MFs Look For Life Beyond Entry Load Ban

Hey, if you happen to meet the Sebi chief, please ask him what is the expiry date of the mutual fund industry.’’ This SMS has been doing the rounds among mutual fund players for sometime. The message is revealing on two counts: one, it tells you how bitter the industry is about the regulator and the changes it has introduced in the recent past. Two, it also smacks of a sense of resignation on the part of the MF industry, which manages over Rs 6.75 lakh crore on behalf of both institutional and individual investors. Incredible it may sound, but sadly the brightest investment minds that can weather the ups and downs of the stock market don’t seem to find answers to the troubles faced by the industry.“Nobody is questioning the intentions of Sebi.Indeed, we have to keep the interests of investors in mind if we have to attractthem. But the entry load ban was something the industry was not prepared for. Itcame [too] soon and the industry or the distribution force didn’t havetime to adapt,’’ says a senior mutual fund manager, who prefers notto be named. “Ever since C B Bhave has taken over as the chairman of Sebi,he has initiated a lot of changes in regulations, be it documentation, expense,benchmarking, disclosure... The industry didn’t object to any of them, butthe entry load ban was something it just couldn’t copewith.’’Sebi banned entry load (upfront commission paidto mutual fund distributors) on mutual fund investments in August last year.This has hit the industry hard, as many independent financial advisors (IFAs)abandoned MF schemes overnight and switched to selling unit-linked insuranceplans (Ulips) from insurance companies because of the attractive commissions onthem. Ulips used to offer very high commissions (up to 40-50%) on the first yearpremium at that time.“The regulator wanted these distributorswho were acting like a medical shop to become doctors overnight. The idea wasthat you offer investors good advice and earn a fee, but the idea justdidn’t take off,’’ says another mutual fund head on conditionof anonymity. “Probably, it is the Indian mindset. Most people wanteverything free or at a steep discount. Probably, distributors aren’t goodenough to demand a fee. In short, most MF advisors figured out that gettingtheir clients to cut another cheque for the advice is not going to happenanytime soon and they just fled from the scene,’’ he adds.According to industry players, there were around 40,000 IFAs active in the country before the upfront commissions were banned by Sebi. The number of active IFAs has reduced to 3,000 since then, they claim. “If the trend continues, it would be terrible for the industry,’’ says Surajit Misra, EVP & national head-mutual hunds, Bajaj Capital. “Unlike banking or insurance, the mutual fund industry is yet to become a brand people are comfortable with. So, you need someone to convince the investor to put money in a mutual fund scheme.’’ Sure, the MF industry has apoint there. However, critics point out that the industry is hiding behind theentry load ban and not willing to take the blame for creating a sales force,predominantly concentrated on tier I and II cities, which was happy churning theportfolios of their existing clients without bothering to bring new investorsinto the system. “I agree the industry is literally at a crossroad. But weshould also share some blame for the situation,’’ says the marketinghead of a leading mutual fund house. “We were pampering our distributorsand forgot to remind them that the industry would survive only with long-termmoney from investors. We were happy if we got some inflows every month. It justdidn’t matter if the distributor was taking the money out from one fundand putting it in another.’’He has point. The argumentagainst the entry load ban is this: insurance companies can still pamper theiragents, but the MF industry can’t do the same. And gone are the days whenMFs would fly their prized distributors to exotic foreign locales for a holidayfor bringing in more money.Nobody could blunt the criticism from fund houses better than the Sebi chief himself. In a gathering of fund house honchos last month, the market regulator clarified that he didn’t have any false notion that anybody would serve investors free. “All we were saying is that let the investor decide what he wants to pay for the service. You don’t decide how much he should pay,’’ he told the audience. As if sensing the skepticism of the industry, he also said that the fund houses should try to communicate better with investors if they want to justify the rationale behind the industry’s existence. Bhave also ridiculed the industry’s obsession with the asset under management (AUM) figure, which funds try to boost by chasing institutional money. Perhaps, he was hinting that the salvation for the industry lay in going back to its original mandate of collecting money from lay investors and managing it for them. However, dumbstruck MF officials didn't seem pleased with Bhave'sutterances at the meet. Many of them said sarcastically that, perhaps, theybetter start selling Ulips since the demise of MF industry was only a matter oftime. Sadly, they don't have that choice anymore. Ulips are not that lucrativenow. Once again, they would blame Bhave. His battle with theIRDA has resulted insome key changes in Ulips — the commissions are lower, and the insurancecover and lock-in period have gone up.Some feeble optimistic voicescan be heard from the industry these days. One set of people is stillconcentrating on how to get the distribution force back into the game. One ofthe main suggestions — the AMFI has made a representation to Sebi in thisregard — is to include the service fee in the MF application form.“We all agree in principle with what Sebi is saying aboutletting the investor decide what he wants to pay for the advice. Since theimplementation of it has not been smooth, we have to find a practical way tosolve the problem. We have proposed that let there be a column in theapplication form where the investor can write what he wants to pay for theadvice,'' says AP Kurien, chairman, AMFI. “We can have a cap on the fee.Let it be X% and we can put that in bold letters so that it will catchinvestors' attention.''Bajaj's Misra also thinks that is the onlyway out of the tricky situation. “The idea of writing two cheques is justnot happening. It will take a lot of time. The one way out is to include the feein the application form itself,'' he says.Another set of people hasalready started speaking about increasing the awareness about MFs amongindividual investors, especially those in smaller cities as tier I cities— particularly the four metros — account for around 80% of the moneymanaged by MFs. They also propose educating the distribution force so that itoffers better advice and is in a position to demand a fee from investors.“We are focusing on advisors. We want them to offer effective personalisedadvice to investors so that they won't hesitate to pay for the advice. We arealso focusing more on the retail investors. We are educating our advisors aboutbringing in more investors who want to invest for the long term,'' says ABalasubramanian, CEO, Birla Sun Life MF.