11 June, 2010

In whose interest?

We all like a story, don’t we? Upamanyu was a sishya in a Gurukul longtime ago, in the ancient past. His Guru wanted to test him and ordered him not to eat food. Upamanyu complied. But he was still healthy, even after several days after the Guru had forebade him. On inquiry, the Guru came to know that he was now having the left over milk straight from the cow’s udders. The Guru forbade that too. He started eating leaves and grass after that. That was forbidden too. Now, Upamanyu did not know what to do. Extreme hunger drove him to imbibe the milk of the Milkweed plant ( Calotropis ); but the milk being poisonous, Upamanyu become unconscious. The Guru comes to know of it and revives him, with his grace.
This story has a happy ending; but what about the MF industry. SEBI has been tying up the industry in knots by bringing in regulation that protects “investor interests”. First, they disallowed the amortization of marketing expenses for NFOs. Then, direct route was created. After that, no-entry load was brought in compulsorily from August 1, 2009 which directly slashed down the distributor margin. Latest in the salvo is the circular that MFs cannot dip into Exit load / Entry load accounts for paying upfront to the distributors. All these have been hailed all around as investor protection.
Are all these moves in investor’s interest?
It started that way. Even Upamanyu did not mind milk straight from the cow’s udders. It later became stifling. Like Upamanyu, the distributors were finding it difficult to survive… and many moved to other areas like Insurance, Real Estate, FDs & other Debt products… Investors were suddenly finding a vacuum as no one was there to service them.
SEBI abolished the entry load to distributors saying that many were pocketing the charge and were not advising their clients. 2% was what the distributors were receiving. This was to be seen as just a transactional fee. A distributor used to receive Rs.200/- if he puts through an investment of Rs.10,000/-. This amount is essentially to cover incidental expenses he incurs towards his efforts. If he is advising his clients, the distributor would charge over and above this. There were & are people who used to charge an Advisory fee ( over the distributor margins ) for proper advisory. The fallacy was that the distribution charge was seen as an advisory fee.
Between a rock and a hard place…
The Mutual Fund industry was a sunrise industry. Now, the sun seems to be going off with a pop.
As per estimates, only the top 10 MFs or so will be profitable as their margins shrink. They are finding that the distributors are no longer there to promote their products. They are now selling anything but Mutual Fund schemes. Mutual AUMs are not growing - Equity AUM has actually degrown from August 2009 to March 2010. The latest move to curb any payouts except from the expenses, has got the MF industry pinned against a wall.
Investor friendliness does not just mean low charges
An obsessive focus on charges is a fallacy. Most investors that I talked to were happy to pay a charge for services rendered. In fact, many of them were curious to know why charges have been removed and if it has been why one should collect the same charge as a separate cheque. They wanted to know why this convoluted method is adopted instead of a simple mechanism which existed, before 1st August 2009. A client would want a complete bouquet of services and is willing to pay for it. SEBI may then want to know – where is the problem?
The problem…
The problem with investors is that, though they understand that it is the same charge that they need to pay, it hurts when you have to write out another cheque. This is where the distributors have got hit. It becomes a fertile ground for haggling on fees – some do not want to pay anything at all, threatening to go direct if they do not want the business and others would want to pay a small fraction of the charge. The investors at large are not mature enough to write out a cheque.
And most distributors, themselves are not mature enough to charge a fee for services rendered. This sudden chill has thrown them off-gear and many have simply given it up. Why would they want to promote MFs when even debt products like PPF, NSCs/ FDs etc give them about 1%. Insurance product commissions are far juicier.
Adjustment time was sorely needed…
Suddenly foisting the no-entry load regime, without any time to adjust, has created problems for distributors. Had the distributors been given a couple of years time to prepare for the impending fee-based regime ( like in UK ), it would have been far easier. SEBI should infact have formulated a comprehensive training program for the distributors, upgraded them and then brought in no-load regime. Washing their hands off the industry & their distributors was a irresponsible move. Now, the distributors have moved on as they do not feel nice to pan handle for their services.
The icing on the cake
The Finance Minister has supported a no-load stance and which may-be construed as a pat on the back for SEBI. But, that is a political statement as well. Doing good is one thing; but being seen as doing good is far easier. Primary food prices have more than doubled in over a year; Fiscal deficit – which is a result of profligacy of government and it’s machinery, is at a dangerous level. Subsidies & benefits of the government run into lakhs of crores of rupees… In spite of all this, there is rampant poverty & misery. Naxalite movement itself is due to poverty & alienation. Such burning problems remain unaddressed. Yet, he supports no-loads as if that is the primary cause of all misery! No one apparently is interested in coming up with a holistic solution that takes along all stakeholders – for that is far more difficult and needs a lot of doing.
MFs have been painted as if they are greedy, avaricious dons who send their henchmen, their distributors, to deprive the citizens of the money they kept aside to buy milk for their infants! It’s really unfortunate as MF is a low-risk route for a lay investor to participate in the India Growth story. Direct investment is far riskier and is not for everyone. Also, MF money stays invested for a longer time as opposed to direct equity route, where day trading and short term trading is rampant. Are MFs the dirty guys of the Financial Services space. Are they the ones who are profiteering from the investors at large? Are other players in Financial Services space lily white?

What about the Banks?
They are the fatcats of the industry. They have access to CASA ( Current Accounts/ Savings Accounts ) which is virtually free money and they lend the money for double digit interest. Is this in the interest of the account holders? Potentially bank users are much larger than MF & insurance customers put together. Why is there no regulation there to eliminate the rather-handsome-spreads, which actually belong to the account holders?
Inspite of the huge spreads, they charge for everything from a statement, to a cheque book, account statement, closing an account etc. See the dichotomy… An MF does not charge irrespective of how many times one asks for a statement… whereas a bank, which is fattening with investor’s money, charges. Saw the hypocrisy in this ?
A bank sells everything from MF schemes, insurance, FDs etc. to their clients. The worst kind of misselling happens in banks. I was witness to this and have heard volumes from my clients. Yet misselling is only associated with the regular distributor.
The Real Estate ripoff…
Residential property is a necessity. And property prices are today nudging a Crore for an apartment. But, here is where they get the rawest deal. For a decision that a person probably takes once in a lifetime, he gets surprisingly little information. And then the ripoff is unveiled in front of the buyer in the form of the Saleable area for which he needs to pay for. These days one pays about 70% more than the carpet area. In a recent deal that a relative of mine entered into, the carpet area was 885 sq ft and the saleable area is 1550. This is wayside robbery. Every single citizen who buys a home is affected by this scam. And yet no one talks about this. Press does not write about this loot. The government is a mere mute spectator.
Mutual funds are hardly the problem to an average investor. Bringing more and more regulations and strangling the industry, is hardly in their interest. They have been made the whipping boys. There are worthier problems to tackle for the common citizen. In financial services a level playing field is a crying need. One regulator for the entire financial services will go a longway in solving the problems. Also, regulators need to be in touch with the ground realities and need to consult all stakeholders before taking such far reaching decisions. Else, unlike Upamanyu’s story, MF industry will not have a happy ending.

A truncated version was published in Money Today June 2010

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