Distributors a must for MF penetration

The regulator has spoken. Representatives of those regulated have aired their views. However, the intermediaries, who are unregulated but would probably be affected the most by the recent regulatory proposal to allow direct investments in mutual funds (without an intermediary) without any entry load, have not yet got a chance to be heard. Sameer Kamdar, country head — mutual funds at Mata Securities, a leading distributor, gets candid with Sanat Vallikappen on the Securities & Exchange Board of India’s (Sebi) move.

Where do you think is this proposal lacking?
I think the proposal has merits in the sense that it tries to tackle the problem of mis-selling and churn of customer portfolios. Where it may lack is the absence of an integrated approach to tackle that problem. What is eminently required is a tighter legislation to regulate mis-selling and churning. Only if that dosen’t work should the regulator introduce a direct model in the absence of any other alternatives.

Are asset managers ready to sell directly? What kind of loads do investors pay globally?
Look at the enormity of the country. Asset management companies have a presence in only a handful of cities so far. The growth in the industry has come about only because of the thousands of distributors and their customer network, which is spread far and wide. If distributors are not paid the commissions, where do they get their resources to expand or survive? They are also battling spiralling wage costs.

In other Asian countries like Singapore, Hong Kong and Dubai, the entry loads are between 4% and 6%. And in India, despite its vast geographical spread, it is as little as 2.25% and 2% post service tax. Doing away with entry loads is not the solution. Distribution is like the lubricating oil that keeps the fund industry ticking. Considering the enormous geographical, cultural and ethnic diversity of India, fund houses by themselves are not geared to serve customers through a direct sales model.

But even now, it’s not mandatory for fund houses to sell through distributors. Then why this issue?
Exactly. Even in the current dispensation, we have one fund house which has adopted the direct sales model without charging entry loads. Look at its marketshare. It is less than 0.01% of the MF industry’s total asset base. If asset managers feel that they could sell directly, they would have already done so. There is no rule which prohibits fund houses from selling directly.

Are you saying that this proposal is unfair to mutual fund distributors?
Look at insurance distribution. There, the first premium commissions on unit-linked insurance plans can go up to 50%. That’s 25 times what it is for selling mutual funds. If at all a direct model is required, it is in the insurance business and not in mutual funds.

There should be a level playing field for mutual fund and insurance distributors. What the MF industry needs is an independent regulatory framework under Sebi to tackle the various issues concerning the MF industry in a holistic and investor-distributor-asset manager friendly manner. Also, Indian customers are culturally loathe to paying any fees for advisory services and the days of charging fees to retail customers on the portfolio value or by the hour are still far away.

But the broad consensus is that this new practice, if introduced, could restrict churning?
It could restrict churning. But it’s like throwing the baby out with the bath water. If distributors are shown the door, who will cover cities such as Begusarai, Ambala and Pathankot? Tighter legislation that directly restricts churning of clients’ portfolios is the way forward.

It’s not difficult to collate churn reports from registrars to funds. This should be called for by the regulator on a regular basis and punitive actions taken against those who churn beyond a limit. The second option is to allow no-load schemes with higher trail commissions to distributors. The system should be designed in such a way as to provide a retention bonus — the longer an investor stays in a fund, the higher should be the commission the distributor gets. That way, it’s a win-win for everybody.

We’ve heard that some banks are lobbying hard to throw the proposal into the dustbin as they would be the worst affected?
I am not aware of any lobbying efforts, but banks that distribute third-party products, such as mutual funds, will definitely be massively hit. A majority of NFO sales are done by banks. This is because they have a large number of HNI clients.

These HNI customers can significantly save on brokerage costs and if this proposal becomes law, then these market-savvy HNIs would prefer to switch to that model. But why banks alone, all distributors regardless of their size or reach will be impacted. In fact, rebating, which was banned by Sebi, may make a rampant comeback as investors could force distributors to rebate or they could go direct to save load costs.

Can you throw some light on distribution models adopted in other countries like the US?
Look at the US model. Vanguard, which sells mostly passive funds, has adopted the model, but still stands out as a minority in a market driven by the conventional distributor sales model. Look at the computer hardware business where only Dell has a direct selling model, but yet, a majority of the computers are sold through the reseller model by Compaq, Lenovo, Acer, etc. Even Dell has been forced to change its model of late and use the reseller route.

Your final take on the issue?
Let the direct model and distributor model co-exist without making either mandatory. Leave it to market forces to determine, which is required and is best for all parties concerned, including the investors and asset managers. But, definitely, tighten laws relating to mis-selling and churn. Investor interest is paramount and has to be above all considerations.