Mutual fund distributor: Villian!
I have said this many times in the past….the easiest person who can be blamed is the distributor..so blame him!
A couple of months ago Moneylife carried an article by Mr. Balakrishnan as to why investors should use the services of a bank, and not that of an individual distributor. I found it amusing, but did not find the energy to rebutt the article line by line, so did not bother doing it.
Now once more Moneylife has said that there is an outflow of equity funds in the month of April, and the distibutor is to be blamed. Fantastic.
Recently one mutual fund had a ‘scheme’ where for creating an equity corpus. Well for a paltry sum of sales the ‘greedy’ distributors were being taken to the land of ‘sin’. Did the distributors sell? Yes of course they did. Will the fund perform? Tch, tch who ever writes about performance of funds (it is damn difficult and I know of 4-5 journos who will even attempt reading an article on performance analysis!!). Has any part of the media written about the trip? No, of course not, some of them are busy preparing for the trip.
One mutual fund recently saw a big distributor pull out money from their fund – and the distributor continues to pull out BECAUSE he is not being paid ‘extra’ commission. Who promised him the ‘extra’ commission….the sales head…WHO will be blamed? the distributor! LOL.
Frankly I think the distributors role is being exaggerated. For all the services my distributor gives me, he cannot get me to invest outside of the 3 fund houses in which I invest. I just do not need it. He of course comes with a new pitch quite regularly, but I just do not listen. I also realise that if he comes to my office and picks up a SIP form of Rs. 500 a month of the security guard, HE IS DOING the security guard a favor – and is partly subsidised by a colleague who does a Rs. 30,000 per month SIP.
To expect that the distributor will sit with you and do your financial planning (another super abused word), is stupid. I wish clients knew what they want, wish they could articulate their needs. Fund schemes which did well in the past but are now slipping will see an outflow. However the biggest distributors now are the banks that have floated the fund houses – so a SBI BANK sells SBI fund schemes, Hdfc bank sells Hdfc mutual fund, Axis bank….so on and so forth.
No investor I know has ever reacted to fund performance sensibly in our country. And financial services industry was never, ever run for the customer.
If banks were run for the customer, if mutual funds had to perform to get further money, if RBI was even worried about customer service life would have been different.
We would have had 5 banks, savings bank account interest rates would have been open to competition, 5 mutual fund houses, and perhaps 200 million investors. If we have 45 mutual funds, 45 more applicants waiting in the wings, …falling distributors, falling Assets Under Management, simple thing is ‘blame the distributor’. Why is withdrawing from SBI tax magnum? afterall it was a well performing fund was it not? Why is he not selling Mastershare? It is such a nice old fund, is it not?
Tch, tch the distributor is greedy. The asset management companies, the trustees, the custodian, the directors, the brokers, the research analysts, the personal finance magazines, the personal finance websites, channels, banks, are all in the business of public service.
The distributor is in this business for making money. How gross! Ayn Rand help!!
Muthu
I’ve posted below the comments I posted in the Moneylife article you are refering to.
“What I’m writing is my personal opinion and do not represent the advisory channel or associations I belong to.
First and foremost, it is not that distributors are not earning anything out of mutual funds now. As a recipient of commission from fund house, I can tell you that, AMCs pay between 0.5% to 0.75% as upfront incentive from their P&L A/C.
A trail income of around 0.5% is paid per annum out of the expense ratio as long as the asset remains in the system under advisor’s code.
Because of the above upfront incentive, banks and national distributors still keep churning a lot and most of the mis-selling happens in this segment. Added to that, stock brokers who are wired to only buy and sell are brought into the system to sell mutual funds.
Prior to August’09, IFAs who had say around Rs.50 lakhs corpus, kept churning the same between different NFOs, few times a year, earned a commission of around 3% to 4% every time he churned the same.
Many of the IFAs who have quit the market post abolition of entry load belong to the above category. It is unfortunate that we lost some genuine ones also in the process.
Paying a commission of even upto 6% in case of certain closed ended NFOs has not helped the industry in any way.
If lack of entry load is the core issue now, the investor base should have grown bigger before August’09. It did not happen. All channels (ofcourse with some exceptions) merrily tapped the same investor base by asking them to book profit in a NFO and enter another NFO.
The sad truth is that industry did not make any efforts to expand the investor base and penetrate even when the financial incentives were good.
Before considering bringing in something like variable load, SEBI need to rethink twice. Mis-selling by banks would become rampant and we can safely assume they would tick the highest slab in the variable load structure.
Most of the IFAs in the market are now serious about this profession and is building long term relationship with clients.
Variable load may bring back people who would prefer to make more money in short term by churning.
It would be better if mutual funds become a pure trial play. Say trial of 1% per annum for equity and 0.5% p.a for debt.
The above trail income is the portfolio advisory (and related services) fee for an advisor. An advisor may charge a fee from clients for overall financial planning and any other service / advice he provide.
Pure trial would eliminate mis-selling done by many banks and irrespective of channels, only those who are serious about this profession would be in this space.
The industry has not grown because starting from AMCs; we all wanted instant gratification and did not believe in growing along with the clients.
AMCs were hyper active in bringing NFOs and giving all kind of rewards- monetary and non monetary linked to assets gathered during NFOs. Mis-selling always start from a product manufacturer.
Many are behaving better today not because we want to behave better but we are made to behave better.
When we see a 5 year return, 10 year return or since inception return – we should be asking how many would have actually made these returns.
I doubt whether it would even be handful because as an industry we gathered assets by churning; depriving the customers the benefit of compounding.”
Brijesh
Subra,
The last person in the food chain gets the hit.But natural…..In this case- the distributor. Also, the human mind and behaviour plays a big role. ( Look, when it comes to returns , the investor ( not all) thinks, all gains are b’zoz of his smartness and losses b’coz of the advisory….)So it’s upon the distributor to articulate the process and get adequately compensated.It’s a long haul… but patience pays.
subra
there is just not enough data analysis to find out anything about how people buy mutual fund. Do banks sell more or IFAs sell more? where is the churn higher? Is there a nexus between a bank and a bank promoted mutual fund at all….
if there is need based selling – is it the client’s needs? the banks needs? or the amc’s needs? …LOL
many such questions can be answered only by SEBI ..which has the complete date…
Rajesh Manoharan
Recently, I was trying to invest some money through my Citi Bank.. they were charging around 2% for all equity investment.. I was taken aback for sometime and later did an online transaction with the MF directly. For a 50K investment, they are charging 1000 as fee..
On other hand, I have Reliance Money account, which takes flat 75 for all equity MF investment..But the catch is 75 is charged for every transaction I make (that includes even SIP). So small investors who wants to SIP of 5K every month will be in trouble
And I feel Banks are good at managing money. I don’t think they should venture into brokering.
Ramesh
Which are the 3 fund houses that you prefer? Please give the names (In view of your previous posts, i think they are Franklin Templeton, HDFC and ICICI). Please confirm. Thanks.
subra
Naren Sankaran as an Individual – he is with I Pru. If he quits, I bail out. Simple. yes hdfc and templeton. Also happy with Blackrock, Birla, Kotak, Sundaram, – selective schemes..
Ramesh
Thanks Subra for the reply.
I was interested in the ICICI one, since recently, Mr. Naren has been promoted to CIO in place of Nilesh Shah and has been “officially” replaced by other fund managers. So, now he is one step away from going away in a few years.
Based upon your own analysis, it will be worthwhile if you can enumerate or write a blog post about the “selective” schemes which you consider to be the good ones (I agree there is no “best”).
Thanks again.