23rd Aug 2012
|Can AMCs please clarify their position on direct?|
|Ashish Goel, Vista Wealth, New Delhi|
In the last one month before this SEBI Board Meet on Aug 16th, there were two news items that hogged the headlines - one is the talk of Kareena Kapoor's marriage with Saif and the other is about SEBI handing out freebees to the distributor industry! There was much media speculation and a lot of hype about higher incentives for distributors. At the end, what we see is a decision to introduce a cheaper direct share class - which is very damaging for the distribution business.
I don't know how such decisions are taken - but this again raises the question of whether the MF industry needs distributors or not. This is not a new question for we have been grappling with this idea since the past four years.
We were hopeful that if TER goes up, we could have more margins and more penetration which would see our distribution business grow but that has not happened. While TERs have indeed increased, the direct issue can potentially derail our business much more than higher trails can support it.
Why should the regulator promote direct?
The people who want direct investment have somehow formed the impression that all citizens in the country who turn 18 years old are all dying to invest in mutual funds and know exactly what they want to buy and what is suitable for them - and hence they should be not be penalized with incremental costs of going through a distributor ! What other rationale can we understand when the regulator says that it wants to promote direct?
Can AMCs please clarify their position?
The message I would like to pass to the AMCs is that there is no clarity from them on many issues. They should be clear about whether they want distributors or not. They should ascertain whether they are in a position to do direct business or not. They should also clarify whether they want growth through distribution fraternity only or whether they would prefer having both channels - direct and through distributors.
There is no industry that has a direct sales channel that competes with its own distributors, with a differential pricing that puts the distributor at a disadvantage. In fact, where both channels operate, the distributor actually is able to offer the product at a slightly lower price as he passes on a discount to his consumers from the bulk sourcing discounts that he obtains from the manufacturers.
Is direct really cheaper? Please do a reality check
There is another fundamental question here : how do we arrive at a conclusion that direct is cheaper? I have a simple submission. Let AMCs create two servicing models and allocate costs accurately to both. As distributors, all we want is transaction execution support which the RTA gives and a good fund manager to manage our clients' money judiciously. And of course, put in the distributor commission as a cost into this. Nothing else. Please put in the costs allocable only to these 3 aspects into the distributor share class. On the other hand, put into your direct share class all your other costs of sales, marketing, branches that have been opened in high streets and malls, senior management costs etc. Find out which channel is actually cheaper. Once you do this working, please share this with SEBI, and decide objectively which model is actually cheaper. Where is this notion coming from that direct is cheaper, when you have not done a comparative evaluation of both channels properly? The fact is that if direct was indeed cheap, it would have been done a long time ago. The fact is that we IFAs operate on a low cost model - many of us operate from our homes - we don't have expensive offices and infrastructure costs that AMCs have.
If today direct is really cheaper, please go ahead and offer the best viable alternative to the investors. I will be very happy to shut shop if I am only adding an unnecessary cost to my investors rather than adding value to them.
Who made this investor knowledgable?
Suppose in Delhi a group of distributors do lots of marketing activity, distribution activity which means a lot of time involvement, lot of engagement with clients and we manage to collect one lakh applications jointly in one year. Suppose out of the one lakh applications, let's say 10,000 applicants decide to save cost and go direct on that product. We lose out and the regulator or the AMC says this money has come at a lower cost because the investors came to us directly. Well, somebody has definitely done something to get those investors interested in mutual funds and in specific schemes that they want to invest directly in. Why are you penalizing the guy who has done all the hard work, only to see that the investor takes all the advice and then goes direct. Is that what you call Do-It-Yourself? Are we really saying that SEBI and AMFI and AMC sponsored investor education initiatives are such a big success that DIY investors are getting created from there?
Who says only HNI investors will go direct?
I don't agree with the view that only HNIs and corporates may look at going direct, and that it will not impact retail oriented distributors.
My grandfather used to say that there is no point in filling water in a vessel that has a leak no matter how big the vessel is. When some AMCs tell us that impact is likely to be only 5% or 10%, this is exactly what we tell them.
We all know that many of our HNI clients today were retail investors some years ago. After woking with an investor for 10 years and helping him build a portfolio of 50 lakhs today, what am I supposed to tell him if he shows me a media report that tells him that he can save 1% p.a. on this 50 lakh by simply transferring him AuM into direct mode? Why should we run a business where every morning you wake up wondering how safe your AuM is? Its not competition that we are talking about - we all live in a competitive environment and know that as long as we add value to our clients, our business will grow with them. But, when you throw in an unfair price advantage, we are not fighting on a level playing field any longer.
If I have worked with a retail client for 5 years and gave him the confidence to stick with his SIPs through all these tough times, and he now wants to shift his AuM to direct because the cost benefit is just too compelling, is that being fair on the distributor?
We don't want to sell expensive products to our clients
Take it one step forward, if the price differential is sizeable, wouldn't we as advisors who care for our clients interests not want him to go for a cheaper alternative anyway? If doing the right thing for the client means earning no money for oneself, is that what we are supposed to do? How is this fair and equitable to all? How is this fair to a distributor?
When there is a cheaper version of the same product available in the market, it will become our duty to offer our clients that version only. We do not want to sell expensive products to our clients. We want the best for our clients. Is that being very unreasonable? Are we saying that distributors must conceal from their clients the existence of a cheaper version of the same product, in order to continue staying in business? Is this the transparency and disclosure standards that are expected from us?
I am making a humble request. If SEBI wants a lower TER share class, that's wonderful. Please also allow me to offer that to my clients. Let there be a low TER share class and a high TER share class - and let us decide what we want to offer to our clients. Don't force a solution down our throats where we sell only the expensive version and the AMC sells only the cheaper version.
Is online direct the solution?
There are some suggestions that if a direct share class has to be introduced, it should be restricted to the online route only. I don't think this is the solution. If fundamentally direct is not equitable, how can it suddenly become fair just because the investor went online instead of walking into an AMC's branch office? This is nothing but buying time instead of addressing the issue. We all know that online is the future. So, what are we saying - that the problem will be somewhat small today, but will keep growing bigger and bigger as online becomes more and more accepted?
Again, I reiterate my point. If SEBI wants to make online cheaper - that's great. Let there be a cheaper online share class - and let that be available to all of us too. Let us then focus on platform solutions and offer lower cost products to our clients. We have no disconnect with lower cost as a principal - we are all for it. We are against discrimination where AMCs will offer low cost products and we are asked to offer higher cost products. That basic issue has to be addressed.
To grow distribution, you need heros
SEBI says it wants to create new MF agents from the pool of retired teachers, bank employees and post office agents. Firstly no post office agents remain now as there is no money in the business since commission on most products has been removed. What I want to say to SEBI is that if you are not able to retain those hard working and sincere people who have been doing the business for last 10 to 15, 20 years then how will you attract newer people?
It is only when the India won the cricket world cup that cricket became such a big fad in India. So we also need role models and success stories in distribution for more people to think about taking up this business. But distributors who are already working in the mutual fund industry are in doldrums. So if you are not able to sustain the present distributors, will this business attract new people? I don't know I am not able to connect the dots, as to how all these things are happening especially when Prime Minister, Finance Minister, Secretaries and all AMC CEO's have had so many discussions on how to revive the industry.
We don't need any media attention at all
Lastly, we don't need the kind of media attention our industry is getting. I have one small request to all the stake holders of the industry : stay away from the media glare. We are happy with the trade media of your kind which is basically more internal than external, it is basically B2B not B2C. But, media that is meant for investors is doing much more damage than good.
Our clients are asking so many questions about what and why SEBI is doing. Basically the investor wants many answers to not so important questions so quality time gets spent on answering frivolous questions. I think I will be very happy if we don't have any media coverage for next one year and SEBI does not do anything for us.