Last-mile hitch

Tags: News

The removal of entry load slowed down the otherwise galloping mutual fund industry, but innovations in the distribution system can put it back on track

In the last few years the phrase ‘entry load’ has become synonymous with the mutual fund industry. It was feared at the time of the entry load withdrawal that the industry’s asset under management would stagnate, but AUM growth has happened despite the absence of entry load, thanks to the innovations in distribution strategy and some products drawing investors with handsome return prospects.

Yes, retail investors have lost touch with the industry partly because their neigbourhood man (the last-mile connectivity) didn’t go to them with the latest product offerings, and only the more informed and alert investors have been putting their money in mutual funds, mostly by doing their own homework.

After all, mutual funds are risky products and require some handholding when a new investor steps in to invest his hard-earned money. Earlier, the industry had relied heavily on the distributors for last-mile connectivity by paying them commission charged as entry load from investors.

Ranjeet S Mudholkar, vice-chairman and chief executive officer of the Financial Planning Standards Board India, best summarised the health of the industry, when he said, “The mutual fund industry in India has seen new plus ultra transformation not only in scale but also in quality over the past two decades. From a mere Rs 47,000 crore managed by nine fund houses in 1993, the industry has come a long way to a achieve a size of Rs 8,90,000 crore and 40 players, which are mostly new fund houses that entered the arena post-1993.”

The boom in equity market earnings during 2005-2007 period added some malpractices to mutual fund distribution. The industry, like any other financial product, had followed the model of distributing/selling their funds through agents or distributors since inception, but after the stock market boom of 2006-2007, complaints of miss-selling started surfacing.

This was also the phase when the life insurance industry wooed potential mutual fund investors with equity market-linked investment products, called unit-linked insurance plans (Ulips). The mutual fund industry players saw a tough competition, with the life insurers doling out more than 30 per cent of the first-year premium as commission for Ulip sales, putting the mutual fund distributors at a disadvantage. At this point, many AMCs and distributors were here caught cheating by the regulator.

Securities and Exchange Board of India (Sebi) chairman C B Bhave’s tenure saw two important developments — the removal of the entry load and the securities regulator taking on the insurance regulator Irda over the hefty commissions paid to the insurance agents.

Jimmy Patel, chief executive officer of Quantum Asset Management Company says, “The reason why Sebi stepped in was that many of those agents who were enjoying higher commissions for distributing other financial products e.g. insurance, started demanding more fees besides ploughing back entry loads into their own pockets. In order to make more money, some unscrupulous elements were churning the portfolios of their clients, moving them from one fund to another in order to pocket the entry load.”

After taking charge at Sebi, C B Bhave became instrumental in cleaning up of the distribution-related malpractices, which forced industry to look beyond the traditional distribution model to sell their products.

After moving away from the industry, the distributor community has not come back in a big way even after Sebi announced some incentives for those selling mutual fund products to first time-investors beyond the top 15 cities. These are early days to judge the real impact of these incentives.

Industry body Association of Mutual Funds in India (Amfi), which communicates industries’ concerns to regulator Sebi and vice versa, has also taken steps to re-energies the distribution channel.

To encourage first-time distributors, Amfi has placed a waiver of around Rs 3,000 on registration fees for first-time distributors for five months valid till June 30, 2014. Amfi’s objective is to expand the overall reach of the industry in tier-II and tier-III cities. Amfi’s district adoption programme is aimed at inducting new independent financial advisers (IFAs) to the mutual fund industry and provide employment to nearly 2,000 youths in tier-II and Tier-III cities. Amfi CEO H N Sinor said, “The adoption of the districts will mean organised and better use of money in investor awareness campaign. There was a lot of overlap in earlier initiatives.”

Amfi is targeting 2,00,000 IFAs by 2015, from 80,000 right now, out of whom only 16,000 are active. However, large distributors are not happy with the current state of affairs in the industry. They feel there is not enough on the plate to motivate last-mile distributors and past undoings have left a scare that is difficult to get over.

Rajiv Bajaj, vice-chairman & managing director of Bajaj Capital, in an interaction with media last week said, “Commercial incentive is very important. Today you need Rs 25,000-Rs 30,000 for a middle-class Indian for basic lifestyle. It has become more and more challenging.”

“Life insurance and mutual funds are two important products for the distributor community. The brand image of the financial services distribution industry in India has suffered, so people do not want to come in though financial services distribution is a thriving business globally,” Bajaj said.

The industry has been facing high attrition among last-mile distributors. “Attrition within three months is high, the retention not more than 10 per cent, though globally it is 50 per cent. It’s hard to market products as incentives are not enough, we need to rebuild trust through investor education, bringing people back into this industry, and raising professional standards,” Bajaj said.

“Investor education camps are being organised in large numbers, but how many investors are coming? Folios are dwindling,” Bajaj asked.

But AMCs are not sitting idle even if the traditional distribution channel is not in full gear as in the past.

After U K Sinha, former UTI Mutual Fund chairman, took over as Sebi chairman, the industry has seen new hope. Even finance minister P Chidambaram speaking at the NSE’s 20 years celebration function hinted at the need for more incentives for distributors working in the mutual fund industry.

Ranjeet S Mudholkar of FPSB India says, “A higher expense ratio of 0.2-0.3 per cent coupled with the removal of sub-limits on various expenses has given greater leverage to fund houses to improve penetration. The direct schemes have also given a choice to investors as well as distributors, who can manage client portfolios by charging advisory fee.”

But the industry has a long way to go in terms of penetration in the vast market challenged by low awareness and lack of awareness about mutual funds.

Gautam Mehra, leader of asset management, PricewaterhouseCoopers India, in a report on the Indian mutual fund industry, said, “The mutual fund industry is yet to spread beyond tier-I cities. Statistics show that penetration in the top five cities increased to 74 per cent in March 2013 compared with 71 in March 2012, whereas for cities beyond the top five, the penetration has actually decreased.”

“Typically AMCs find it a less expensive proposition to pay commissions to distributors than communicate through other channels,” according to Mehra.

But things are changing over the past few years as the entry load debate forced some AMCs to start using technology to reach greener territories. When asked how Franklin Templeton is trying to reach potential investors with a foreign name unfamiliar to investors in smaller towns Himanshu Pandya, head of products at Franklin Templeton Asset Management (India), said, “You will find us more on Facebook and other social media.”

Technology seems to be the answer; AMCs have started seeing technology as a game changer.

Sanjay Sapre, vice-president for transfer agency at Franklin Templeton Management (India) said at the recent CII Financial Distribution Summit, “Technology is the only way to break barriers. Online and mobile for banks, mutual funds and insurance are getting popular.”

“China’s single largest fund is Money Market Fund which is $16 billion in size and it’s sold online,” Sapre said.

The transaction platform is now device-agnostic – desktop, mobile and tablet. Transactions enabled via text messaging is also an option,” Sapre said.

Sapre, who is also part of the Amfi team that is getting the online transaction platform of the industry body ready for buying and selling of mutual fund products some time early next year, says, “Launching of MF Utility will be a game changer in the MF industry. MF advisers have set up their own portals and investors are transacting on them.”

“The challenges for IFAs include maintaining infrastructure for technology, servers and recurring cost. It can only be done by somebody who has scale,” Sapre said, justifying Amfi’s plan to set up the transaction platform.

Quantum Asset Management Company stands out in the domestic MF industry having registered profit year after year as a successful AMC without any support from distributors.

Jimmy Patel of Quantum AMC said, “We wanted to keep costs low by not paying commissions to distributors and also wanted our distributors to offer full transparency towards our investors. We also did not want to indulge in unnecessarily churning of the portfolios of clients (since we believe in long-term investments). Hence we started out as India’s first and only direct-to-investor mutual fund.”

“We use technology and a seamless paperless online process to reach out to our investors,” Patel said.

But top distributors are forced to sell Quantum AMC products without commission, as investors buying products of other AMCs demand Quantum products from the distributors and they have to provide them without caring for commission. “We also have more than 100 distributors empanelled with us to whom we do not pay a single rupee in commission and they deserve respect for their professional approach. Our approach of using technology, focus on transparency and keeping costs low has worked very well for our funds and investors since our inception in 2006,” Patel said.

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