Last week, Sunil Jhaveri wrote in this forum on the gross injustice that the direct regulation is set to impose on high quality advice oriented institutional distributors like himself (Click Here). Here, we have a retail champion - Ashish Modani - winner of several Wealth Forum Advisor Awards for retail business in North India - who challenges a notion that seems to be prevalent within the fund industry - that direct plans will not impact retail distributors very significantly. Ashish shares with us the ground realities on why he believes that introduction of direct plans as currently envisaged will do significant damage to even retail players like himself. As quality players in diverse distribution segments like Sunil Jhaveri and Ashish Modani start actively looking at alternative businesses, the challenges in front of the AMFI sub-committee on direct plans appears daunting. AMFI needs to quickly come up with a viable middle-of-the-road set of suggestions that they can persuade SEBI to consider, which will be fair on all stakeholders - investors, distributors and AMCs.

With all the hue and cry about Mutual Fund not able to reach out to retail investors, SEBI on August 16, 2012 came out with newer set of regulations. This hue and cry about lack of penetration and importance of distribution came from all corners country and on the top of it from the mouth of Prime Minister and Finance Minister of India as well. So definitely the regulations were expected to make a big bang reforms in this retail strapped- retail oriented industry. The reason for such under penetration was mainly due to lack of distributors who could take mutual fund to door step to many households across length and breadth of the country. The reason for less number of distributors was mainly on account lower remuneration. So with all things taken into consideration SEBI comes out with BIG BANG reforms. But unfortunately the outcome came along with a surprise element of DIRECT SHARE CLASS. For industry at large, it is 10 steps forward and 20 steps backward.

Before I further go into detail, a brief introduction about myself.

I am Ashish Modani, Chartered Accountant by profession and into the business of mutual fund distribution since 2004 and my business is mainly retail oriented. I am one of the biggest distributors in North India especially when it comes to retail side of business.

SEBI's recent ruling of direct where if the client comes directly to the manufacturer, he should not be charged with the distributor's expense in the form of commission would have lot of negative impact on the overall industry. Many AMC experts have been quick to come to the following conclusions :

1. That the impact of direct share class will be most felt in the institutional segment - which is a small fragment of the distribution fraternity and then to some extent on the HNI oriented distributors.

2. There is a widespread belief among AMC experts that retail will be unaffected and therefore that retail oriented distributors need not really worry about direct plans.

3. There are also suggestions that even if we lose say 20% of our clients, our trail commissions will now increase by around 20%, thanks to the new regulations - and since this will be on our overall AuM, the increased margin on assets that remain will more than offset loss of income on assets that go away to direct plans.

In my view, these observations are far removed from ground reality in the retail world. I am giving below the ground realities that we retail oriented distributors are experiencing and will experience - and I would like all of you - including our AMC experts to comment on each and every point.

1. The 80:20 Rule

It is been said and discussed that direct will not greatly affect retail segment of client and it may happen that 20% of the client may go away but since the revenues are going up 20% due to hike in TER, it will compensate. Now here the figures need to be understood rightly. In almost every business, 20% of clients give 80% business and 80% of clients give 20% business. It is these 20% clients who subsidize the cost which one has to incur on rest 80% of the client. Now if someone tells me that Ashish your 20% top clients can go to direct option, I will be left with 80% of client which actually gives me 20% revenue.

In fact, it is same for AMCs as well where 80% of their business comes from 20% of distributors and rest 80% gives 20%. Now if 20% top distributors are not there in a given city, I would like to ask AMC here that would they continue their business in that city for remaining 80% distributors who account for only 20% of their business. Will they be happy with servicing a large number of small distributors only - who don't give them enough business to sustain their branch in that city?

Now if 80% of my business is at stake, can anyone give me confidence to carry on the business? Will I have revenue to cater to Rs. 1000 SIP client without the support of Rs. 1 crore client?

2. Retail turning into MNI or HNI

If for a moment I agree that retail investors will not be affected, I would like to ask what will happen when a retail investor in times to come become MNI or HNI investor. It is an herculean task at the distributor's level to educate the client and elevate him to higher levels as far as investment in MF is concerned. All the hard work by a distributor to educate him will go for a toss by this direct model and he may one day wave good bye to a distributor. If that could be the case, why would a distributor go about educating clients more towards mutual funds. One would direct most of his investment in those areas where there is no such direct share class model.

Is industry going to reward me for educating clients and elevating them or is this industry going to punish me for taking this industry forward?

3. Technology use - a curse or a bone

In a world where reaching to neighbour has become costlier than reaching out to person in America, I am indirectly being advised by regulator that better don't use technology because if you start using technology for transactions, your client will become smarter and will start dealing with manufactures directly just to save on the cost. So I should not be promoting technology as far as Mutual Fund is concerned. And, what will happen when MF Utility comes in? If it offers a single window investment into multiple AMC products, with a single cheque, and a substantially lower cost through the direct plan, will this not impact our business even more?

Will a distributors promote technology? And if the answer is no, then do we think we can increase the business substantially?

4. Cost of Direct business

As stated in SEBI's regulation, the TER of direct should be arrived after deducting the cost which is paid to distributor as commission. Now here I would like to tell that apart from just advising and selling funds to an investor, there are other post sales services which a distributor gives to a client. For example

1. Account statements and valuation report at least 3-4 times in a year.

2. Non Financial Transaction processing such as change in bank mandate, Change in ECS, change in KYC, etc.

3. Transfer of units in case of death of any unit holder.

4. And most importantly a client typically talks to a distributor 3-4 times in a year to take stock of things. Whether should he remain invested, should he continue SIP, should he redeem as markets are up, etc. There are so many behavioural and emotional questions that a distributor is been asked. At times, client walks into the office or at times distributor has to go his place to explain him.

The above points I mentioned are only for illustration purpose. There are so many other functions which a distributor performs. Recently I met a local AMC person and asked him - Sir aaj kal bahut busy ho, dikhte hi nahi? He replied - " kya kahu sir, jab investor direct office mein aata hain to jaan nikal jaati hai. He will first ask us for account statement and after reading it for 5 minutes, he will ask us - should I withdraw or stay invested. What do you think of markets? We will then have to discuss with him about markets. If he wants to redeem, we give him a redemption form. He will then check his bank account details and if they are different, we will have to explain him the procedure of change of bank mandate. He will then come with relevant set of document and then ask us to fill the redemption form. He will then ask us to check the signature which he made at the time of making investment etc etc. One simple redemption takes almost 45 minutes of ours. And if such redemption comes from a distributor's place, we process the same is a matter of second just by punching it. Now a days, a lot of investors are coming to us direct."

Now there is cost to everything and before one draws conclusion between direct share class TER and distributor share class TER, please account for all these expenses as well which will now be incurred by AMC one client comes direct.

Does AMC think that their cost of serving and advising clients will be cheaper than that of distributors? If yes, why did not they start such direct earlier. There was no regulation that binds them to empanel distributors only for doing AMC business.

My conclusion on Direct

I have always been passionate about this industry and loved to work for retail set of clients. In fact in many forums, I have motivated many others to work for retail rather than only looking at affluent set of investors. But today I am totally dejected. If I am not been offered a level playing field and I have been asked to compete with direct, I am sorry to say but I will have no option but to say a final good bye to this industry. I will have to find an industry where at least my hard work will be rewarded. I do not want to work in an industry where I am considered as a liability than an asset. I do not want to be in place where I am always assumed as a villain for my own set of clients for whom I have put in my blood and sweat for so many years now. I do not want to work in an industry where there is no one to listen to us. Our representative AMFI has not spoken even once on this grave issue.

It is said that don't average a sinking ship - so I have already given over a decade to this industry and I am in no mood to further give my golden years and find one day left in no man's land.

I would request all readers, whether manufacturers or distributors to give their unbiased answers to all my questions.