 2009 2:48 PM
Now that the D-day of 6th March is close, let us wake up to reality. Let us for a moment believe that the variable entry load system is law already. Now what happens to our business models ? Also of the AMCs ? There is a strong case for increasing the trail fees - atleast to 0.75% APQ. This should not depend on whether SEBI allows the AMCs to increase the management fees or not. AMCs can well afford this. Cut the Fund management expenses to begin with, if not everything else. This suggestion is being made not with any greedy intention. Any business to sustain must have a reasonably assured income flow -lest there will be no expansion,no technological upgradion or improvement in services. After all, this profession has a lot of qualified CFPs,CAs and MBAs. They are going to be as much affected as the fly-by-night advisors. No one would mind if the AMCs impose restrictions on the advisors to be eligibe for increased trail fees - the benchmark could be a certain AUM size, number of SIPs, number of investors etc. Of course these parameters should be reasonable at the beginning. Is'nt it surprising that the AMCs have not bothered to reassure us the distributor community with any of these possibilities ? Let us give up any oneupmanship here - neither we the advisors nor the AMCs can survive without such mutual co-operation, now and in the future. Let us hope for the best outcome!

From Harish Rao

March 4, 2009 8:06 PM

Som : Apropos your suggestion of AMCs cutting their management fee and increasing trail. Can you please let me know how much an insurance company earn per annum by holding on to ULIP assets for 3 and 5 years. I shall not embarass anyone here by asking what the intermediary earns for the said period.

From nanda kumar

March 8, 2009 2:00 PM
with no load for direct investment in mutual funds now available,the next step SEBI should concentrate should be inter fund switches similar to switches between sachems within same fund, through internet without any load by enabling fund transfer from fund to fund rutted through registered bank account similar to net banking, with prior mandate and limited to fund to fund trance fer,instantly.

From Harish Rao

March 9, 2009 11:55 AM
Nanda : Possible, but you have to 'register' as Direct with the AMC, if there is already a distributor tagged to the scheme.

From Dipankar Pattnaik

March 10, 2009 10:10 AM
It looks like all AMCs are of the view that variable entry load is not a bright idea at this point of time. Now AMFI is of the same view and hopefully for the first time Mutual Fund industry will be able to present their case before SEBI. Although we'll all see the outcome in the right time, there are few ifs and buts. If this is a great idea, how do we start to charge this load/ fee. The question is in the absence of any barometer of services or advisory what option we have to measure/ justify the load at a certain level? Will the current load of 2.25-3.0% will be a benchmark to start with or it's going to be '6% less something'? The other question is the idea of timing. If this is a great idea and the time is not right, what is a right time? We all know markets will continue to behave irrationally. Sometime they go up and then they slide. If we implement this when the markets are rising, how do we measure that or select the time? And what happens subsequently when the market falls. When the markets rise, everyone knows where to invest and how to book profits, the role of the advisor is probably limited in many cases.

From Harish Rao

March 10, 2009 11:17 AM

Dipankar : Quite right. This whole timing issue. When advisors ask investors to 'forget' about timing or 'anytime is the right time', then really what is the right time to introduce this?

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