- Wealth PMS (50L+)
By focusing only on investor interests and making the business an unviable proposition for fund houses and distributors, Sebi is actually harming investor interest in the long run.
As per estimates, only the top 10 MFs or so will be profitable as their margins shrink. Compounding this, distributors deserting mutual funds for greener pastures, moving on to insurance, debt products and real estate. AUMs are not growing; equity AUM has actually declined since August 2009.
What went wrong?
Sebi has been focusing on the charges aspect alone and has been trying to whittle that down. That is a very lopsided approach. For example: The latest move to curb any payouts except from expenses has got the MF industry pinned against a wall. The fund houses now can only pay out of their own pocket, which means the must suffer losses or pay out what is possible from the recurring expenses account.
Also, while distributors cannot hope to earn in MFs, all other spaces in financial services were not similarly hamstrung.
Distributors of debt products including Public Provident Fund, National Saving Certificates and fixed deposits, etc, get about 1%. Commission on insurance products can be in double digits. This is what caused distributors to beat a retreat from MFs.
I disagree that the proposition is unviable – it is only short term unviable until the AMCs scale. They need to get to their customers directly and make their products saleable even over the counter. And distributors CAN charge clients directly for their service. Yes compared to other products which pay them a fee, they can get by with lesser.
Also PPFs/NSCs pay the 1% from their fees – “out of their own pockets”. (they don’t cut it from you, remember) so in the same way AMCs can take the money from the fund management fees (upto 2.5%) that they charge.
Every industry depends on intermediation. Take retail. The size of the retail industry is about $450 billion. Retailers make margins of anything from 10-70%. Assuming the average is about 20%, the intermediation cost is $90 billion, or about Rs 4.2 lakh crore!It would be great if we didn’t have to incur this cost, right? After all, we all have to pay this price. Still, we pay it.
Thus, intermediation is a value-add; not just a cost. It is a service and any service needs to be paid. Vilification of the service provider and making it unviable to operate will only create an undesirable vacuum.
The comparison with retail is crazy. You buy retail products for consumption, mutual funds are investment. You don’t buy a book to sell it back – if you did, you would definitely be bothered with any intermediation costs.
Take term insurance for instance – I don’t care what commissions are paid, it’s a product I buy for consumption (rather, it’s an expense). But investment product commissions directly impact the goal for my purchase, that is, to make the value go up; I have no other use for the product. Commissions cut into that goal, so I must work to reduce them. And when misselling by not informing customers about commissions becomes rampant, the regulators must get involved.
And there are value addition and logistics charges. For instance, buying a book online may cost me shipping charges of say Rs. 20 per book. If I’m ok with that, I’ll pay the shipping (and I’ve paid tons to Amazon to ship books to India); if I think I can do better by going to a bookshop or contacting the publisher directly, I can do that. Or I can pay the retail price, because I value the book at that much. Bookshops also have inventory cost, and return costs. That I understand is value I pay for.
There’s no such thing with mutual funds; distributor value addition is largely form filling and transport! For that, I should pay 2.25% of AUM? Or even 1%? That is silly. If he gives me good advise I don’t mind paying him separately, and I can value that right – so it shouldn’t cost me more for 2 lakhs versus 1 lakh.
What distributors should do is charge their costs separately, then I can value it appropriately. The comparison with retail is a sorry excuse for looting customers.
(Let’s not get ad-hominem and say that the author, Sadagopan, is a financial planner, please. Attack the argument, not the arguer)