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'It is Like Being Laid Off'

Here is what advisors have to say about SEBI moving to abolish entry loads on mutual funds

After the Securities and Exchange Board of India (SEBI) said that entry loads will be discontinued Value Research asked the very people who will be most affected by the move to give their reactions – the fund advisors.

Here are some samples:

Bhaskar Bhattacharya: “A built-in incentive for investors to enter and stay invested for the long term is a must”

I wish they had followed the classification used abroad, of Class A & B. Particularly, Class B shares which have NO entry load, but an exit load depending on when the investor exits.

The exit load starts at 5 per cent for exit within Year 1, and drops by 1 per cent for each succeeding year. So, after Year 5,exits do not attract any exit load. This results in a built-in incentive for investors to enter and stay invested for the long term, which to my mind is the essential objective of mutual funds.

Gopala Krishnan: “If entry load is abolished, how can we educate and offer after sales service?”

It is a dastardly act on the part of SEBI as India is not a mature market as far as the mutual fund industry is concerned. Most of my clients are investing on my advisory, I arrange PAN Cards for them and educate them the need for reading financial papers, periodicals , watching financial news media reporting and others. Thus awareness is spread from one to another. If entry load is abolished, how can we educate and offer after sales service? The growth of mutual fund may be retarded, if entry load is abolished.

Anupam Parhi: “I would even scold my clients if they asked me about commissions”

Shabash SEBI. You need to worry about change if you are clinging on to commissions. I never worried about NAV, dividends, commission, trails etc. I would even scold my clients if they asked me about these and my answer was: “My knowledge regarding these things was even less than my mother’s – read: layman. Give quality advice and as you have advised, limit how much we listen to day to day market commentary and not panick. I enjoyed, and will enjoy the business.

N.K. Raveendran: “SEBI finally has walked the talk”

Well done SEBI! Finally some one puts money where one's mouth is. This has been a debate point with the distributors and funds both unwilling to go along with the regulator for the benefit of the retail investor.

Now, all reasons and excuses have been exhausted and SEBI finally has walked the talk.
He who pays the piper shall call the tune; so what is wrong in the investor deciding how much the distributor has earned according to him/her? If  foreign trips, liberal bonuses, commissions are casualties of this move, so be it!

Let the investor, the retail one, benefit.
The Funds and the Distributors will most certainly indulge in some side plays and the Regulator should watch for the same. By this move if genuine and professional advisors take over from share brokers, insurance agents, sales men and women (or boys and girls?) of the so called banks and wealth management companies the real task of financial planning and advice based on a professional fee, the industry will be on the growth path though slowly. That is far better than rapid but bubble-like growth.

Anil Budhraja: “At least the entry load kept an upper limit cost that was incurred in mutual fund investment”

Well the extent of change it can bring will depend on certain more clarifications like:-

1. If the distributors are allowed to charge a separate advisory fee then how much will be the upper limit of that fee;

2. Some smaller banks and brokers promote SIP’s and with no incentive left, they will not continue doing so;

3. There was already a window for those who wanted to avoid the entry load then why the need of abolishing the entry load? At least the entry load kept an upper limit cost that was incurred in mutual fund investment;

4. I think the right advice would be the winner and the ability of the advisor to generate more returns will define the cost;

5. There is a cost of servicing the client. How will the distributors manage the same?

Sanjay: "It is like being laid off"

With the entry load gone all the (Individual Financial Advisors) IFA's would be in big trouble. It is not going to be easy to take care of our expenses. There was no logic in Mr Bhave’s approach regarding removal of entry load.

Our incomes well surely reduce by almost 70-to-80 per cent and our future looks very bleak. It is like being laid off. I do not understand why such a move was made and I am in as state of shock.

I am not finding any words in my mind to mail you, but the thought of not being able to earn now lingers in my mind and it is going to be very difficult.

I pray to GOD and leave it to him to take care of us.

Devendra Panjrolia: "No investor will willingly give a separate cheque"

I am an IFA. The SEBI rule is a death knell for small IFAs because no investor will willingly give a separate cheque and AMCs are not able to service small towns well at all. Neither will I be able to rustle up new business now nor advise my clients to redeem when they earn at least 15 per cent profit.

I have decided to quit the business.

Bharat Bhushan: "The industry has to prepare for a life under a new regime"

The Distributors are now realising that variable entry load was the best option for them. I feel that distributors should not have opposed variable entry loads in first place. Instead they should have worked for a positive, active dialogue with the regulator regarding modalities of efficient, transparent and effective introduction of variable entry loads.

The regulator wanted to give options for bringing down entry costs of investors. But, sadly some AMCs went on to increase the entry loads beyond even 2.25 per cent to either 2.50 per cent or in some bizarre cases to even 3 per cent. Only a handful of AMCs acted positively by introducing No Load options and referral modes, etc.

Now the industry has to prepare for a life under a new regime.

I sincerely hope that better sense will prevail and all constituents should work towards taking the industry to greater heights and in the process even try regaining trust and faith of the regulator and government.

Nishikant Rotkar: "Instead of finding the remedy for the disease SEBI is trying to kill the patient"

I am really surprised why SEBI is so bothered about the 2.25 per cent brokerage paid to distributors (I am talking only about individual and small distributors). After deducting service tax & education cess it is 2 per cent in most schemes.

NO ENTRY LOAD decision assumes:
1] The whole Indian population is highly educated , fully aware of financial markets and has an in-depth knowledge of MFs;
2] Mutual fund (MFs) industry has reached to every corner of the country, just like post offices;
3] MF. has country wide network in every city & smallest of the town as the banks in India have
4] MF offices are is easily accessible in every part of the country;
5] Almost 60 years since independence, insurance penetration in India is one of the lowest in the world, but the same population is highly intelligent and fully aware when it comes to MFs;
6] Because of high penetration of MFs, there is no need to pay even 2 per cent to distributor;
7] Investors can approach MF offices, there they get very IMPARTIAL advise -- that their funds’ performance is not so good, so kindly approach ‘XYZ’ AMC and invest in their products;

Because of all these reasons there is no need of any DISTRIBUTOR to work.

In my opinion no entry load decision will help only 3-to-5 per cent of investor community which is well educated, well informed and lives in big cities, but totally KILLS the product and the DISTRIBUTOR too in small cities and towns.

This decision is like a sword given to investors. Only 5 per cent of the financially aware investors’ community will use it properly, while rest 95 per cent of the people, who are totally financially illiterate will misuse it and harm the distributors.

On one side SEBI says that small investors should be the focus of MF industry, but on other side it is trying eliminate individual distributors who are their only representatives in small cities and towns where there is no MF office.
Just by opening offices in selected big cities, you cannot reach out to the common people. MFs have zero presence in most part of the country. The only representative they have there are individual distributors working against all odds. If you are not ready to pay even 2 per cent commission, then this tiny presence will also vanish.

No entry load decision is taken only for the benefit of high networth individuals (HNI) and corporate clients. It will benefit high profile investors but it is against the small investors because no individual distributor will work aggressively as there is no proper commission and future prospects are bleak.

If SEBI has a problem that funds are not sold with transparency and distributors unnecessarily churn the funds, then it can start investor education programmes/seminars or give advertisement in media to avoid mis-selling by distributors. Lock-in periods can be made more stringent and exit loads can be made more restrictive to avoid early redemptions.

Instead of finding the remedy for the disease SEBI is trying to kill the patient.

Everybody knows that MFs have the least expenses, still small investors are opting for ULIPS to invest in, which carries expenses/allocation charges up to 80 per cent in some cases. If that small investor is still not aware/caring/bothered about the vast difference between 30-to-80 per cent load in ULIPs and just 2.25 per cent in MFs, then what is going to change even if there no entry load.

In last 5-to-7 years, private insurance companies have reached into every district and tehsil, but AMCs are limited only to certain cities. Distributors from small cities have to face huge problems in processing the purchases, redemptions, or any transactions. They have to bear courier charges for every transaction to send the documents to AMCs. Every transaction gets delayed by 2 – 3 days because of this.

If you want to grow the mutual fund industry, the focus should be on investor awareness, expansion and penetration of the industry in small cities, which can not be done without the help of distributor.

Aparjeet Nakai: "Now they want to write off everyone: The GOOD, the bad and the ugly."

This is just another way of saying that IFAs will not be allowed in India. Initially, SEBI could not ensure quality of advisors. It allowed UTI to conduct AMFI tests and they ensured the whole classroom full of people who appeared and passed the exam. MF houses were keen to put maximum number of so-called advisors on the street with the aim of selling NFOs or funds which were about to offer dividends.

If they had stuck to stock exchanges managing the exam, the quality of people would have been far better.

Now they want to write off everyone: The GOOD, the bad and the ugly.

Atul Mehra: "It is a matter more of investor education than of fleecing by distributors"

I think it is not fair. This huge exercise has been carried out and a complex solution provided, all in the name of the retail investor.

Making refunding of commission official would have been more simple and a balanced solution. It would have achieved what SEBI wants to achieve by abolishing commissions. There would not have been any question in the mind of any investor/AMC/registrars on how to handle the new situation. As regards broker distributors, it is an open secret that refunds were being made in one way or the other.

So, I think it is more of a noise than any meaningful or balances solution that has been provided by Bhave to what SEBI perceived as a problem.

It is also more a matter of investor education than of fleecing by distributors. I agree with your comment that we need to wait for the strange twist to play out. It will lead to AMC's/distributors finding some way -- quite similar to refunding commission. I feel making refund official would have done the job.

I have yet to come across any business service/manufacturing that can survive without earning/profit. Any business where there is no commission/profit sharing etc with the retailer. What interest would a Maruti dealer have if he is told that he will not get any commission!

Strange twist will be the answer for sure.

Today, I got a phone call enquiring about Reliance Infra NFO. The caller had three queries: 
1. When will this issue get listed?
2. What is the minimum amount I need to pay?
3. In which project will the company put the money in?

This only indicates that investor education is an ongoing thing and should be pursued by all concerned. Cutting commission of the agent is no solution to the problem, if any exists at all.

Reducing banks commission by AMC's could have helped, but that again would not have been a fair solution.

Investment Solution Providers: "Paying for consultancy in India? Forget it"

I am feeling like a unwanted person in the mutual fund industry. I spent more than 10 years of my most effective years working for the industry. I am having no idea how to cope with this . The type of investor base that we have currently, always on the lookout to get something out of our pockets, will never agree to pay us. Instead, they will prefer to buy online from the fund sites and the other cheaper sources. And thanks to sites like http://valueresearchonline.com, http://moneycontrol.com and other, who present almost 50-to-70 per cent of the information and investing ideas online, and in a so user-friendly way that anyone can decide and buy directly from the fund.

So, where is our need now. Paying for consultancy in India? Forget it. Every second person here thinks he is smarter than the other.

Unfortunately, no one is on our side. I am looking towards new business. Do you have good business ideas to share with me?

P. Shankar: "An advisory model will be the key point of selling"

Firstly, I think SEBI has done a good job by getting rid of entry loads. Lots of clients really don't realize the load which they are paying for each transaction. Going forward PMS is going be the selling point for most distribution houses and an advisory model will be the key point of selling.

Secondly, no one is questioning the huge amount of loads charged by insurers, paid by a client in his first premium that can amount to 40-to-50%. They should have waited little more to implement this new rule because the MF market has a long way to go yet -- without distribution charges SEBI has put a break on growth.

Ashish Kumar: "Wrong decision at wrong time"

Mutual fund is not just a product like Pepsi, which you can purchase just after watching its ad on TV. If Dhoni is drinking Pepsi it will be a good product. But mutual funds investors always need an advisory before purchasing and we were providing it at the rate of 1 per cent to 2 per cent at very minimum cost, but the method of SEBI is not good for industry as a whole.

Mutual fund is a product which helps to grow money much more faster than FDs, PPF, NSCs, ULIPs and lots of many product available in market. Who made mutual fund a known product to all in the market? Definitely they were MUTUAL FUND ADVISORS and DISTRIBUTORS and if advisors are getting 2 per cent and investors are getting return of 20 per cent per annum, instead of 8 to 9 per cent, then I think SEBI should appreciate our work and not demoralise us.

I still think a good advisor will survive, but the distribution channel of mutual funds will get affected and it will lead to unemployment in the industry.

Rajiv Shah: "India is not that mature for such a step from SEBI"

I think entry load abolishment in mutual fund schemes means no upfront commission to advisors. SEBI's move of no entry load has been a real surprise to all of us. I think India is not that mature for such a step from SEBI. If we take into consideration the investors mind set in India, people usually are not willing to pay any charge towards their investments. So I really don't think this will help both advisors and clients. Because if adviser in not adequately rewarded for his/her efforts to manage investment portfolio's, he would not be able to provide proper advise and service. Therefore those investors who are looking for good services from their advisers will suffer.

I urge SEBI to come up with some uniform format where both investor & advisor are benefited equally.

Suresh Bajaj: "How will we cope?"

At the moment an Indian investor is loath to pay for advice unless it is coming from a tax consultant or a doctor. Consultancy charges are seen as a legitimate method of bribing. I hope better sense prevails and the fund houses somehow find a way of reimbursing the IFAs.

Vijay Gupta:  "This step is harmful for all, whether it is a distributor, investor, AMC or even the government"

This move by SEBI is totally out of my understanding and I am not able to understand what SEBI is actually trying to do? It looks that decision-makers in SEBI do not know the ground reality. They don't know that in our society investors ask the distributor to pay back a part of the commission to him.

This step is harmful for all, whether it is a distributor, investor, AMC or even the government, because it will affect the earnings of all them. In one important way it is not good for investors because there would not be quality people to advise them, especially new customers who do not know the ABC of mutual funds.

Also read :
‘Don’t Kill the MF Industry’
'SEBI Has Grudge Against Distributors'
'Investors Are Not Self-Motivated'
'Sebi's decision will be counter productive'