21 July, 2012

Reviving the MF Industry

The entry load abolition was a watershed event for the MF industry. The industry has been sliding since and is now in a sorry mess.  The rapid-fire changes that were imposed on the industry added to the woes. Admittedly, many of the measures were good. But, they imposed a punishing load on the distributors, MFs and their R&Ts. This increased the costs when revenues had shrunk. To compound the problems, the stock market in this period had played truant. Result – an industry which is a spent force today and is a mere shadow of it’s former self.

Media bought the logic of investor friendliness, hook, line and sinker and went to town about how SEBI’s moves were – oh, so investor friendly. They depicted intermediaries as some rapacious plunderers and sullied the name of the entire community. It was true that some people did unethical acts. It was also true that it could have been handled by simply identifying and punishing the guilty, instead of tarring the entire distribution community and penalizing them with oppressive regulations.

Lot of water has flown under the bridge. Many distributors have found the profession to be all work and no pay and have hence since quit. They have sought other professions which allow them to earn a living, in a dignified manner. It is easy to mouth platitudes that the distributor can collect a fee, if their services are good. The fact is that most of the investors at large are not mature & professional enough, to pay for services. The problem in part was the making of the distributors themselves; they used to pass-back a portion of their commissions to the investors. How will they go to the same investors and now collect a fee? In a sense, they reaped the bitter harvest of their past karma.

SEBI & particularly it’s erstwhile chariman Mr.Bhave were not willing to give anytime before bringing in a game changing regulation.  It was a fait accompli that they foisted on the industry. The problem was that they also did not know what will be the effect on the industry, but still they persisted and look at the result!  SEBI should have first undertaken the task of communicating with the investing public and raised the level of public awareness on the sea change they were bringing about and what the investor was to expect and do.  Instead, they irresponsibly called distributors – courier boys. How do they expect self-respecting intermediaries to stay in the industry, which was anyway getting into the sunset mode? SEBI conveniently packaged the whole bitter sludge with a sugar coating called investor protection and got away. But the havoc it brought on the industry is there for all to see.

What can be done to get the industry back on the rails -

1.       Remuneration of intermediaries :   This is at the core of the matter.  The simple fact is that there should be a way for the intermediaries to earn respectably, instead of going to the investor and begging for a fee.  A standard percentage of the invested amount can be collected as a fee, along with the invested amount. For instance for an investment of Rs.10,000/-, an amount of Rs.100 ( let us say the fee is 1% ) is also collected in the same investment cheque as Rs.10,100/-. Rs.100/- is paid by the MF to the intermediary by the MF. This becomes transparent and will bring viability to the distribution community.

2.       Leave alone the industry :  We all understand that SEBI is very concerned about the investor. Now, thanks to their policies, there are legions of orphaned investors  who find that their distributor has moved on.  The industry has had it’s share of regulations. It is hightime that it is left alone to find it’s level, settle down and perform. The last thing the industry requires now is the regulator coming behind them and pulling them up for non-performing funds. The regulator should be more worried if there is non-performance due to non-compliance of regulations. The non-performers would anyway be taken care of by market forces and be driven out of business.

3.       Recognise the cost & time involved :   If the distributor has to maintain the rationale for recommendations, in every client case and needs to record every conversation, he has with the client ( which is at the proposal stage ), it will eat up on his time and would be costly to comply. If such regulations are brought in, the actual costs & time lost on such compliance needs to be recognized and should be built into the fee charged to the investor.  Similarly, sending reports to clients on a monthly basis is an investor friendly and welcome step. But, it costs money, which MFs have to bear. When regulations are brought in, the costs that it imposes should be recognized, and there should be a mechanism  for the MF / distributor to recover it.

4.       Be actually investor friendly : Asking even an investor who invests Rs.5,000/- for KYC, is taking matters too far.  If MF investments need to come from all across the country and not just Mumbai & Delhi, then a threshold to invest without KYC ( like upto Rs.50,000 ) should be brought in.  Processes have become complicated. For instance, a bonafide investor who has given one bank account and has now closed that account and wants to receive the amount in another bank account, has to go through a tortuous process where he gives proof of both accounts, before he gets the money. If the investor establishes his bonafides and is able to prove that the bank account is his, why haul him through coals. A lot of such rules exist today, which rattles the investor, instead of helping him.

SEBI needs to focus on bringing in an enabling environment where all stakeholders will benefit. Investors alone cannot benefit if MFs & their distributors are impaled.  It is not a question of entry loads. It is matter of change in attitude that will bring in the changes necessary to revive this industry.

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