Ashish and Manish Goel of Vista Wealth are among the most successful retail distributors in Northern India and are members of the core team of DFDA, Northern India's most influential IFA group. In this open letter to AMC senior management executives, Ashish articulates 4 key points that he and his colleagues at DFDA strongly believe will actually help deliver the kind of retail growth that the industry is so desperately searching for. Three of the four points are completely in the ambit of AMCs to consider and one has to do with requesting SEBI for a change that better addresses the purpose of a recent regulation. The points Ashish raises equally focus on grass root level initiatives to boost new client acquisition as well as de-bottlenecking archaic processes to enhance distributor productivity and client service. As Ashish says, the industry has been salivating and dreaming about scaling up its retail penetration for the last 10 years. The time to act is now, and a good way to begin is to address these 4 points - else, he believes we can keep dreaming about retail penetration for another 10 years.

Dear AMC CEOs,

This open letter to you on the Wealth Forum platform is not about regulatory changes impacting distribution. We at DFDA think that though these regulatory changes have brought in challenges, there are opportunities for those of us who choose to look beyond the immediate challenges. This open letter is about how to actually promote growth by removing bottlenecks and impediments that come in the way of serious distributors' efforts in growing their businesses - and yours.

Rising entry barriers is good for existing players

Earlier, there were really no entry barriers in the distribution business. Whenever the market cycle turned upwards, and demand for mutual funds increased, anybody could jump into this business, become an intermediary and then move out the moment the cycle turned down - leaving his investors in the lurch. There was very little investment to be made by him in skills development and in meeting regulatory standards for distribution. There was no real penalty for mis-selling. We therefore saw many fly-by-night operators jump into this business in the last bull market, most of whom have vanished in the subsequent down cycle. Distributors who were serious about financial planning and offering needs based solutions to their clients had to compete with these opportunistic application form pushers, with no real advantage in terms of pricing or benefits for doing the right thing for the investors. This sometimes demotivated some of the serious players too - it was easier to take short cuts and earn more money than serve clients better and earn less money in the process because you spent more time with your clients.

In the last couple of years, all this has changed. Many of us in the business may be feeling the pressure of adapting to the new regulatory environment - of strengthening our sales processes, of enhancing our paperwork, of being subjected to due diligence audits and living with the new mis-selling guidelines that make it a fraudulent activity with accompanying penalties. Though these may seem negatives, we at DFDA see some positives in the long term, because these stringent requirements mean that the next time the market cycle turns up, it will be much more difficult for non-serious players to jump into this business for a couple of years and then vanish at the first sign of business momentum slacking. Its no longer a very easy business to be involved in - it takes a lot of effort to scale up to the new requirements and remain compliant. Margins have shrunk since the days of the last bull market and it is not reasonable to expect that margins will expand in future in this business. Claw back of brokerages has also restrained distributors from unnecessarily churning to maximize their brokerage. Those distributors whose business model depended on churning, are finding the new environment less attractive, which is a welcome sign. Investors have also understood that there is a value proposition available from distributors beyond application form pushing. All of this will act as entry barriers for non-serious players. This means that those of us who have chosen to remain in this business and are investing in scaling up to meet the new requirements, will be the biggest beneficiaries when the market cycle turns up again. So, what looks like bad news in the short run, can actually be good news for us in the long term.

SEBI's long term policy is a breath of fresh air

Without getting into too many of the specifics mentioned in SEBI's long term policy for mutual funds, let me just say that it's a breath of fresh air to finally get a long term policy! We have, for far too long, been too short term oriented in the industry. It's a welcome step that some serious thought is being put into putting enablers in place for long term growth of the mutual funds industry. In particular, the financial literacy initiatives - of getting school and college students to understand the basics of personal finance as part of their curriculum, will go a long way in building awareness about the importance of financial planning and the role of mutual funds in future generations of savers. We at DFDA have been advocating this for a long time, and welcome this step from the regulator. Exclusive tax savings limits for mutual funds along with Pension plans with appropriate tax benefits is also a big positive for the industry and for investors.

What do serious distributors need from the industry?

We at DFDA are serious players, we are committed to serving our investors well, we are here for the long haul. We look at challenges and find opportunities within them. We are committed to growth. For serious players like us, we need the industry to put in place 4 enablers that will help us help the industry grow and de-bottleneck some areas which curtail growth. I am requesting all AMC CEOs and AMFI to give serious thought to these 4 points and act quickly on them. Believe me, we can work together to grow the retail side of the business much better, much faster and on a much more sustainable basis, if AMC managements act quickly and decisively on these 4 points.

Point 1 : Incentivize genuine retail penetration efforts

1.a. Change the B-15 vs T-15 incentive system to retail vs non-retail incentives

We are seeing now that the MF industry is seriously focused on retail penetration efforts. What was lip service earlier, has now finally become real intent. The regulator has put in place an enabling mechanism that allows AMCs to incentivize business in B-15 cities and towns. This allows growth in smaller cities - which is a very welcome step.

The issue here is that giving a blanket incentive to all kind of money from B-15 cities - whether institutional, HNI or retail - is not really enabling retail penetration in the true sense of the word. Higher commissions to source big ticket money from small cities does not enable retail expansion, which was the intent of the regulator when they created this mechanism. Rather we feel, that all distributors - whether in T-15 or in B-15 cities and towns must be incentivized for sourcing retail applications - say below Rs.200,000. At the same time, through KYC and PAN checks, let the industry put in place filters to weed out potential misuse through the multiple application route.

If the same kitty of 30 bps that SEBI created can be channelized for retail business across the country, it would go a long way in enhancing retail penetration for the industry. We all know that retail penetration in large cities is actually quite low - it is corporate and institutional money that makes big cities contribution to the industry AuM look disproportionately large. We also know that urban savers are more likely candidates for MF investing than rural savers. Why then are we ignoring the lower hanging fruit within the retail segment?

The reality is that a retail distributor in a large city has to spend considerable time and effort in sourcing retail business. His transport costs and commuting time across busy streets makes it unviable for him to source small applications and he is losing interest in doing so. Why are we letting go of retail investors in metros? Are these retail investors not important for the industry?

Our request is for AMCs to take this issue up first at AMFI and then from AMFI to SEBI. I want to emphasize here that all we are saying that SEBI has very good intentions in creating an enabling mechanism for incentivizing retail business. The only flaw here is that retail penetration has been defined by geography rather than ticket size of investment. Getting more retail savers to buy mutual funds in Delhi and Mumbai is as important for the industry as getting investors in Moradabad and Aurangabad. Let us not discriminate by geography. Let us segregate by ticket size - because it is the small ticket size that has become unremunerative to service at the current T-15 commissions.

1.b. Recognise and reward efforts to bring first time MF investors

Let me ask a simple question to our AMC friends. What is actually more beneficial for the industry - a distributor who brings in 2 new PANs into the industry (who creates 2 new first time MF investors) every month or a distributor who brings in the same 5 crore cheque for a liquid fund for 10 days every month from an existing corporate investor? If you think that the first distributor adds more long term value to the industry, in what way are you rewarding and recognizing his efforts? How much prominence does this distributor enjoy in your system as opposed to the one who brings in the 5 crore liquid cheque?

If we want new investors to come into the industry, what are we doing to recognize and reward distributors who are actually doing this? How are we motivating them? Why not start with a small initiative of compiling the list all distributors who are bringing new investors to the Industry and publish the list on AMFI website the way we do for brokerages of top distributors followed by yearly appreciation certificate topped with some other benefits. There can be some cash incentive ranging from 200 or 500 for each new PAN, each new KYC brought in by a distributor. This simple step will go a long way in motivating distributors and very importantly, in putting the message out there that the MF industry is willing to put its money where its mouth is.

Point 2 : Tackle the root of the SIP stoppage problem

Vista Wealth is one of Northern India's largest SIP distributors in the IFA category, and has been recognized year after year on this score in the Wealth Forum Awards. We have a large SIP book, we have SIPs of considerable vintage and we have a lot of experience in dealing with clients who start SIPs, clients who stop SIPs and clients who continue with their SIPs through all markets.

The industry is facing a huge problem of SIPs being stopped prematurely and SIPs not being renewed. The common theory is that market volatility is making investors stop their SIPs. I beg to differ. Let me give you a simple case. A client started a SIP of Rs.10,000 per month 10 years ago. Over the last 10 years, he has saved Rs. 12 lakhs which today is worth over Rs.20 lakhs. When he started the SIP, his risk tolerance on an amount of Rs.10,000 was very high. Over time, the same market volatility impacting Rs.20 lakhs of an equity portfolio, is too high for him to digest. His risk tolerance has come down because his exposure in equity is no longer small. Now, he comes to us when markets have fallen 20% and asks us to stop the SIP. What he is really saying is not stop the SIP, but stop investing further in equity markets. He is perfectly ok with continuing to save - he just does not want to invest those savings any longer in equity.

Ideally, what should we be doing? Making it as convenient as possible for him to simply switch his savings plan into an alternative asset class - switch his ongoing SIP from an equity fund to say an accrual based debt fund. That way, the money seamlessly remains with the industry, with the distributor. There will be no stoppage of a SIP - just a switch in the end product of the SIP. But what do we do in practice? First, we make him stop the SIP. Then we have to persuade him to create a fresh SIP in another scheme and go through the entire SIP opening process all over again. What the industry is failing to understand is that by making him stop the SIP rather than switch, you are forcing him to break the savings habit with you. Then, it becomes a lot more difficult to get another savings habit started all over again. An investor who has stopped a SIP has a bad taste in his mouth, has a bad experience he has just been through. Convincing him to start a new SIP in a different asset class immediately after a bad experience is an uphill task. Investors typically ponder over it, think about it, distributors follow up - and often give up after a few follow-ups. The investor is lost to the industry. Somewhere our industry is not grasping the point that what we need to do is encourage the investor to start a savings plan with us and give him tremendous flexibility to move across products, while continuing his savings plan. Investors will be more willing to commit to long term SIPs when they know they have a wide choice across asset classes to deploy their monthly savings in. Distributors will be able to keep the savings plan intact while switching the funds where these savings will be invested in, without closing a SIP, without losing a client.

Market volatility can dissuade an investor from investing more in equity - but market volatility does not prevent him from continuing to save. Create a SIP solution that enables him to continue saving and give him the flexibility to change products as often as he wants - you will find this SIP stoppage problem reducing significantly.

The amount of work involved in changes made in SIPs is humongous even if the client has to increase the SIP (which we suggest with increase in income) or has to change SIP dates - then also we have to close the SIP and then get it re-started . Same is the case for option change i.e. div to growth option. Closing and re-starting requires huge amount of paper work, tracking and host of other unproductive task . All that is required is a simple form where such changes can be made with one signature.

Point 3 : Is your customer service actually serving investors or putting them off?

3.a. Do not think of convenience only in the online mode

Manish and I have been in this business for 20 years now. We were recently felicitated by Franklin Templeton on the occasion of the 20th anniversary of FT Bluechip and Prima - there are only 6 distributors in Delhi who have clients with investments since inception in these funds - and out of these 6, 5 are stockbrokers and we were the only IFA firm. We have seen this business and been part of it for 20 years.

One of my clients with whom we have an 18 year old relationship - a retired army Colonel working now in senior management in a big corporate recently told me, "Ashish, I pity you and the industry you are part of". I asked him why he felt that way. He elaborated, "18 years ago, you used to come to me, fill up an application form for every investment, ask me to sign in a few places, take a cheque from me. Now, 18 years later, you are still doing the same process. Nothing has changed in your industry to make it more convenient for us to invest. The world has moved forward, your industry is still where it was."

Colonel saab has a very valid point. We keep talking about MF Utility, about platforms, about technology. But, in all these years, we still haven't created a simple infrastructure where an investor's master data is captured once and that information is used for all further transactions he does with any AMC, without asking him to submit master data again and again. Why can't we have simple processes which make it convenient for him to invest or redeem, without going through all the documentation that we currently have? How much have our transaction processes changed over the last 20 years? Is this industry in step with changing times?

Online platforms are not the only solution - we must have convenience in the offline mode too. Banks make online payments easy. But they also have ATM machines across every city, which make offline transactions easy. I can go with my ATM card into any ATM of any bank and withdraw money from my account in my bank. ATM is a shared on-ground infrastructure which benefits all account holders. Why can't the MF industry think of convenience in the off-line mode in a similar manner?

We see advertisements which show celebrities opening new bank accounts on a tablet in 2 minutes, while flying kites. I wonder when we will be able to offer similar convenience when opening a mutual fund account and buying and selling mutual funds.

3.b. Handle sensitive issues with sensitivity

Death is a trying time for all families. Families have many emotional issues to deal with to cope with the sudden loss of a loved one. Financial service providers like insurance companies, bank and mutual funds can either do their small bit in these times by smoothening the financial procedures relating to transmission, claims, nominations etc and earn a lot of goodwill or make life difficult in such a sensitive period for the family, and earn permanent ill-will. The mutual fund industry does not make any attempts to make transmissions easy, to facilitate the process. In the bargain, instead of creating goodwill, the industry loses clients, who then spread the word about their hassles to many more.

We have heard every AMC defend its own processes and justify why they are so important. The core issue is not the processes, but the fact that a transmission case is nobody's baby within the AMC. Nobody will hand-hold the family through all the paperwork. Nobody will ensure speedy resolution. Nobody is made responsible to the investor for this. If each AMC were to appoint one person from its operations team as the transmission expert and have distributors directly liaise with this one individual for all cases, and have speedy resolution as this individual's core KRA, we will be able to collectively serve these clients a lot better. We don't need to get into a debate on which process and which documents are better - just have one central person take responsibility for these cases and you will see how we can help ease the situation for these clients, earn their goodwill, retain those assets and in fact build on them. What the industry fails to understand is that in trying to be extra cautious in transmission cases and not looking at the investor's convenience, we will most certainly create so much dissatisfaction in them that they will redeem all the money the moment the transmission is completed. Whom have we served in the process?

Senior LIC Agents are authorised to attest signatures and documents. This is on the basis of certain control that manufacturers naturally enjoy over their distributors and is subject to checks and balances. But, is a great tool to achieve customer delight because the distributor is most attached to the customer. This authority may be limited in scope by virtue of level of delegation and amounts involved, but will go a long way in reducing heartburn where as in our industry we are forced to send clients to banks for attestation etc.

3.c. We have been waiting for common processes for years - and the wait continues

40 AMCs, 40 different application forms, 40 different processes - serving the same investor through the same distributor. Why does the industry not get the futility of this? For years, we have been waiting for the promised common application form, uniform processes - and the wait continues. We are told that once MF Utility comes, these issues will get addressed. The AMFI platform idea was first discussed 4 years ago - from then onwards, all efforts for common forms and common processes have been pushed aside, saying that the AMFI platform will solve everything. I wonder whether when the AMFI platform is finally launched, we will be told that common processes will be in the next phase of MF Utility - thus pushing this basic customer service issue even further down the road. In these 4 years since the platform has been discussed and debated, how much ill-will have we generated among investors due to different processes of each AMC for the same activity? How much of an uphill struggle have we created for distributors who have to spend huge amounts of their sales time helping clients deal with all this confusion and sort these issues out for them? How much more sales effort could we all have put in, if we hadn't kept delaying this customer convenience under one pretext or another? How many more customers could we have served better, in these 4 years?

When returns are great, investors have more patience with cumbersome procedures. When generating returns is anyway a challenge, the least that the industry needs to have done is to progressively enhance convenience, to give investors less reason to exit. Inconvenient processes with moderate returns is not a recipe for retaining clients and acquiring new ones.

Point 4 : Use IAF funds effectively at grass roots to give boost to distribution

Thanks to SEBI, our industry has big money to invest on Investor Awareness which our industry needed so badly. We all in this industry would agree MF is the best option available for any investor but most investors are either not aware of this or see them in totally different light. We request all AMCs to plan aggressively to deploy these funds for meets at ground level, jointly with IFAs.

Most IFAs want to do this but shy away due to bandwidth issue and time constraints. AMCs can appoint dedicated teams or outsource this task to some professional vendors who can identify and do local tie up with Banquet Hall/ Meeting place with all other arrangement like AV etc. Vendor can also give some guidance on how to invite prospect /investors to meets and follow up later. Objective here is to hand hold distributors to do meets for creating awareness.

AMCs can expect many distributors coming forward and doing this activity which can go a long way to get new investors to our industry which is desperately required to bring meaningful growth to any distribution partner. Some AMC have done this for us and we are getting wonderful results but we believe if this happens at a much larger scale by all AMCs pan India, then only we will get the true fruits of these initiatives. This is need of the hour and we have the all money to do so. We believe that the time to do this is now ! Do or die! It's now or never!

To conclude

Manish and I and all of us at DFDA are serious players who are focused on growing our distribution businesses and serving investors better. We are enthused to see the regulator talking about long term steps to grow the industry. We are happy to see AMC managements serious about promoting retail business. What we are saying is that now that the intent is clearly there to promote retail, please act on the 3 points we have discussed. I am convinced that if we are able to work on these issues and resolve them quickly, we can all work together to actually deliver on the retail penetration promise that this industry has been dreaming about for the last 10 years. If we don't act, we can continue dreaming for the next 10.

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