August 1, 2009, we will see the entry load of the mutual fund investors being freed up. Its a good sign. I have no objection to it ? As far as I know, there are no objections from the distributors on this. But reducing the distributors commission has proved to be a death knell to most new “Independent Financial Analyst’s (IFA) and other Distributors.” The impact on the established ones will be considerable too.
There are various aspect to this. let me put them step by step.
Securities and Exchange Board of India (SEBI), if you are reading this and you know what SEBI stands for, you are one of the lucky people who know about them. SEBI is not a well know entity outside the investing community or the finance students. Majority of the time, while handling objections from the small and medium investors and about the safety of the Mutual funds, I have noticed that they have never heard about SEBI. SEBI defines itself like this “SEBI protects the interests of investors in securities and promotes the development of the securities market through appropriate regulation.”
Somehow, we need an agency that actually promotes awareness among investing public and which can penetrate the non investing community. SEBI does a terrible job at this. Another aspect is SEBI is a control freak. The “control” part is not bad, the “freak” part is. The problem is that, once SEBI decides on something like capping on the stock brokers fees and commission, it wakes up to the loop holes, then it tightens more, then finds more loop holes and then tightens more. What is the result? The general public is totally left out of the stock market boom. You have rich people making most of the stock markets as they have resources. The common man in India finds it daunting.
For example, whom to ask (brokers don’t have time for small investors, sub-brokers are dead, remisers are not allowed to advice etc). Common people cannot make a head and tail about whats in newspapers like Economic Times Intelligence Group and others which are a constant source of confusing, conflicting and sometime incorrect information. The television belts out panelist who makes no sense. Even if someone decides to invest, where does he go? Say for an example, an insurance agent comes to your house, finishes all the requirement, reminds, collects, pays your premium, finds out solutions to your problem and updates you on a new policy or seasonal opportunity. Try that when handling stocks. One needs more support than that. People are afraid to invest. Then comes online trading, how many small investors are actually going to get into it? And so on.
So, there is an option called mutual fund, the investor can turn to. Mutual Fund industry is guided by another unknown (mostly) organisation called Association of Mutual Funds in India (AMFI). Even I came to know of it when I wanted to become a distributor. It has an impressive definition for itself, but, its toothless. Its mostly into collection of statistics and other documentation. The first thing about AMFI that I found out was to pay them up for exam and collect a book from them. The book, other than AMFI chairman’s message, its totally meant for American Mutual Fund Industry (ok, it also has few paragraphs on Indian mutual fund industry).
AMFI is a collection of Mutual Fund companies (AMC’s as they are called). These AMC’s broke one of the rules they themselves formulated. Its the distributor commission. They started offering higher and higher commissions. The MF industry decided that people can invest directly. But, they did not succeed. The explanation they gave was that investors asked for it, so now where are the investors? Some AMC’s have started taking off entry loads on schemes which are not performing to attract investors. They took of the entry and exit loads of the High net worth investments, logically penalising the smaller investors. One AMC told me that if I have to join them as their distributor, I need to start SIP of my wife (I told them that I have come to make money and not start SIP of my wife or dog or donkey, so they backed out). Such are the practices. The 1998 stock market crash showed that the high net worth investors don’t stick around, so they came back to the distributors.
Now SEBI has dealt another blow to them. SEBI expects rationalisation of fees. Fees is the only hiccup the investors face? Is it not going the stock investments way I explained? Distributors need resources, time and energy to prepare for the investors objections, perceptions and advice. AMFI says you must charge them a fee for advice. How to tell AMFI that even finding customers is difficult and asking them to pay commission from separate cheque is very very difficult. As said earlier, AMFI is suggesting to us that how it is done in America (just like their book).
Another issue is servicing. How is the IFA going to service his client? Its ok for large distributors. I will give you an example. I saw a very sad looking lady standing in the bank and looking helplessly around. She had a file in her hand. I took courage and asked her if I can help some way. She opened the file and showed me the mutual fund statements. She told me that her husband died recently and she has been banging her head with the bank executives to tell her how much money she can get out of the funds her husband held. She said the executives are very busy selling than helping (they have targets targets, I tried explaining to her). So, I gave her an appointment and asked her to come the designated day. She did come and we sorted her mutual fund problems. No, I did not charge her a penny. The point is, that one needs an personal agent who can help in time of need.
Ultimately, the world will go an as usual, the IFA’s will settle for a lower commission and some hang boots or will fade away. Big distributors will survive.
No doubt, AMC’s will find a way to benefit the IFA and distributors. But will the small and mid investors actually benefit or will it go the sock market way? SEBI should be able to manage an investor friendly environment and not shutting out the investors.
