Advisor Speak

.................................................................................................................

Signed and stamped. SEBI has done it. It has issued the notification, directing a regime of No-entry load on mutual fund schemes. This will forever change the landscape of advisory and distribution of financial products in India.

Yes, we can debate on this decision. Yes, we can curse the decision. We will all have a point of view. The timing was wrong, variable load option would have been better, some load should have been there, and so on. But then, its signed and stamped. It’s difficult to fight the regulation. Specially if it has come into effect after months of deliberations and thought by the regulators. Yes, we can hope against hope. Yes, there may be a possibility of a roll back. But I am not optimistic that SEBI will make a material change into this.

While it is definitely a step towards a more matured market, I personally feel that it is premature to do away with entry loads completely in a country where savings and investment products are still sold and not bought. However, we can only look forward.

At this crucial juncture, there are two options before distributors. See the darker side of it, regret it, protest it and eventually leave the profession thinking it’s all over. The other worthwhile option is to look forward, adjust and take the challenge head-on. For those who choose to stay on, there is not only hope but a bright future in waiting.

During the next six month or so, there will possibly be aggressive pricing by AMC’s by way of exit loads, up-fronting the first year trail, extra incentives by discounting their future income, etc. However, I am convinced that all this will not sustain for a long time. Eventually, margins will fall for distributors and they will have to find a way out. The possible options are to increase volumes, charge a fee from the client or increase their basket of products.

Amidst all this, one thing is for sure. Pure distribution of mutual funds will be hit. Clients will be looking for value from their advisor / distributor. A distributor must have or must develop expertise in managing client’s money. People who will remain in distribution will have to exit this profession sooner or later. Better take a call today. For others, consider the following.

Accept it – It has happened and it is here to stay. Come out of the denial mode. It’s time to start afresh.

Level playing field – It is not something that has happened to an individual or a select group of people. This regulation will impact everyone who is distributing mutual funds. Whenever there is a change in law or regulation, it benefits some and affects others negatively. It depends who gears up fast to face the challenge. It’s for sure that there will be a way out because all distributors are not going to leave this profession.

New commission structure – It’s not that there will be no commissions in Mutual funds. Trail is going to stay, and possibly increase, anyway. There will also be some upfront commission by way of exit loads. Yes, gone are the days of 2-3% upfront commissions in equity schemes.

Will the volumes go down – I doubt. There are not many investment opportunities for investors in India other than Mutual funds. No entry loads will result in improved performance by equity funds prompting more investments. Further, we have all read in economics that in most cases, decrease in prices results in increase in demand, other things remaining the same.

Increased Opportunity – No doubt, a large number of mutual fund sellers will exit this profession giving way to the ones who remain. Further, this regulation will be a deterrent for new people who wish to take up this profession as the gestation period will be longer and it will not be lucrative in the initial years. Imagine what this can result into. Hundreds of thousands of stranded investors will look for new advisors who can service them. It’s time to gear up.

Increase product basket - Look at alternative products. Life Insurance, general insurance, structured products, Overseas investments, etc.

Client Base – World over, typically, a planner / advisor handles around 200 clients. In a country will over a billion people, getting 200 clients should not be a big deal. Most distributors may already be having around 150-200 clients. The important thing is to serve these clients well and provide solutions to them. Clients want a loyal advisor whom they can trust. They are not interested in switching their advisors very often unless there is a meaningful deficiency in the level of expected service and advice.

Can Clients do it themselves – Again I doubt. An average investor needs handholding when it comes to investing. With thousands of schemes, volatile markets and servicing issues, they will need help of a distributor. Even when direct applications were allowed at zero entry load in Jan’2008, it did not impact the industry as not many investors went direct.

Margins – Many consider that the real issue is that there will be pressure on margin. If a particular distributor fees that low margins going forward will make this profession unviable, so will be the thought process of many others. If this were the case, distributors will start talking about some form of fee with the client. Sooner than later, clients will be open to talk about fee for services rendered.

Impact cost – The impact is going to be only on fresh investment, including SIP,STP and switches from debt to equity. If we assume that on an average a client makes fresh investment ( including necessary churning of existing portfolio ) of 25% of existing AUM in mutual funds annually, the impact will be 0.50% of the total assets under management. Out of this, there is expected to be some upfront commission going forward due to exit loads. Effectively, if a distributor is able to get a fee of 0.25% - 0.50% on the client’s AUM, he will come out winner and will not have any loss of revenue. I agree its easier said than done, but asking a client having investment of Rs.10 Lacs in mutual funds, to shell out Rs.2,500/- to Rs.5,000/- annually for good advice and service may be difficult but not impossible.

Eventually, fee based advisory will come into practice. It may take time but as distributors will feel the pinch, they will push clients to pay them or leave them. This will lead to clients realizing the need for advice and service and compel them to pay. I don’t think two cheques model will ever work. It may be in the form of a percentage of AUM, profit sharing or a fixed annual retainership charges.

As the famous saying goes – “there lies an opportunity in every crisis” , this is one crisis which can open the doors for a long-term, respectful and rewarding career for people who stay.

brijeshdalmia@gmail.com