We often have problems with our insurance agent. Thank goodness we can change the agent if we are unhappy with his services. Many of us also have problems with our mutual fund agent — the dealer or distributor who mis-sold a fund. Can you change your fund agent without surrendering the policy you bought through him? Yes and no. Yes if your agent is small (mostly individuals), no if he is big (mostly institutions). This is unfair to small agents, disservice to investors and anti-competitive for the mutual fund industry.
On its part, the Association of Mutual Funds in India (Amfi) is encouraging the move to allow fund investors to change agents by just informing the fund house. But the fund houses are not particularly enthusiastic.
That’s because the industry depends heavily on the distributor and agent network. Funds continue to ask investors to get no objection certificates (NoCs) from the existing dealer or agent before agreeing to a transfer. This is like asking an agent to gift his client to his competitor. Not surprisingly, agents are unwilling to give customers the NoCs, since they will lose out on the trail commission that’s paid to them as long as a customer remains invested. Apart from this commission, which can go up to 0.5% of the existing investment, the agent also makes a commission on new funds sold. This commission generally comes out of the 2.25% that’s charged as entry load.
Now, in a bid to divert attention from the lack of service, some agents and distributors started offering gifts and incentives to woo investors away from other distributors and agents. The only way a fund house can maintain any control is to insist on the NoC. They are also using discretionary methods to force small agents to follow the practice of transferring fund holders, which means the new agent earns the trail money.
However, large distributors like banks and brokers are not similarly forced. The trail commission for such large organisations can run into several crores of rupees, so the loss of groups of customers can have a definite impact on the bottomline.
What this means is that investors have an exit option only if they are with small agents. Large distributors, particularly those with a significant online presence, say that since you signed a power of attorney authorising them to buy and sell on your behalf, if you move out, you will have to sell your units. And if you sell and then buy again, you will be paying the entry load again, leading to more commissions for the new agent.
All of this ultimately spells bad news for investors, who are stuck between different agents and distributors, and can expect no help from the fund house. The main reason for this is that the Amfi suggestion was not a guideline or stricture. The way out is for the Securities and Exchange Board of India (Sebi) to issue a directive forcing all fund houses to allow transfers. This is something Sebi is working on, and this could be implemented in the new year. Until then, the small fish is taken to task, while the big fish make merry.
By Narayan Krishnamurthy
PAYING FOR INEFFICIENCY
|Difference between lending rates and deposits, or the intermediation cost, in 2007|
|Source: Economist Intelligence Unit, RBI, McKinsey|
That India is no longer a debt-averse society is hardly breaking news. A recent McKinsey study shows that loans have grown at over 30% in the past three years. But the fact that we are becoming aggressive borrowers becomes more impressive when we consider that the cost of borrowing, or intermediation cost, is higher in India than in most other countries in the region.
The average lending rate in India in 2006-7 was about 13% and the deposit rate was close to 8%, which means that the rate at which we borrow is 5% higher than the interest rate banks pay you on your savings. This is double the intermediation cost in Singapore. The main reason for this is low overall efficiency and the regulatory costs involved. Banks need to keep a minimum statutory liquidity requirement of 25% and maintain lending to the priority sector at 40% of total lending.
A large portion of funds are thus invested in low-yielding assets and this pushes up intermediation costs.
By Sushmita Choudhury