28th July 2012

Jennifer and Mathew Mendes exemplify the kind of retail oriented IFAs that this industry so desperately needs many more of, across the country. 4000 retail MF clients, an MF AuM of over Rs. 90 crores - largely in equity - built up painstakingly over 25 years, an unwavering focus on getting investors to commit to 10 year + SIPs of amounts even as small as Rs. 1000 per month, a growing SIP book of over 2000 live SIPs, and active handholding of clients in these challenging times - which gets clients to not just continue with their SIPs, but in fact top-up in weak markets - the industry clearly needs many more of such advisors ! And, when sincere advisors like the Mendes couple express anguish over what they see happening around them, its surely time for the powers that be to sit up, take notice, and act.

Professor Mathew Mendes is a Professor of Western classical music and a music therapist, based in Mapusa, Goa. What would a professor of music have in common with the mundane world of finance and investments? Well, a lot, as it turns out. Prof Mendes along with his wife Jennifer moved from Mumbai to Goa, 25 years ago, in search of a better quality of life, after Jennifer resigned from her job at Indian Bank. They started up their Investment Advisory business back in 1987, in Goa - from scratch. At that time there were very few professional advisors and so Jennifer, with her bank experience was able to gain the confidence of investors. Over the years, they have built up a large retail client base of over 4000 investors. Their business (which is carried out in the name of Jennifer Mendes) has a MF AuM of over Rs. 90 crores, of which Rs. 80 crores is in equity. Their son Schubert has now joined the firm and Prof Mendes plays the role of mentor to his wife and son, who are hands on in the business.

The Mendes family exemplifies the kind of retail advisors this industry desperately needs in all parts of the country. They are proud of the fact that over the last 25 years, they have given a taste of equity to primarily bank deposit oriented investors. They preach and execute only long term SIPs - which are at least 10 years plus tenures. They have seen enough ups and downs in the market over these last 25 years to maintain their firm conviction on the power of equity to build wealth in the long term - and instil this confidence in their clients, especially in times like these, when confidence is badly shaken. As Prof Mendes says, in an environment where SIPs are getting cancelled each day and redemption pressure continues unabated, he has been able to convince his clients not only to maintain their SIPs, but often to top-up their SIPs as markets are low ! They have a SIP book of over 2000 live SIPs, which is growing at a steady pace.

Their focus on offering genuine goal based advice to retail investors has remained unwavering, despite margins shrinking post the entry load ban. Often, as Professor says, it is unremunerative to travel long distances and meet clients, to get them started on their SIP journey with amounts as little as Rs. 1000 per month. But, they maintain that retail advisory focus, keeping the long term picture in mind.

It is not the markets that trouble Prof Mendes. He is today deeply troubled about two aspects that he sees in this business :

1. Role of an advisor - it is in challenging times like these, that the true value of an advisor should be perceived by investors. The spate of redemptions and SIP cancellations across the industry vividly suggests to Prof Mendes that so many investors still don't have access to good advice. It is for the IFA fraternity to step up to this challenge and help investors through these difficult times

2. Power of SEBI - SEBI has power, but along with that power should come a sense of responsibility - to nurture and grow the industry and protect the interests of all its legitimate stakeholders. SEBI's actions since 2009 do not inspire confidence in Prof Mendes about its ability to take such a balanced approach.

His anguish on these two aspects prompted Prof Mendes to write this piece......

Role of an advisor & Power of SEBI

.......... By Prof. Mathew A. Mendes

If becoming "investor centric" is the mantra, the role of an advisor is pivotal

With the onset of the radical changes effected and engendered by SEBI with the aim and purport of Mutual Funds becoming 'investor centric' the role of the advisor assumes a unique importance in the unfolding of Mutual Fund industry. Peter Drucker, the celebrated management guru persistently and ubiquitously emphasized the importance of "marketing" in any business. Therefore, ipso facto, the role of an advisor needs no defence !

Being an investment advisor in today's world is a challenge fraught with difficulties and opportunities unheard of in any earlier era. Against the backdrop of the volatile Sensex, swinging widely and wildly.....having, in effect falsified all calculations and cleometrics .... the role of an investment advisor assumes an importance which is, 'a fortiori', pivotal and far reaching, since finance and financial well-being touch the core of every human being.

A melange of standard of life and a standard of living is required and awaited by modern man. Finance, which is normally beyond the scope and tenure and ambit of intellectual and intelligent discussion of modern man, thus finds a rightful place in man's pursuit of happiness.

Good advice can help you and your clients tide over these difficult times

In keeping with professional probity and the client's interest being paramount and uppermost, the advisor must engender a detailed asset allocation portfolio which includes Fixed deposits, Mutual funds (pure equity, balanced and debt) gold, property etc. according to the client's risk- appetite and age (the volumes that I recommend in equities are often directly proportionate to disposable income and inversely proportionate to age!)

The present negative sentiment and senseless spate of redemptions ipso facto does not exist within my client circuit. I have explained, giving numerous specific examples how in a falling market some extremely good stocks can be picked up at bargain prices. The Ketan Parekh scam era (2000) exemplifies my stand and vindicates my philosophy: the Sensex fell from 6,000 to 2,800 level, a seeming bloodbath - which was made to seem more real by the ubiquitous media - caused needless and mindless panic in the minds of gullible investors. The recent Satyam scam rocked the civilized world and sent shock waves across the financial circuits, replete with negative sentiments of being circumspect of any private enterprise. Every scam frightens the prospective investor who is awaiting disinterested and enlightened guidance from qualified, sincere and dedicated investment advisors.

Financial advisors should become movers of people and mobilisers of opinion

Sincere, advice, as opposed to 'slavish adherence to herd mentality' always pays rich dividends in the long run, in point of fact, it may be stated that because a significant number of my clients followed my advice to invest additional amounts when all their friends and 'expert' advisors indulged in crazy redemptions, it proved amply rewarding and they garnered the golden grain! Here it may be aptly said that financial advisors have fortuitous opportunity to be "movers of people and mobilisers of opinion", to quote the historic phrase of the celebrated jurist, Nani Palkhivala.

Although I have received a few requests for redemptions, I have been able to show my clients the light of reason and convince them to resist the temptation of yielding to redemptions (which is a more helpless and hapless mode of yielding to the herd mentality - always in a majority, led by self proclaimed 'experts' making specious/dubious claims and prognosis of the Sensex) and most strongly recommended fresh investments and adding to their past investments - thereby averaging their returns. This strategy is bound to enure enormously, favourably and profitably to their credit. History repeats itself with shocking regularity.

Power of SEBI

What is the future of mutual funds? Since it is a given that the present approximates the future and the past holds the key to a clear perception of the present, therefore it follows logically like in the diurnal revolution, night follows day: good times are ahead. The ominous abysmal downslide will be followed by a salutary vertiginous upswing!

Over the recent 24 months the markets seem to be "range bound". Investors who have invested in Mutual Funds with ideas of phenomenal profit and fantastic returns are apt to be disappointed. The inexorable forces of nature which can be surrogated by the market vicissitudes speak their own language in time and space. The bard of Avon said quite appositely 400 years ago, "The whirligig of time brings forth its revenges". The Mutual Fund industry, globally and particularly in India where it is in its nascent stage cries out for understanding to the powers that be.

Power of amendment cannot extend to abrogation

Since SEBI enjoys wide powers bestowed by Parliament, it can play a stellar role in the growth of the industry by using these powers "wisely and well", as famously expressed by Shakespeare, specially in dealing with the role of the advisor who is the best surrogate of Mutual fund to the common investors drawn from the various parts of urban and rural India. The noted jurist, Nani Palkiwala, in the Keshvananda Bharati vs State of Kerela case told the supreme court in 1973, "Parliament in the exercise of its amending power cannot become its official liquidator. The power of "amendment" cannot extend to abrogation." So also today SEBI's power of regulation of AMC's cannot extend to strangulation and virtual liquidation. The entry load ban and the resultant "diminuendo" as reflected in to AMC's balance sheets bears eloquent testimony to Shakespear's comment, "The sad augurs mock their own presage." The precipitate hurry to rush through the entry load ban is best expressed in the timeless tocsin uttered by Alexander Pope when he declared, "Fools rush where angels fear to tread."

Will SEBI do the rational thing only after exploring all other alternatives?

It is best and most rational that the whole philosophical change of "fee-based model" be given a quietus - the sooner the better ! Lord Keynes uttered an enduring truth when he said, "Men will do the rational thing, but only after exploring all other alternatives."

It is respectfully submitted that SEBI has been vouchsafed with regulatory powers over: 1. IFA's, 2. The AMC's and 3. The clients. To take a very parochial view that SEBI is only concerned with the well being of the clients is untenable and hopelessly impractical. Moreover, it betrays confusion of thought. John Donne said "Everyman's death diminishes me, because I am part of mankind." If SEBI so uses the regulatory powers to constrict growth and prosperity of the AMC's and/or the IFA's it will in effect and practice be doing a dis-service to the clients by killing the proverbial goose that laid the golden egg.

SEBI must take all stakeholders with it, not just one

It is a fact which requires no explanation and no underlining that when power is conferred it should be used nobly and in good faith. Just as in a government all the three organs of the State viz. Executive, Legislature and Judiciary must function harmoniously and well so also in the financial field of Mutual funds, it is submitted that IFA's, the AMC's and the clients must function with harmonious confluence.

If SEBI works towards this end, - of harmonious confluence and mutual benefit - only then will the regulatory (not strangulatory) changes have a salutary (not stultifying) effect and be in practice a harbinger of change which will enure to the benefit and betterment of all.

We, on our part, must be ready for change

We must prepare ourselves for change. As a thinker once put it, " The only unchangeable thing is change". Change in the Mutual Fund industry will definitely be for the better. The only abominable alternative to change (whisper it ) is decay !!!

As the British poet, Shelley, famously put it, "if winter comes, can spring be far behind?" The financial guru, mark Mobius has already predicted that a bull run is around the corner, it is only a matter of time!. "Warren Buffet, chairman of Berkshire Hathaway, exclaimed, "When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble in the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary".

After going through the diverse views of so many experts expounding the obvious (albeit replete with irrefragable purple patches) one is forced to admit that the present phenomenon is but ephemeral and transient. The gloom will be transmuted to bloom. "Such is the inexorable, inevitable law of nature!