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Assessing changes

Assessing changes

The recent regulatory changes, such as no entry loads on mutual fund investments, cap on Ulip charges, draft report on investor awareness and protection, and the proposed direct tax code, have all made the financial services industry buzz with activity.

The recent regulatory changes, such as no entry loads on mutual fund investments, cap on Ulip charges, draft report on investor awareness and protection, and the proposed direct tax code, have all made the financial services industry buzz with activity. We decided to seek the opinion of six experts on these issues as part of the fourth MONEY TODAY Round Table. The panelists included Sandesh Kirkire, CEO, Kotak AMC; Sanjay Sachdev, Country Manager (India) & Regional Manager (South East Asia), Shinsei Bank; V. Srinivasan, CFO, Bharti AXA Life Insurance; K. Venkitesh, National Head, Distribution, Geojit Financial Services Ltd; Ajit Dayal, Director, Quantum AMC, and Suresh Sadagopan, Certified Financial Planner.

The recent regulatory changes seem to imply that the distribution model of selling mutual funds and insurance will be phased out. How will it impact the business?

VENKITESH: The past few days have been tough. The mutual fund inflows, especially the fresh ones, have been impacted. For large distributors like us, the problem is that talented people do not want to join the industry to sell mutual funds and insurance.

There is talk of a new platform that will allow mutual fund trading by the National Stock Exchange and the National Securities Depository Limited. If this comes into being, it has the potential to transform the industry much like stock broking. The role of the distributor will change; it could drive us into being asset gatherers. For the consumer, the choice increases, making it complicated to pick the right product.

SADAGOPAN: For financial planners, things have not changed much because we have an advisory model, wherein we charge an additional fee from the consumer. Customers don’t mind paying as long as they are convinced about the rationale behind the fee. Moreover, as a practising CFP, I need to state upfront all the charges I levy on the clients and share with them the kind of monetary incentive I receive from the product manufacturer.

KIRKIRE: Distribution will ultimately take two routes; one will be transaction-led, while the other will be advisory-led. We need to have a perspective on the commission that was shared between the distributor and the manufacturer. Assume that a fund charges an annual recurring expense of 1.75%. When there was a 2.25% entry load, a total of 4%, including 1.75% annual expense, was being shared in the first year of investment between the distributor and the manufacturer.

Today, the 2.25% entry load is a question mark. Whether a distributor can charge 2.25% or part of it from clients remains to be seen. What is left is the 1.75% of the annual expense that can be shared between the distributor and the manufacturer. Besides this, there are several third-party expenses, comprising custodial charges, registration fee, transfer costs and service tax incurred by an AMC.

A distributor could make money through the trailing commission that the manufacturer gave him. Over a three-five-year horizon, this component of the total revenue would be 70-75%, assuming a market growth rate for the fund of 12-15%. Considering this assessment, what is at stake over a threefive-year horizon is 10-15% of the revenue pool, which is not visible now as far as distribution is concerned. The direct investing model initiated in January 2008 did not have significant volumes, which only emphasises the need for distribution.

Dayal, your model is not based on distribution. Is it faring as well as you had envisaged?

DAYAL: We are a small AMC compared with several others. We may never top the AUM charts, but consider our performance: we raised Rs 10.7 crore at the NFO stage and our NAV is up by 60-65%, so we should have an AUM worth Rs 18 crore today. Instead, we have Rs 38 crore. I think we have managed to change the view of investors and they have helped us grow despite the lack of distribution. I believe there will be big fund houses, with multiple fund types to offer, and there will emerge boutique fund houses like ours, which will play a focused role.

What is the big picture that is emerging because of the proposed changes and those that are already in place?

SACHDEV: Distribution is an important element of the financial services industry as you have to be accessible to the customer. I see financial planning emerging in a big way as people can get the necessary advice on setting financial goals and working towards them. Distributors should get into need-based selling.

The regulator is rightly taking a pragmatic lead, which is going to be painful in the short term but will be a success in the long run. Multiple regulatory bodies are involved—Ministry of Finance, Irda and PFRDA, besides the banking regulator, RBI. They all need to come together to create a level playing field. Over the next 12-18 months, I see major changes in the dis-intermediation system, which will alter the traditional way of selling products. This system will have to be monitored and fine-tuned over time.

The Swarup Committee has recommended doing away with commissions for insurance agents. Will it change the distribution matrix?

SRINIVASAN: The regulators need to consider the ground realities and look beyond the metros as 70% of our population is non-banking. Without setting the distribution infrastructure and understanding its advantages, regulatory moves will not get the desired results.

For instance, as insurers we have a rural and social obligation set by our regulator. This forces us to penetrate into new areas, but who will bear the distribution cost? It is, perhaps, one reason why mutual funds do not have the penetration levels that they could have had.

Is the lack of interest also because financial products seem boring and unattractive?

SRINIVASAN: Yes, very few people get excited about financial planning. To change this perception, we need to include finance as a subject in school and college. This will not only improve basic understanding, but will also force product manufacturers to deal with aware consumers.

DAYAL: Some financial products have been made to seem fancy, and they sell. There should be a simplified product suite; one must have term plans, an index fund, pension plans and a long-term equity fund. But the dozens of products being offered by each manufacturer are confusing and the salesman takes advantage in such a situation.

Will the formation of a self-regulatory organisation (SRO) work better with regard to distribution?

SADAGOPAN: The SRO model has not worked in the US. The entire investment banking crisis and recession in the past 18 months was primarily based on the fact that the industry would regulate itself. Of course, just because it did not work in the US does not mean that it won’t work here. It is the intent on the part of every player that makes a difference. The mutual fund industry is trying to regulate itself and I don’t know if it will succeed. But I do know that if we don’t try, we will never know.

DAYAL: Worldwide, the industry has failed dramatically on ethics and education. Consider the way that various risky products have been sold and bought, as well as the churning of mutual funds and the amount of money distributors have made. An SRO can work only when there is high investor awareness.

VENKITESH: Attempts to self-regulate have been made several times, but it results in a who-blinks-first situation. For instance, a manufacturer will go to another distributor if I do not agree to sell his product because of its high cost and low value. There has to be a sincere effort for an SRO to work.

Are there situations where one financial arm is in contention with another, say, the insurers versus the mutual fund industry...

SRINIVASAN: At times the investment management team and insurance team compete with each other. The reason is the existence of multiple regulators and no common framework. Take fund management. There is tremendous scope to outsource fund management for us, but regulations do not permit this.

KIRKIRE: At Kotak, we have a mutual fund arm, an insurance arm, a portfolio management service and an offshore fund. All of these need a research team to track the same stocks and sectors, but we cannot share them because of regulations. Just consider the saving on costs and increased efficiencies if we were allowed to do so.

SACHDEV: I agree with the benefits of a common resource and expertise. However, some regulations were introduced to check misuse and differential charges on the resources by one division compared with another. Regulators need to have a code with definite rules and allow the players to set their own benchmarks.

Do you believe the consumer will gain from all these regulatory changes?

SADAGOPAN: Yes, it helps money-wise because now clients don’t have to pay charges on some products and reduced charges on others.

SRINIVASAN: Yes, the consumer gains, but it should not be at the expense of changing products, where an offering seems cheaper today than it was six months ago.

SACHDEV: Consumers definitely benefit. But what about those who will lose the window that was available to them? Some may lose investment opportunities because they won’t come to know about them. Now, the onus is on manufacturers to push their products.

KIRKIRE: They do benefit, but consumers also need to increase their awareness to make the most of the gains by choosing the right product. The regulator has to make sure that such information reaches the customers.

VENKITESH: Investments are made with a goal in mind and if regulatory changes help maximise returns, it is good for clients. They need to weigh their options before making any drastic changes.

Published on: Nov 05, 2009, 3:26 PM IST
Posted by: AtMigration, Nov 05, 2009, 3:26 PM IST