What, No Load !!! What, No Load ???

re: What, No Load !!! What, No Load ???

R.Lakshman — Mon, 10 Aug 2009 07:31:05 GMT

Dear Mr. Harish Rao, I congratulate you on your eloquent advocacy as a devil’s advocate for SEBI on the issue of entry load abolition and transition to a fee based model. As a senior investment advisor in the field for more than 27 years, I am not against introduction of a fee based model. But my reservations are over the manner in which SEBI has gone about it. It has essentially unbundled the role of a distributor into two – one as an advisor for which a negotiated fee model will arise and the other as a distributor where he will be compensated by the fund - house as a distributor for his services. To my mind, distributor is a businessman who acts in his own interest for a profit. Whereas an advisor is one who acts in his client’s interest for a fee. In the first role as an investment advisor, he has to align his interests with the interests of his clients and fulfill his role responsibly in the best interest of his clients. As a distributor he has to sell the products of the fund house in terms of the expectations of the fund - house as per his distribution contract with them. These two roles are essentially adversorial in character and it is very difficult to perform the two roles with fairness and equity. In the earlier scenatio, it was possible for the distributor if he so wished, to waive the fee for the advisory role on informing the client that he was not charging any fee for his advice since he was compensated by the fund house for his services. He also had the opportunity to sell the products of the fund houses he rated high both in terms of service and performance. Some advisors even earlier charged fee to their clients when they believed that they were providing value added services. In my opinion, SEBI could have transitioned to a fee based model in an altogelner different manner. It could have mandated that licensed advisors fulfilling some prescribed criteria will only be permitted to act as mutual fund advisors for a fee. They need not be empanelled with any fund house but could offer advise on which fund and which fund product to invest in, complete the investment formalities and direct the client application to the fund house. The system of licensing suggested is something similar to the Bar Council and Medical Council licensing Lawyers and Doctors respectively. This is akin to a Doctor licensed by the Medical Council practicing on a fee based model subject to a code of conduct prescribed by the Council. He advises patients with due care and diligence for a fee and is no pharmaceutical salesman. There could be another category of empanelled distributors who will sell mutual fund products for a commission paid by the fund - house and they should be prohibited from charging any fee and the cost of distribution will have been prized into the product. This system will have avoided conflict of interest as well as met SEBI’s objectives of transparency and investor empowerment.

re: What, No Load !!! What, No Load ???

Anoop — Fri, 07 Aug 2009 11:21:54 GMT

But one should also understand that what is the service being provided. In India there is nothing called service. If people are filling forms for you - thats your service. There is so much information available online on each fund .. one can choose and decide. Theory and gut feeling. Compare this with absolutely unqualified (some loser) charging you for your lazyness. Once this entry loads has been banned all banks are shutting down their mutual fund distribution business. Cause they know, their staff doing the advisory are just CLERKS filling up forms with ABSOLUTELY NO CLUE of which fund will do well and WHY. BET THEY WOULDNT EVEN KNOW THE FUND MANAGER, Portfolio etc. WHY SHOULD I PAY FOR A COURIER GUY. I can transfer funds online. WAY TO GO. just need to ensure these websites dont crash .. cheques going to wrong address/ acs which i think in service industry in india is ACCEPTABLE.

re: What, No Load !!! What, No Load ???

Harish Rao — Sat, 04 Jul 2009 11:19:17 GMT

@Vikas : I am afraid you are generalising too much. Having been in the industry for a decade, there is certainly no 'unholy nexus' between Fund Houses and Agents. Also, many of the Agents and distributors I have met are fine people whose advice and counsel are terrific.

@ Bingo : Nothing is secret in this business. The client just has to ask and he can get all the information. The Asset Management business is certainly more transparent than Banking, Insurance, Real Estate or Stock Broking.

@ Nishikant : Well said.

@ All : The AMC industry may be down, but certainly not out. I wish such activism is shown in say, the Real Estate industry. Fat chance.

re: What, No Load !!! What, No Load ???

nishikant — Sat, 04 Jul 2009 08:54:33 GMT

to bingo, how can u say that 2.25% entry load is secret/ hidden. if u see a account statement, it clearly mentions current NAV, then % of entry load, then comes applicable NAV ie current NAV + load. after that no. of units alloted against invested amount. also in every statement of account,there is line which mentions entry load 2.25 for amount below 1 cr/ 2cr etc, no entry load for direct investments. how much more transparency u need. can u show me recepit of any insurance company/ ppf/nsc which clearly mentions how much amount is deducted to pay the agent. majority of the investors have no problem with 2.25% load. if they secretly charged then it is in ULIPS not in MF.

re: What, No Load !!! What, No Load ???

Bingo — Sat, 04 Jul 2009 07:11:48 GMT

The distributors say that: 1. Investors in India never want to pay for advice. 2. After the no-load for direct investment route was established, 5% investments happened direct and 95% still through distributors. If these 2 are correct, we can safely conclude that the investors were not aware of the entry load. The mechanism of investment was such that 2.25 was "secretly" deducted from investors' money and the rest was invested. This is nothing but theft. If they were aware of this charge, investors would have definitely invested direct because, as distributors say, investors never want to pay for advice. Also, distributors being given a percentage of the total investment seems too much. Effort of the distributor are same whether the investment is of 500 monthly SIP, or 50000 monthly SIP. In both cases, someone is entrusting the distributor with, say, 20% of their monthly income. Why then should payment be so different. Because of this, distributors currently only chase rich people and poor people are shunned. I think investment should also move to the fee structure of doctors: fixed fees for an appointment.

re: What, No Load !!! What, No Load ???

VikasK — Fri, 03 Jul 2009 05:50:33 GMT

I have been a private banker at a large Indian Bank and a customer of MFs for nearly 7 years. I feel the point no 2 in your post highlights the unholy nexus between Fund Houses and Agents and is actually a bane for customers. a) Most agents in the MF game offer bad advise. The employees themselves know no better than their customers b) They have no shame in churning portfolios or advising clients without trying to understand their needs and situation in life. Banks and Organized Agents are the biggest culprits. In an ideal world such a move should force the intermediaries to use their brains to 'earn' their fees. I am sure, however, that Fund Houses will find a way of robbing customers and compensating agents, SEBI or no SEBI.

re: What, No Load !!! What, No Load ???

Dipankar Pattnaik — Wed, 01 Jul 2009 11:41:44 GMT

The insurance penetration is high, much better than a mutual fund. Shouldn't SEBI be looking at making the banking convenient in rural areas. That would increase the participation in mutual fund much faster than the current No Load regime.

re: What, No Load !!! What, No Load ???

Harish Rao — Wed, 01 Jul 2009 07:08:34 GMT

Shanoj : Yes, the penetration of equity is dismal. But I wonder whether re-imposing the load will improve it. Equity penetration was low because the cost-effort-reward ratio was always unfavourable. This improved drastically with ULIPs and look at insurance penetration.

re: What, No Load !!! What, No Load ???

Shanoj — Wed, 01 Jul 2009 06:15:35 GMT

Mr. Rao, The SEBI directives might be a matured one but do you think our markets have the kind of bandwidth to obsorb such a move.SEBI is much ahead of times. What would AMFI/CFP certification mean anymore? Why are we ignoring the retail aspect of MF business, with penetration of household savings in equity being so low as compared to devoloped economy, it completely discourages retail participation. The percentage of investor community who would pay for advise consciously is a minority( It would pain the investor when he cuts a cheque of 2.5 lacs while making an investment of 1 crore everytime and neither will a retail SIP investor). All those who have commented above would have dealt with the menace of payouts in their careers, Imagine turning the tables. Yeah I agree, we need to move on and show will continue but the thin margins and high cost of operation would take its toll. Financial goondas is a frankenstein created by AMC's, now they want the monkey off their back. Thanks to recklessness of the so called private bankers (I am not sure if RK was referring them:))

re: What, No Load !!! What, No Load ???

Harish Rao — Sun, 28 Jun 2009 07:21:35 GMT

@Dipankar : Yes, there could be a problem of intermediation for the small ticket investor. But don't be surprised if the retail oriented mass distributor comes up with something innovative. @ Nikhil : Where is the loss of manpower? The men are there, but the power seems a bit weak, for now. It will bounce back, I am sure.

re: What, No Load !!! What, No Load ???

nikhil — Sat, 27 Jun 2009 15:26:26 GMT

Just want to know whats the plan for the future. How will mutual funds industry cope with this sudden loss of man power. What strategy will the fund house's adopt to bring in new investors and to serve the existing once. Perusing CFP.

re: What, No Load !!! What, No Load ???

Dipankar Pattnaik — Sat, 27 Jun 2009 04:21:22 GMT

What happens when you deal with small investors e.g. Rs.10,000/- - Rs.20,000/- annually. The advisor either shuns them or charge heavily. There are many in that segment who probably need equity exposure more than anyone else but have very limited or no knowledge of the markets at all. A businessman will always find a way to be in business, you call him a Goonda or find another word even more derogatory. Of course now on the financial advisors have to start understanding and evaluating their services and elevate themselves in value.

re: What, No Load !!! What, No Load ???

Harish Rao — Fri, 26 Jun 2009 03:32:31 GMT

Nishikant : Point on Technical vs Practical is well taken. I agree, it may be practically very difficult. However, as can be seen some advisors don't see any problem in charging fees. Also, the Direct threat is in my opinion overblown. Less than 5% of applications is Direct.

re: What, No Load !!! What, No Load ???

nishikant rotkar — Thu, 25 Jun 2009 12:53:21 GMT

mr. harsha rao has said that distributors are technically free to charge wht the market can bear. he use word technically. yes it is possible technically,but not practically for majority of the distributors.

re: What, No Load !!! What, No Load ???

nishikant rotkar — Thu, 25 Jun 2009 12:43:27 GMT

even in fixed income/ guranteed return products like PPF,NSC,RBI BONDS there is a commission upto 1% to agents. in these products there is no need to advise anybody as the structure of the product & returns are fixed. MF is a risky product very few investors are self motivated & informed to invest in such product. so it is the role of the distributor to reach to such people.no product can survive for long without aggressive maketing push. no matter how best is your product. best example NPS ( new pension scheme). it is the latest example of what can happen to 'THE BEST'product in absence of proper marketing. those who do not need any advise & service are free to go by direct mode. u can not generalised any decesion for all. it may be good for particular class of people who are well educated, well informed people in big cities but it may very harmful for investor in small cities. the term 'Financial Goondas' i also like that term. but remember u can find such Goondas in each & every profession & sector. noble profession of doctor is also not the exception. for less than 10% of such Gondas, dont harm to other sincere people. the system to take fees by cheque/ cash from investor is highly impossible particularly in small cities. as investors are totally fianancially illitrate they will not understand that system. instead they can ask us, why we need any fees when they are giving business to us. MF industry is stll not matured to adopt advisory system. may be there is some class in metro cities who dont need our services then they are free to invest through direct mode. no small investor is worried about 2.25% load. i have yet not questioned by any investor regarding entry load. they appreciate us when we give comparison betn MF load and other high load products.