It would be fair to say that the mutual fund eco-system in India - comprising fund houses, large distribution houses, IFAs, R&T agents and other service providers - hasn't exactly presented a picture of a united house. It would also be fair to say that perhaps due to this, we haven't - as an industry - engaged as well as we could have with our regulator to influence the shape of regulations in a manner that focuses on the investor, but at the same time, looks at business realities as well.
We can keep wringing our hands about this, or we can try and do something constructive to change this. At the plenary session of the 6th annual Wealth Forum Platinum Circle Advisors Conference, held in Mumbai on July 17th and 18th, 2015, we made our humble attempt to showcase to our industry a different model of regulatory engagement and industry advocacy, which is working very well in another country.
Our keynote speaker at the plenary session was Ms. Joanne De Laurentiis, President & CEO, Investment Funds Institute of Canada. Joining Joanne in this panel was a high powered set of industry leaders - who most likely will lead the forthcoming distribution SRO. The panel comprised:
Sundeep Sikka, CEO Reliance Capital AMC & Chairman - AMFI
A.Balasubramanian, CEO Birla Sun Life AMC & Vice Chairman - AMFI
Neeraj Choksi, Jt MD, NJ India Invest, Co-founder FIAI and Member of SEBI's Mutual Fund Advisory Council
Dhruv Mehta, Chairman FIFA, and
Joanne De Laurentiis, President & CEO, Investment Funds Institute of Canada
The panel was moderated by yours truly.
L to R: Dhruv Mehta, Neeraj Choksi, Joanne De Laurentiis,
Sundeep Sikka, A.Balasubramanian, Vijay Venkatram
There were many valuable inputs that Joanne shared with the panellists, of which, I am going to highlight just two. She had 2 clear messages for us on how to meaningfully engage with the regulator:
Speak with one voice: Don't go to the regulator with views on any proposed regulation as multiple bodies - one representing fund houses, another representing IFAs, a third representing large distribution houses. Any regulator, when they see multiple views from multiple trade bodies, will finally do what they want to do, as the industry is presenting a divided house. Don't simply object - give a credible alternative solution: No regulator will listen to you if you only come to them with issues with any proposed regulation. Understand what they are seeking to achieve with a proposed regulation. Don't fight the outcome, come up with a credible alternative that achieves the desired outcome in a better manner.
Two clear messages from Joanne De Laurentiis, IFIC, Canada
Speaking with one voice - the Canadian way
It is very interesting to note that IFIC - the fund industry's trade body - is not just a trade body for fund houses. Its members include fund houses, mutual fund dealers (akin to distributor platforms), banks, financial advisors, custodians - basically, the entire mutual fund eco-system. When IFIC speaks, it speaks for the entire MF ecosystem, not just for one part of the ecosystem. When IFIC engages with the regulator, the regulator understands that it speaks on behalf of the entire MF ecosystem. When IFIC engages with the media, it does so on behalf of the entire MF ecosystem, to showcase how the entire ecosystem works to serve the investor. IFIC takes up issues that impact all parts of the ecosystem and not just the fund management piece.
IFIC actively engages with the regulator in discussing fund distribution related policies and regulations, since fund distribution is an integral part of the MF ecosystem. When the Canadian regulator proposed new regulations to ban trail commissions on mutual funds and insist on a fee-only model, IFIC took up this issue with the regulator - although this had nothing to do with fund houses. If it impacts the MF ecosystem or any part of it, there is a single voice that will put forth the industry's view and engage meaningfully with the regulator.
IFIC has a number of issues where its members do not always see eye to eye. But, the top management of IFIC - the industry leaders - recognize that if they are unable to resolve their differences in a mature manner and come up with a common view, nobody is going to benefit as lack of a single voice on any issue means no voice at all. No voice at all is never a good idea - as we know from our own experiences.
What can we learn from this?
We have AMFI that represents fund houses, we have FIAI which presently represents large distribution houses and we have a number of IFA associations - some pan India in character and some regionally focussed. There are a number of issues where views across our industry are divergent - including service tax, pricing of direct plans, commission caps, advisor regulations. We need to ask ourselves these questions: (1) Is our inability to formulate a common view across our ecosystem actually working for the industry or against it, and (2) Is it better for the industry to arrive at its own "compromise" formula on issues where no consensus emerges and take this to the regulator, or leave it entirely to the regulator to take decisions that impact the industry.
To start with, can our industry formulate an institutionalised mechanism where all parts of the ecosystem are duly engaged and consulted on all matters? Will the new distribution SRO be the entity that finally brings all stakeholders together on a common platform? Will the SRO's brief include industry advocacy or will it only implement rules and regulations for fund distribution? Can an SRO actually take up industry issues or is this the domain of trade bodies? And, if it will remain the domain of trade bodies, can all our trade bodies across the MF ecosystem come together on a common platform and attempt to speak with one voice?
Give the regulator a credible alternative solution
This was a key point that Joanne made. No regulator is going to seriously entertain your views if all you have to say is why their idea is not good or won't work. You need to first step back from the proposed rule / regulation and understand the outcome that the regulator is trying to achieve. Don't fight the outcome - that's never going to work. Instead, accept the desired outcome and come up with what you think is a credible alternative solution that achieves the desired outcome, but in a different, and hopefully better manner.
In Canada, like in India, mutual funds pay out a trail commission to distributors, which comes from the TER charged to the fund. The regulator has been looking at whether they should abolish trail commissions and get advisors to seek fees from their clients, as a more transparent way of being remunerated.
The industry believes that this may not work, since there is - like everywhere else in the world - a reluctance by many investors to cut a cheque towards advisory fees. What the industry understood however was that the regulator was seeking a much higher level of transparency than is currently available. The key here is to accept the outcome, and try to find an alternative solution. The solution that the trade body came up with is, in my view, exactly the kind of "compromise formula" that I referred to earlier. The industry has proposed that starting from 2016, all investors will receive a consolidated annual statement of their mutual fund holdings which provide the dollar value of performance of the portfolio as well as the dollar value of all trail commissions paid out to their advisor from this portfolio. Its like saying that instead of simply saying that trail commission is 1%, the annual statement will say for example that this portfolio of CAD 200,000 appreciated by CAD 10,000 during the year and total trail commission paid to the advisor during the year amounted to CAD 2,000. An investor will be able to see, at a glance, the total return as well as total remuneration of his advisor. This therefore gives a whole lot more transparency to advisor remuneration, while at the same time, enabling the existing trail based income model to continue. Is this something that distributors will be elated about? No. But, do they believe that in the circumstances, this is a better option to seeking fees from investors? Yes.
The regulator has accepted this suggestion as a credible alternative and accordingly, the industry is moving ahead with implementation of this idea from 2016. The key here, in my view, is a mature understanding that if the regulator wants lot more transparency in advisor remuneration and therefore was considering a fee based model, there is no point arguing whether transparency is warranted or not. There is more merit in accepting the outcome and coming up with a credible alternative.
What can we learn from this?
Our regulator is currently riding two horses on the subject of advisor compensation - pushing the case for RIA on one hand while bringing commission structures towards an all trail model to curb churn and mis-selling. There is a guessing game going on in the industry on when the regulator might decide to force the pace on RIA conversions. We need to, like the Canadian industry has done, understand the outcome that SEBI wants. Does SEBI want more transparency in advisor remuneration and an elimination of upfront commissions which are seen as a source of mis-selling? Is higher transparency the desired outcome which is leading SEBI to lean on intermediaries to become RIAs and thus seek fees from investors instead of commissions from fund houses?
If that is indeed the case, should our industry think along the lines of the Canadian industry, and maybe go one step ahead, in the interests of full transparency? We already have a consolidated statement that goes out to investors from the R&T agents. Do we want to consider three additional data points in the annual statements:
Total rupee return on the portfolio for the financial year Total rupee value of fund expenses charged by various schemes during the year on this portfolio Out of 2 above, total trail commission paid out to distributors pertaining to this portfolio
Will something like this settle once and for all, the angst and debates over distributor compensation and bring in stability and predictability into revenue models in the distribution business? Will this end the debate on advisor vs distributor?
We have a choice of proactively engaging with the regulator by offering credible alternatives, or stand by and watch as regulations get implemented, with or without industry buy-in.
Take direct plans and their pricing. The regulatory intention clearly is that self directed investors who don't use the services of distributors should not be asked to bear fund expenses which contain embedded distributor commissions. This desired outcome gave rise to the regulation that currently defines how direct plans are to be priced. If however it has transpired that over the last couple of years, fund houses have indeed spent incremental amounts to serve investors who are coming to them direct, should not those expenses be borne by direct plans? Is the regulator's intention that advised investors should bear the costs of servicing direct investors? Surely not. If we are clear about the regulatory outcome, we need to work together and present to the regulator a credible alternative to the current pricing mechanism for direct plans, which is consistent with the regulatory intent of treating all investors fairly.
To conclude
Advisor compensation and pricing of direct plans are just two examples to illustrate a point about how we can imbibe lessons from the Canadian industry experience, and apply these to our domestic challenges. Our challenges are unique to our industry, and our solutions too must be unique. But, looking and learning from others, and applying principles that make sense, never hurts anyone.
More than anything else, what we really need is a lot more maturity and collaboration among all stakeholders in the industry, to hammer out workable solutions and present them cogently to the regulator - in one voice. If we can't do this, we will forever continue wringing our hands in frustration, while our counterparts in other markets figure out how to engage meaningfully with their regulators and contribute proactively in the development of regulations for their industry.
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