Over the last month I've been interacting with large numbers of mutual fund advisors around the country. These interactions have all been as part of large events where broad cross section of advisors of all kinds have been present. It goes without saying that almost to the man, advisors say that their business has been, for all practical purposes, been destroyed by the abolishment of entry load by SEBI. These protestations are understandable. Few businesses can take the sudden revenue reduction of 50 or more per cent without a lot of pain. Moreover, many advisors are relatively small businesses run by the business-owner with at most a handful of employees.
However, I strongly felt that mentally, most advisors are modeling the future of their business without imagining the kind of growth that is possible. To me, the situation in the mutual fund business is most similar to that in the stock brokerage business ten years ago or that in the telecom business at the same time. To all intents and appearances, India is set for years of economic growth. Moreover, we a large chunk of our urban population are young white collar workers who are going to come into the saving and investing stage of their lives over the next decade or so.
At this juncture, the kind of reforms that have been implemented over the last year by SEBI should be seen as making mutual funds an investment product that is far more suitable for building a good business around. Let me explain what I mean by a 'good business'. It means a business which offers a product that is clean and honest and none of whose characteristics have to be fudged or hidden. Say what you may but this is not so common in financial products. Look at ULIPs. Today, every ULIP salesman in the country dreads finding a knowledgeable customers who asks intelligent questions. It's a product that has fallen to such depths of anti-investor structure that it can only be sold to customers who are not thinking for themselves. There may be no shortage of such customers today, but it's not a good way of doing business for a small advisory, which relies on long-term personal relationships and word-of-mouth.
In sharp contrast, the mutual fund business now has a basis for a fair and open long-term dealing with its customers. Whether its sales commissions (which don't exist any more), or funds sticking to their mandate, or the transparency in the information that is put out by funds, there's nothing that even the most nit-picking investor can find that is wrong with the structure of the fund business. The biggest source of mis-selling in the fund industry-new funds being offered with flimsy differentiation from older ones-has now been completely choked off by the regulatory stance.
For mutual fund investors, it is a time to be confident of the product class they are choosing and that means that for fund advisors who wish to take up this opportunity, it could be the end of something, yet the beginning of something bigger.
This article was originally published on June 16, 2010.
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