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'SEBI Decision will be Counter-Productive'

Abolishing entry loads will hurt the investors in the long run, say some fund advisors

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:

Anadi Shankar Biswas: “AMCs offered back-door incentives to IFAs to mis-sell their products”

This move by SEBI is a fallout of years of mis-selling of the MF products by the IFAs for their personal gains. Before becoming an IFA, I myself was a victim of such mis-selling. Churning of good performing investments, especially, when NFOs were on offer, was a step in this direction by IFAs for greater personal gains.

MF products were sold by the IFAs like  other savings products e.g. post office savings, or insurance. But MF products are a totally different ball game by way of 'after sales service'.

Selling of MF products had become more lucrative for agents (IFAs) for its volume impact and as a result post office and insurance agents had become mutual fund advisors overnight. UTI had greatly contributed to this development by granting ARNs to all and sundry, especially people who could serve their myopic goals. It is known that there are some IFAs with huge AUMs to their credit, who can't fill a common application form or a SIP form properly.

The AMCs are also to be blamed. In their zeal to market their products, they at times offered back-door incentives to IFAs to mis-sell their products, especially during NFOs. As a result the agents earned commissions ( sometimes even more than 2.5 per cent) while the investors’ investments were left to suffer their own fate.

The examination system followed by AMFI, for granting ARNs,  should also be completely revamped. The entry level exams should be conducted by the stock exchanges only and the online system should be discontinued totally.( Since Mr Bhave is so concerned about the investors' interests, he may be pleased to make a note of this).While doing this, AMFI can take up publicity campaigns to induce serious whole-timers , who can make this vocation a career.(Mr Kurien may like to make a note of this).

The MF industry may suffer an initial setback, but in the long run it may be saved from  a dubious reputation, which it had already started to earn, due to recklessness and greed of some individuals. 

Deepak Kapoor: “All in all, the decision is bad for everyone it is supposed to help”

I feel the effects will be:
1. No service will be given to small clients as they cannot afford a service charge of say even Rs 500,which will be 10 per cent of Rs 5,000;
2. Brokers will push ULIPs more, which are harmful to the investors;
3. Brokers will shift to other lines of business;
4. Neither do the AMCs have the capacity to directly entertain so many investors, nor they have the reach;
5. Small investors will have to leave their work and spend time in queues, unlike HNIs who can send their staff or drivers; All in all, the decision is bad for everyone it is supposed to help.

Srini: “The mutual fund industry has become the soft target for so-called reforms”

Although SEBI has implemented lot of good changes in the financial industry, off late we find a lot of inconsistency in terms of its implementation, particularly in the mutual fund industry segment.
The mutual fund industry has become the soft target for all the so called reforms. SEBI has been trying to say on one hand that they want to penetrate the Indian market in a big way by bringing in more retail participation in the mutual funds. But on the ground the agenda seems to be different.

The recent move on the part of SEBI to implement No Entry Load thereby abolishing the Upfront Distributors Fee may bring in an illusion that it is a blessing in disguise for the investors. Such a model may suit the so called knowledgeable investors but for those who are in the process of accumulating wealth for long term the 2 per cent fee is not a great deal. They not only get advisory services, but also get a relationship which otherwise no other segment can ever match.

In India it is practically impossible to get the right fee for an advice. Such a concept can prevail in a country where the financial literacy is quite high. Even in such a so called financially literate country there are mutual funds which charge as high as 8 per cent entry load.

SEBI has a decent corpus in the form of Investor Education Fund, but we don’t find adequate investor education being imparted by them. They should start concentrating on macro issues rather than on micro issues.

SEBI talks about openness, free and fare treatment in all its dealings. But when it comes to its own decisions everything is forgotten.

The latest being a drama conducted by SEBI in the form of inviting views on the implementation of Variable Load in mutual fund schemes.

There were lot of opinions and the majority favoured either no change in the existing system or implementation of Variable Load in phases. But everyone had outright rejected the two-cheque model. But finally when the curtains went up we saw that only the one which was rejected by one and all has found its way.

Great show SEBI. Keep it up.

Should we not thank Mr Bhave and his team for enacting such an wonderful drama?

Is it not fair on the part of SEBI to be open enough to come out with a response it had received for its Variable Load initiative and prove its logic behind the new system?

THINK, THINK, THINK before acting.

But before taking any further step I do feel that we have to see the official Circular from SEBI in this regard, but I don’t understand why it is being delayed?

Ashish Modani: “A distributor feels he is smart and intelligent because he made a fool of the client”

I am a Chartered Accountant (CA). Though I am a CA by profession but I am wholly into this profession of mutual fund advisory since 2004.

I sincerely believe that this move of SEBI has laid foundation for the betterment of financial health of Indian people at large.
Following are my views.

1. Financial advisory is a service industry and in no service industry the price of the service is pre-determined. The price is dependent on the quality of service and terms and condition between the user and the provider;
2. In present system, the way financial services are delivered, is by way of agency model and not by way of financial advisory. Most of the so called service providers are basically product providers. This entire concept was wrong and this move will rectify the problems associated to this industry in the times to come;
3. I have come across various distributors, who openly used to say that today I have earned Rs.20,000  just by mere switch from liquid to equity. He feels he is smart and intelligent not because he has done it by understanding markets or by clients need analysis, but by making a fool of the client. How long could this have continued?
4. Industry says that this will hamper industry growth. I believe Mr Bhave is 100 per cent right when he says that he doesn’t want the growth of the industry by wrong methods. Industry has grown by introducing NFOs. Definitely this has led to the growth of the industry. But had the industry thought of a longer version of the game, then they would have garnered more money, which would have been a slow growth, but it would have been very solid. NFO money is typically churned money. Now all those people who ate more and did less exercise, time has come for them to shed load and get fit. You work hard and then you eat more. Earlier financial distributors used to work less and eat more. This is anyway not good.
5. We also fight on the point that the investors are not educated that they will be willing to pay. I would ask the advisors at large, how many of us are educated. I have come across so many distributors who possibly would not know the difference between HDFC Equity Fund and HDFC Growth Fund. But on the basis of past performance and on the basis of commission, at times, HDFC Equity is better or at times HDFC Growth. Now at least financial service providers will try and first educate themselves to raise their fee-taking capacity and then automatically clients will understand the need for quality service and he will pay.

Tavan Sheth: “For all of our services SEBI should increase our commission upfront”

I’m a distributor. I think that SEBI has taken right step by eliminating the entry load, but on other side it discourages me that there will be no upfront commission. I know that we the distributors are giving investors a lot of service like creating and managing their portfolios, SMS alerts, email alerts and a lot of other services. We also incur lot of expenses like on our software annual fees, printing costs, charges for downloading NAV, SMS charges etc.

For all of these services SEBI should increase our commission upfront. We are into this business to earn something. I don’t know what the SEBI is doing. If this will be the behaviour, than lots of advisors will be thinking to quit the MF business. AMC's are getting majority of the business through distributors only.

Some AMC like UTI, SBI are planning to give distributors upfront commission. I got an SMS from UTI regarding this. If this is the situation then I will prefer to do business only with UTI.

The entry and exit load system should be like that in the US. The longer the investor agrees to stay with the fund, the lesser entry load will be charged.

I think that SEBI should correct this step, otherwise there will be no growth for mutual fund industry.

Samraj: “No one is unhappy if the AMCs pays more to the distributor than the amount of load it carries”

SEBI has issued a consultative paper on the abolition of entry load and invited suggestions. I want to know how many have given consent and how many were against such a proposal? Where is the transparency?  

Everyone knows that the distributors are paid by the AMCs. The investors are aware about  the entry load charged and they clearly understand that full or part of this is being paid to the distributors for the services rendered. No one is unhappy if the AMCs pays more to the distributor than the amount of load it carries. Why should anyone bother as long as they are not charged more than the percentage stated in the offer documents?

There are several financial instruments available in the country be it Govt of India Bonds, small savings, insurance or any other and the applicable brokerage are all paid by the institutions and no one asks to collect the remuneration from the investors. It is strange that MF distributors are asked to collect the commission from the investors. Already there is no entry load for applications received directly from the parties but the response is very poor as most investors are dependant on the services of advisors.

Where is the need for tinkering on the subject again and again?

As the SEBI move is a retrograde step, I request it to drop the proposal and put an end to this matter.

Prasad: “It is just like a ‘populist announcement’ which in the long run, may prove counterproductive”

The Securities and Exchange Board of India's (SEBI) has abolished entry load for investing in mutual funds.

Being a small IFA, here are my views.

I believe that this move is not that favorable to even small investors as it seems to be. It is just like a ‘populist announcement’ which in the long run, may prove counterproductive.

It is not warranted on following grounds:

(1) Affordability: In most of the cases the IFAs were getting around 2 per cent of the invested amount, and taxes make it significantly lesser. Where in India do you get lesser percentage of  brokerage than this? Even an illiterate real estate agent or a second-hand car dealer charges you more than this.

In fact, SEBI has already given the investors who can not afford such ‘charge’ to invest directly with ‘No Load’. Now why did they impose such a harsh measure?

(2) Transparency: It is known that the funds were charging an entry load and most or part of the entry load is paid to the distributor. There were many investors who were expecting or even asking for the part reimbursement out of such incentive paid to the distributors.(Which interestingly was prohibited by the SEBI under the code of conduct). The option of direct investing was also given due publicity by mentioning it in fact sheets. So there was no material hiding of a fact about this particular issue.

Going further I would like to point out that if an investor is unaware of such a familiar thing like ‘entry load’ then how one should assume he is able to make right financial decisions in the complex situation?

(3) Practicality: Though it sounds good to say the IFAs should disclose their commission and charge it separately it is not at all practical.

If we take into consideration the investors mind set in India, people prefer to buy medicines from the chemist directly and opt to check their eyes from the opticians, just to avoid paying fees to proper consultants. Forget they will hire a ‘PAID’ financial consultant. This will create a ‘lose-lose’ situation for both the investor and the IFA. Because if advisor is not amply rewarded for his/her services to manage investment portfolios, he would not be able to provide proper advise and service.

Further, expecting that after investing Rs 5,000, an investor will give a cheque of Rs 50 to the advisor is impractical. It also will create administrative problems like collection of service tax or showing the income in the income tax return.

(4) Competitiveness: When peers like ULIPs have no such restrictions, (the load charged under different names altogether is up to 40 per cent) the IFAs would like to opt the other way. In fact, only this factor has helped the private Insurance companies to reach even in smallest towns and the MF industry is limited to the class II cities only.

Also, it may encourage non-transparent ways like private PMS or unorganized chit funds, which are finally not good for the investors.

In no other business (or in similar products like PPF, NSE etc) does anyone have to declare how much incentive is earned out of a business. Then why such discrimination here?

(5) Assumptions : (this is a pure cut and paste job from of one of the esteemed fellow advisors, Nishikant  Rotkar)
    (1) The whole Indian population is highly educated , fully aware of financial markets and has an in-depth knowledge of MFs;
    (2) Mutual fund industry has reached every corner of the country, just like post offices;
    (3) MFs have country-wide network in every city and  smallest towns as the banks in India have;
    (4) MF offices are is easily accessible in every part of the country;
    (5) Because of high penetration of MFs, there is no need to pay even 2 per cent to distributor;
    (6) 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.

(6) It is said that it is a measure against ‘ill selling’ or  ‘churning’ of funds. I fail to understand how the quality of advice could be improved by this particular measure. About ‘churning’, it is done out of profit  or it is a kind of profit booking, as generally neither a client nor an IFA would like to book a loss. If it is so then you cannot term it as an unhealthy practice. ‘Do not book profit because your IFA may get some more commission out of it’ is not a positive approach.

I hope you will take measures to unite the IFAs and fight against this move.

Also read :
‘Don’t Kill the MF Industry’
'It is Like Being Laid Off'
'SEBI Has Grudge Against Distributors'
'Investors Are Not Self-Motivated'