18 June, 2011

Is a tied agency model good for the investors of Mutual Funds?

Recently there was a news item in the press that SEBI is contemplating introducing a tied-agency model for Mutual funds. Is this good news for investors?
For that, we need to understand the tied-agency concept. This model is currently at work in Insurance industry with their agency channel. In this model, an agent can sell the products of any one company only. Even if the agent finds that there are other insurance products from other companies that are far more suited, he would not recommend that… for he is not empanelled with other companies and cannot sell their products.

As it is evident, this model ensures that the agent is just a sales person of that one company and always needs to look at all client needs through the limited vision afforded by his company. This model is a fertile breeding ground for sub-optimal advice. The biggest loser in this model is the investor. The AMC may find this worthwhile. For them, the agency channel is an extended sales-force of the company, who are not on the payroll. The company needs to pay a commission only if they sell a product. It’s like having the cake and eating it too.

In mutual funds, currently a distributor can empanel with any number of Fund houses. This allows a distributor to pick and choose and create a portfolio of good funds, suitable for his client. Now, if this were to be straitjacketed into the tied-agency model, like it exists in Insurance, investors will start experiencing unwanted sales push with a skew to a particular company’s product only.
It is felt that it will help Mutual fund industry when they are reeling today under the impact of various regulations that have come up in the past 2-3 years. Mutual fund houses may get a temporary reprieve through this. But this is a retrograde step and will result in aggressive selling on part of distributors, of the company products they are aligned with. This will result in a flood of complaints, sooner than later, from the investors. If investors find that it is not working for them, they will stay away from the MF schemes, further adding to the pressure that MFs are facing.

Though I had mentioned earlier that it would be good for the fund houses, it would be positive for some & a big problem for most fund houses. If distributors are allowed to empanel only with one fund house, the top few fund houses only, will be able to empanel distributors. The smaller and unfancied fund houses will not be able to attract any distributors to their fold. These MFs will have to start wooing the distributors with various attractions like a sign-on bonus, regular salary like payments, special incentives, trips etc., which could entice a distributor to a particular AMC. It is obvious that the cost of doing business will go up for most AMCs.

National level distributors & Banks would find that they are hugely in demand due to their distribution muscle. They will be able to extract their pound of flesh with the AMC they are aligned to. In this, those fund houses which either have a bank in the group like ICICI & HDFC or have a strong distribution setup like Motilal Oswal, Birla Sunlife will find that they are able to come out of this relatively unscathed & even increase their stranglehold.

The outcome of all this is that it will increase the concentration of MF assets with a few fund houses only and concentrate power in the hands of a few MFs. The diversity in fund houses & schemes which are seen now, will be a thing of the past.

The smaller fund houses will have to sell more through the direct & internet platform. To sell through these channels, marketing efforts would be required. If such efforts are to be fronted by their own staff, it will tremendously add to their fixed cost. Distributor channel is a low-cost channel for MFs, which are only paid for the sales they put through. Hence their costs will go up if they have to migrate most of their sales to direct or internet platforms. Again, this is not great news for the AMCs, as their revenue stream is limited to the expense they are permitted to charge.

In a nutshell, if tied-agency model were to be introduced it will be a losing proposition for the investor & for most of the AMCs. The distributors will also find it difficult to suggest a bouquet of MF schemes which are suitable to the client and will find resistance from the client, who may want good schemes from across the board. This could mean that atleast some of the clients would want to desert the distributors and go the direct route, in the interest of a diversified portfolio. This will again drive distributors away from the system. This will be useful to a few big AMCs and big distributors only. So, why consider such a retrograde step at all? We have enough headaches in the industry as it is.

Article by Suresh Sadagopan ; Published on 17/6/2011 in DNA Money

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