Is it a crime to have built up an advisory practice in the corporate treasury management space, where the more convenient business model is passback arrangements instead of quality advice? Is it a crime to have converted passback oriented clients to understand the value of good advice and get them to transact in an ethical manner? Is it a crime to have consistently put client interests first, and offer agile advice on getting out, just as often as one gives investment advice? Why should excellent advisors like Mr. Bond be driven to consider exiting a business that he has painstakingly built over 15 years - the right way, the difficult way - just because of one decision of the regulator? Intelligent and resourceful advisors like Sunil Jhaveri will undoubtedly find other businesses which offer a level playing field. The question is whether the MF industry is at a stage where it is ready to part ways with high quality advisors who cater to the top end segment of clients. The question is whether the industry can still do something to mitigate the situation and keep good quality players interested in this business. If not, one may well find quite a gathering at the Prarthana sabha that Sunil is alluding to on Jan 1, 2013.

SEBI has put final nail in the coffin of MF Industry ( especially the distribution community).

When our Hon Prime Minister announced steps to be undertaken to revive the MF Industry & increase penetration; lot of expectations & euphoria was built around it. Lot of representations with a lot of hope and enthusiasm were done by the industry participants viz. AMCs, Distributors, AMFI,etc with both SEBI & MoF.

So far SEBI has taken some pro active steps & tried to reverse some of the negative impact of banning entry loads. It is difficult for any Regulator to reverse their predecessors policies; especially if it seen as acting against the interests of the investors. To reverse this trend & put more funds in the hands of the industry ( which gets perceived as anti investor clause) is indeed laudable. Inspite of that following positive steps have been announced by the Regulator viz:

1. Put more money in the hands of the AMCs for additional payouts to beyond 15 city distributors to enhance penetration

2. They have allowed fungibility of expense ratios

3. Service tax to be borne by the investors; very logical & long awaited announcement

4. They have done away with compulsory requirement of PAN card for investments upto Rs.50,000

5. They have allowed investment in cash upto Rs.20,000. This can have great penetration where banking systems are not very robust

6. Tried to enhance fleet of distributors by allowing teachers, post office agents, etc to sell simple products to investors ( this can have great impact in rural penetration)

7. Structurally the most important step is to recognize the distribution community which is treated as unorganized sector currently & setting up SRO

However, with one hand Regulator gave all the above, & on the other hand, with one mischievous clause took away all the positives & put distribution industry ( especially the HNI, SME & Institutional business ) on the brink of collapse.

Latest SEBI Circular ( dated September 13'2012- missed it being Friday the 13th by one day) instead of helping the MF Industry growth will ensure that it spells death knell for the industry; especially the distribution community & it's domino effect will be felt by the industry as a whole.

One clause which actually rings death knell for genuine advisors is the introduction of separate plan for DIRECT investments. What does this do to the business models of genuine advisors? I can relate this with the experience of how we built our advisory practice in MSJ Capital ( my firm) which caters to Corporates, Banks & Institutions.

1. Separate option for direct investments:

Mutual funds/AMCs shall provide a separate plan for direct investments, i.e., investments not routed through a distributor ,in existing as well as new schemes. Such separate plan shall have a lower expense ratio excluding distribution expenses, commission, etc., and no commission shall be paid from such plans. The plan shall also have a separate NAV

So far the most regressive of the clauses which will ensure that distributors concentrating primarily on the debt space & advisory servicing Super HNIs, SMEs, Corporates & Institutions will be out of business post January 2013 deadline. In most cases, especially corporate set of investors are most sensitive to both expense ratios & returns. Any option that reduces one & enhances the other will be preferred. I fear that slowly & steadily most corporates will actually take Board Approvals to invest in lower TER direct debt products only.

How did we create credibility as genuine advisors?

First & foremost we put investor interests before our interests or that of AMCs. We ensured that we only recommend those asset classes & schemes which will make sense for the investors first & then our revenue streams followed. We gave disinvestment calls as aggressively as investment calls ( even at the cost of our revenue loss) so that investors exit at right times.

We tried to be ahead of the yield curve by identifying right asset classes & schemes. Even within an asset class, we tried to identify those schemes which made more sense to the investors rather than a generic asset class calls. Classic example of this was identifying and recommending only those short term plans which had high accruals & roll down effects in past 2 years (rather than giving duration or interest rate calls in rising interest rate scenarios). This call ensured safety of investor funds at the same time giving excellent returns even in rising interest rate regime.

We gave investment call in G Secs thru SIP from July 2011 till March 2012 & gave a disinvestment call in April 2012 when RBI announced first benchmark rate cut. This gave rise to almost 20-25% p.a. returns to the investors.

All this takes a lot of research & understanding of the markets. It also entails understanding requirements & returns expectations of the investors & then identifying schemes to suit their portfolio needs.

Investors of MSJ Capital swear by the advice given by us & genuinely follow our advise. To reach this level of confidence with our investors has not been built overnight. It has taken us almost 15 years to reach this trust & confidence levels. Given a choice, none of our investors would like to bypass us & invest directly.

However, when SEBI gives them an option to earn slightly better returns ( if they invest thru DIRECT mode); which investor will be able to argue against this mode of investment? Finally every client will be answerable to their respective Boards who over a period of time will insist on investing in low TER schemes thru the DIRECT mode.

Also, institutional business is built over a period of time as the same is thru empanelment process. It has sometimes taken over 3 years of constant advice, nurturing & hand holding before the first deal is struck with a new client.

We also have shied away from pass backs by giving away most of our practice in North India & concentrated more & more in Mumbai. We even converted some pass back clients to invest thru us based on our advisory to non pass back clients.

What do we get in return for such ethical, genuine & correct advisory practice? What does SEBI do to such genuine advisors? With one stroke SEBI has undermined our importance which was built over so many years of hardwork, relationship building, research based advise & with genuine interests of investors at heart.

To recapitulate, what did we do over 15 years of Mutual Fund practice build up:

1. Investor interests first

2. Tried to be ahead of the yield curve by recommending right asset class at the right times

3. Gave disinvestment calls as aggressively as investment calls

4. Been patient with new clients over many years till they struck their first deal- during which time we went on imparting correct & timely advise

5. Created huge awareness with new & old clients of benefits of investing thru MF route

6. Desisted from pass backs & actually converted some pass back clients to non pass back clients thru MSJ Capital advise

7. Even gave product ideas to AMcs based on which many products were launched in the market

And then SEBI strikes & says you are no longer required to be part of the Mutual Fund business. You have done your job. Now let investors invest directly & take advice directly from AMCs. First SEBI took away upfront brokerage by abolishing entry loads, now they are doing away with trail as there are no brokerage payouts for DIRECT investments. What do we earn ? Nothing?

As everyone is aware, institutional clients will never pay advisory fees ( which SEBI is directing all distributors to earn) as they deal with 3 or 4 such advisors & sometimes their investments are only in liquid schemes ( with very short investment durations). In such scenarios, how can any investor quantify any retainership fees & on what basis?

Hence, let us assume we have say Rs.1000 crs in AUM of our various clients which is earning us some trail. All that the clients will have to do is take an NOC from us post January 1'2013 & ask the AMCs to put this thru the DIRECT( lower TER)code. With one letter our so many years of hard work will be wiped out in a jiffy.

As far as equity MF schemes are concerned; all will depend on the expense differentials of the two schemes viz. Higher & lower TER schemes. If the differential is 50 bps or lower, investors I would presume would be indifferent to whether to go direct or thru distributors. However, if the differential is higher than 50 bps, logical assumption would be that investors would prefer lower TER schemes & once again put revenue stream or entire business models in jeopardy.

Which of the above does the distribution community think help in re energising the MF Industry, increase penetration or help investors at large?

I think time has come for all those in the mutual fund industry ( read distribution community) to fend for themselves & start looking at alternate sources of businesses like insurance, real estate, etc. and move away from an industry who is in no mood to protect the most important pillars of the industry. Regulator thinks that the industry can survive, thrive & grow without the participation of distributors ( who have actually brought the industry from nascent stage to the current stage; only to be told that you have no role to play in future).

SOLUTION

Industry can survive this blow only if any one more or the following steps are taken. Also, collectively we will have to concentrate our efforts to either do away with this clause or make representations to the REGULATOR to minimize this blow:

1. Reverse this clause of DIRECT and maintain status quo

2. Allow distributors to sell lower TER schemes to their clients & earn commission on the same

3. To protect existing AUM, investors should not be allowed to transfer to DIRECT mode. Only incremental investments should be allowed thru the DIRECT mode

May God give better sense to the Regulator & help the distribution community from near collapse of their business models & revenues or else let the souls of the distribution community REST IN PEACE. AMEN.