MFs Stop Commissions from own Pocket

Source : http://epaper.dnaindia.com/epapermain.aspx?queryed=9&eddate=9/3/2010

MFs stop commissions from own pocket

May shift completely to trail commission model from Oct 1

Khyati Dharamsi &Sachin P Mampatta. Mumbai

Your mutual fund distributor may soon begin advising you to stay invested in existing schemes rather than exit and enter new ones. Yes, it's the same guy who has always told you that churning pays like nothing else does. What gives? Well, for one, it doesn't pay him to get you to churn anymore. Several large mutual funds have stopped paying distributors upfront commissions out of their own pockets to get new customers into their schemes. These include HDFC, Canara Robeco, Franklin Templeton and Kotak Mahindra. SBI and Reliance mutual funds too are learnt to have stopped paying upfront commissions to distributors out of their pockets, though Sundeep Sikka, chief executive officer at Reliance Mutual Fund told DNA Money that "It is a scheme-specific issue... We are still paying small amounts." SBI, on the other hand, had not responded to a query sent on the matter at the time of going to print. Earlier, fund houses used to pay these commissions from the entry loads charged by them to customers. But the Securities and Exchange Board of India banned entry loads with effect from August 1, 2009. Following this, any fund that still wanted to pay upfront commissions to its distributors had to do so from its own pocket. Some fund houses did try this for a while, out of compulsion to garner customers and their monies, but the trend just couldn't have gone on forever. So now, the industry is shifting focus to trail commission, which is paid periodically to a distributor for his client's assets under the mutual fund's management. "It is not as if the distributor will not have any income. The trail commissions, which constitute a major portion of the income, will continue," said the chief executive officer of a fund house, requesting not to be named. "Most fund houses are going completely trail starting October 1," an industry official said on the condition of anonymity. And that is precisely the reason the distributor will now ask you to stop churning your portfolio. Earlier, a distributor would be paid 2.25% upfront commission from the entry load and 0.75% every year as trail commission on the assets he brought in. Considering an average 15% annual return on equity funds, the trail commission could account for more than half of the overall commission he received over a three-year period. Even so, upfront commissions were more attractive of the two as long as a distributor could get the investor to enter new schemes and thereby earn him more upfront commission. Now, with upfront commissions out of the way, trail commissions have become the primary incentive. And the longer an investor stays with a fund, the bigger the amount of commission the distributor stands to earn. Distributor reaction on the issue appears to be mixed, going by industry officials. Some may be appeased by the fact that trail commissions themselves are headed higher with some fund houses giving as much as 1% or more compared with 0.75% earlier.

KYD Process for Mutual Fund Distributors

Know Your Distributor (KYD) Process for Mutual Fund Distributors

AMFI has introduced the process of Know Your Distributor (KYD) for all mutual fund distributors (Ref Circular: 35P/ MEM-COR/ 13/ 10-11 dated August 27, 2010)

The Know Your Distributor (KYD) norms is similar to KYC norms for investors, requiring the distributors to submit mandatorily identity proof, address proof, PAN and bank account details with proof. It is also decided to introduce bio-metrics as a part of KYD process.

The process would start with KYD being mandatory for fresh ARN registrations / renewals effective 1^st September, 2010. The existing ARN holders would have to comply with the KYD requirements by Feb’ 11 failing which the payment of brokerage / commission to them will be suspended / put on hold till the requirements are complied with

The prescribed form for KYD and updation of information such as change of address, contact details, bank account, etc. would be available on AMFI Website shortly

PROCESS FOR KYD COMPLIANCE:

A. Document Verification

• The distributors will have to submit their applications for registration with AMFI, alongwith the KYD application and self attested photocopies of relevant documents as mentioned against their respective category in the table below.
• AMFI has engaged the services of Computer Age Management Services Ltd. (CAMS) to carry out the KYD process through their centres in 60 locations initially (hereinafter referred to as “CAMS Point of service” / “CAMS POS”).
• KYD application along with the requisite documents could be submitted at any of the CAMS POS, a list of which is available at www.amfiindia.com or www.camsonline.com.
• The distributors are required to produce, in person, the original documents for over the counter verification at the time of submission of their applications along with self attested photocopies of the same.
• The distributor should obtain the acknowledgement from the CAMS POS confirming completion of KYD process.
• The said acknowledgement should be submitted along with the relevant documents for empanelment / renewal
• The existing ARN holders empanelled with us will have to send photocopy of the said acknowledgement to us. AMFI would be sending communications to all existing ARN holders advising them to send to us the copy of the acknowledgement issued by CAMS as a confirmation of having complied with KYD requirements.
• AMFI has decided not to charge ARN holders for carrying out KYD process, at present.

Category of ARN holder	KYD Documents required to be submitted
	Documents for Identity Proof	Documents for address proof (any one of the following)
Individuals & Senior Citizens	Photo PAN Card (Mandatory)	i)         Ration Card (Vernacular language) ii)       Passport iii)      Latest Demat/ Bank Account Statement ** iv)     Voter Identity Card v)       Latest Utility (Electricity / Municipal tax/ Water-tax/  Land Line Telephone) Bill* vi)     Driving License vii)    Lease / Sale Agreement of Residence
Proprietary Concern	i)         PAN card  of the Concern (if available) or ii)       Photo PAN card of the Proprietor	If the address of the proprietary concern and the proprietor is same, the following documents in the name of proprietor : i)       Ration Card (Vernacular language) ii)     Passport iii)    Latest Demat / Bank Account Statement ** iv)   Voter Identity Card v)     Latest Utility (Electricity/ Municipal tax/ Water-tax/  Land Line Telephone) Bill* vi)   Driving License vii)  Lease / Sale Agreement of Residence In case location of concern is different, then the following documents in the name of proprietary concern: i)       Latest  Bank Account Statement  ** ii)     Latest Utility (Electricity/ Municipal tax/ Water-tax/  Land Line Telephone) Bill * iii)    Lease/ Sale Agreement of office
HUF	PAN card of HUF	If the address of the HUF and the Karta of HUF are same, the following documents in the name of Karta: i)       Ration Card (Vernacular language) ii)     Passport iii)    Latest Demat/ Bank Account Statement ** iv)   Voter Identity Card v)     Latest Utility (Electricity/ Municipal tax/ Water-tax/  Land Line Telephone) Bill * vi)   Driving License vii)  Lease / Sale Agreement of Residence In case location of HUF is different, then the following documents in the name of HUF: i)       Latest  Bank Account Statement  ** ii)     Latest Utility (Electricity/ Municipal tax/ Water-tax/  Land Line Telephone) Bill * iii)    Lease / Sale Agreement of Office
Partnership Firm/ Societies/ Trust	PAN card of Firm	i)    Latest Utility (Electricity/ Municipal tax/ Water-tax/ Landline Telephone)  bill * ii)   Lease / Sale Agreement iii)    Latest Bank Account Statement  / Bank Passbook **
Corporates (Pvt./ Public Ltd. Co., Banks, NBFC)	PAN card of the corporate entity	i)     Latest Utility (Electricity/ Municipal tax/ Water-tax/ Landline Telephone)  bill * ii)    Lease / Sale Agreement iii)   Latest Bank Account Statement  / Bank Passbook **

*   Not more than 2 months old.  

 ** Where bank account statement is submitted as proof of address, the said bank account should have been opened at least six months prior to the submission of application and the statement should not be more than 2 months old.

For any other category of Distributors not covered in the above list, please contact AMFI/ CAMS for assistance.

B.             Bio-metric :

The Bio-metric process involves taking impression of right hand index finger and registering the same for identification purpose. The said process will be carried out at the CAMS POS, at the time of submission of applications for registration or renewal of ARN along with KYD application form.

·   Individual and Senior Citizen Category Distributors are required to visit in person for Biometric registration.

·   In case of non individual entities, bio-metric is required to be carried out for the authorised persons/ officials as indicated in the below mentioned table:-

Category of ARN holder	Persons required to undergo bio-metric process
Proprietary Concern	Proprietor
Partnership firm	All the Partners
HUF	Karta of HUF and the signatory to the application (if the signatory is a person other than the Karta).
Societies & Trust	Principal Officer/Chief Trustee and the signatory to the application (if the signatory is a person other than these officials).
Corporates (Pvt./ Public Ltd. Co., Banks, NBFC)	Authorized official who has signed ARN application

In case of non individual entities, the persons who are required to undertake bio-metric process as indicated in the above table are also required to comply with the document verification process by submitting the required documents i.e. proof of identity and proof of address as applicable to individual applicants.

SEBI asks brokers to collect investors' income proof

This Message is posted by Mr Amit Bachhawat, Email: amitbpb9@gmail.com

NEW DELHI: Concerned over inadequate checks on possible flow of black money into stocks, market watchdog SEBI has asked brokers to get income details such as tax returns, salary slips and bank account statements of the investors, not once but every year. 
 
To begin with, SEBI has asked the brokers to bar those traders and investors, who do not furnish the adequate proof for the source of their funds, from trading in derivatives market. 
 
Sources said that the direction would be soon extended to the cash market segment also. 
 
To seek a speedy and more effective compliance from the brokers, the Securities and Exchange Board of India has also directed the stock exchanges to enforce the new requirements. 
 
Sources said that SEBI might consider asking the bourses to put a mechanism in place through which the non-compliant brokers and clients could be denied access to the market. 
 
As per a circular from Bombay Stock Exchange to its member brokers, "In respect of clients trading in derivative segments, the member shall collect documentary evidence for financial information." 
 
"The illustrative list of documents to be collected from the clients include copies of Income Tax Return (ITR) acknowledgement, annual accounts (for institutional clients), Form 16 for salary income, net worth certificate, salary slips, bank account statements for six months, demat account holding statements and asset ownership certificates," it said. 
 
Besides getting these documents at the time of opening an account for the client, the brokers have also been asked to collect fresh documents every year as part of an annual updation of financial information exercise. 
 
Sources said that the move is aimed at checking illicit money, including those coming through money laundering or for terror financing as also from tax defaulters, from entering the stock market. 
 
The first move has been taken for derivatives market as the trading volume and turnover is much higher in this segment as compared to the cash market, sources said. 
 
Although they find it a daunting task to get the income details from lakhs of investors, brokers have started asking their respective clients for these details. 
 
SEBI had first asked the brokers to adopt these measures in December 2009, but brokers have been buying time on the ground of the enormity of the exercise. 
 
However, SEBI is now considering stringent measures to guard against any further delay in the compliance to these directions, sources said. 
 
Accordingly, the brokers are writing to their clients that "Submission of documentary evidence of financial details is must in case if you wish to trade in Derivatives Market" and they need to immediately submit the relevant documents. 
 
For company accounts, the clients are also required to submit copies of balance sheets for the last two financial years and copy of latest shareholding patterns, including list of all those owning more than five per cent stake. 
 
These documents need to be attested by the company secretary, whole time director or managing director of the client company. 
 
For both individual and company clients, all the documents would be valid for only one year and these would need to be submitted every year for continued access to trading.

Regards,
Amit Bachhawat

Should CAMS / KARVY / Deutsche / Sundaram allowed to do Distribution Business ?

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How to kill Mutual Funds

How To Kill Mutual Funds
August 23, 2010 06:34 PM
R Balakrishnan on saving and investing prudently
Source: http://www.moneylife.in/article/71/8459.html

It is the distributor who expands the market, as was proved again when a foreign bank raised Rs1,000 crore for its PMS when MFs are losing assets


There is a lot of discussion over the fact that mutual funds are not able to increase their assets under management. The reason for this is simple. They are not paying the salesman enough money. Investor preferences have absolutely NOTHING to do with money not coming into equities. Investors have no clue about where to put their money and need some push. Pushed hard enough, they will put money into fixed deposits of companies with no credit rating or low credit rating, dubious real-estate portfolio management schemes or plantation schemes. They need just one nudge from the distributor and they will do it. The retail and the high net worth investors are the ideal clients for smooth-talking sales guys.

Just last week, one foreign bank raised over Rs1,000 crore (yes, a thousand crore rupees) for a portfolio management scheme (PMS). At the same time, ‘experts’ are saying that mutual fund inflows have dried up due to market valuations getting stretched and for other equally inane reasons. I went a little behind the curtain to see what the distributor got from the foreign bank. He got a 4% upfront commission for selling this PMS which itself had a very simple structure. An upfront annualised management fee of 2%, and exit-load of 2.5% if redeemed within 12 months and a profit share if the returns crossed two digits! There was no link to market performance. If the market returns were 30% and the PMS delivered 20%, the PMS manager still got an incentive. It is typical of most PMS structures. And, of course, the return is measured before tax and not after tax.

Now, let me talk of a second PMS, where the value of a Rs5-lakh investment had gone up by Rs1.45 lakh, but all of it was short-term gains. Removing 30% tax, the gain shrank to under one lakh rupees. The PMS manager also deducted his incentive on the gross gain (around Rs0.29 lakh). The investor was left with around Rs0.70 lakh! The more interesting part was that the money was invested three years ago. If one takes the churn into account, the broking firm has made a handsome return. The investors got totally screwed.

What is the connection between the first and the second scheme? It is the same investor of the second PMS who again put money into the PMS of the foreign bank that I mentioned first.

The investor is a fool and no amount of reading or counselling makes any difference to the guy. All that matters to him is a slick distributor making a sexy PowerPoint presentation and perhaps treating him to a drink or attacking some other weakness of his. In any case, neither the investor nor the distributor understands the product. What the distributor knows is that by selling this, he makes 4%. So, he sells. For the investor, it is ‘long-term’ investing advised by an ‘expert’.

It is the distributor who is the key to the expansion of any market. By taking him on, the regulator has killed the reach of the mutual fund industry. No mutual fund can build a distribution system of its own and survive, given the paltry amount that is available to meet expenses.

To top it, we are seeing a toothless and mindless agency like the Association of Mutual Funds in India (AMFI) trying to slam the distributor with a nine-fold increase in ‘registration’ fee. I do not know why a distributor has to have a registration with AMFI which is only a trade body. Its inability to do anything meaningful has been demonstrated by the fact that even the test it used to hold for distributors, was a sham and it has now been transferred to an agency of the Securities Exchange Board of India. Why should AMFI have anything to do with the distributors? Distributors should ignore AMFI and have their own trade body. If I were a distributor, I would simply not sell a mutual fund product. I can sell PMS or insurance and make my living.

Sebi asks MFs to furnish distributor commission details

SEBI asks MFs to furnish distributor commission details August 24, 2010 02:48 PM Ravi Samalad

Source: http://www.moneylife.in/article/72/8479.html

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The regulator wants to make sure that fund houses are not distributing commissions from investors’ pockets
Market watchdog Securities and Exchange Board of India (SEBI) has once again turned the heat on mutual fund distributors. The regulator has sought details of commissions paid out to distributors over the last 10 months from asset management companies (AMCs). Some fund houses have already submitted this information to the regulator while others are in the process of doing so. According to industry sources, the regulator wants to ensure that AMCs are complying with SEBI's recent diktat which disallowed fund houses to disburse upfront commissions from the load account. AMCs had to comply with this rule from 1 April 2010.

"We are not paying commission from the load account. The problem is peculiar with fund houses which are in existence since the last 7-10 years. Their load accounts will be heavy. AMCs which have entered the business recently will neither have many schemes nor much money in their load accounts," said an official from a mid-sized fund house. Typically, it is Unit Trust of India that can pay a lot of money from its load accounts.

Equity schemes come with a lock-in period of one year while equity-linked saving schemes (ELSS) have a three-year lock-in period. If an investor exits the scheme before this lock-in period, the fund house charges 1% exit load. This money is stored in the load account and is utilised for investors' benefit. SEBI has been asking fund companies to carry out investor education programmes with this money.

There are variants of incentive structures like age-wise (tenure of investment holdings) and target-wise commission (among others) which are offered to intermediaries. Big fund houses that are ready to push their funds by going that extra mile are paying money from their own pockets. The distribution of schemes is carried out by filtering the top performing schemes. The schemes which have a consistent track record are pushed. Some industry players say that national distributors are only pushing schemes of a few fund houses which are ready to pay a handsome commission in return for sales.

Distributors are now paid 45 to 75 basis points (bps) trail commission depending on the fund house. Moneylife had earlier reported on how fund houses were offering upfront commission to the tune of 2%-3% under ELSS.
See: (http://www.moneylife.in/article/8/4440.html).

How SEBI killed the IFA: A murder investigation report

August 24, 2010 01:56 PM
S Rodrigues
Source:  http://www.moneylife.in/article/72/8477.html

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The IFA (Independent/Individual Financial Advisor) is on life support — suspected dead — and the prime suspect is the Securities and Exchange Board of India (SEBI). The acronym is alternatively called in a parallel world, the Systematic Elimination of Brokers and Intermediaries
Now the distributor is on the incubator, on life support, suspected dead. We know how he got there - is SEBI going to revive him or remove the life support system?
Let us study the history of this crime, and discover what the investigation reveals:
1. The Golden Beginning:
The golden days of mutual funds (MFs) were when they were a hard sell. The IFA educated the investor about risk-control measures, liquidity, profitability over a gestation period, tax benefits and working of an MF and introduced them to asset allocation before putting down a single rupee. However, the investor wanted to hear about the 'guaranteed returns' that he was addicted to - thanks to the Unit Trust of India (UTI), fixed deposits, etc. So he missed the boat but not before dipping his feet into the swimming pool by investing small amounts. The IFA said to himself, "Today he is dipping his toes into the swimming pool - tomorrow he is going to jump in." Right enough!
2. The 'Unethical Practices' begin:
Once the investor started to take a dive into mutual funds, they (mutual funds with the active connivance of some IFAs) introduced their first unethical practice - 'dividend stripping'. They did not inform the investor that the net asset value (NAV) falls to the extent of the dividend amount and that there is no advantage in chasing dividends (in fact there is a disadvantage as the investor is paying a load on money merely returned to him - without any fund management).  It was dividend that attracted the inflows and not the client's investment goals nor the fund performances - the party continued.
3. The 'Unethical Practices' grow:
The next big 'con' encouraged by mutual funds was "NFOs" (New {and unnecessary} Fund Offers). Mutual funds did not educate the distributors and investors that the NAV does not generate any return (but rather the 'Portfolio' does) - thus whether the NAV is Rs10 or Rs10,000 does not make any difference - it is merely a mechanism for 'entry' and 'exit'! They instead sold 'Rs10 as 'cheap'. This resulted in thousands of superfluous schemes being launched. SEBI did a great job of stifling the NFOs by abolishing the entry load.
4. Some 'Greedy Distributors/IFAs':
The biggest evil is yet to be highlighted - it is the 'banker' - who sold MFs based on head office's recommendations, which in turn were based on target collection shortfalls - client needs were nowhere in the picture. If the client needed 'debt' - sell 'equity' because there lies the shortfall in targets and the HO's rewards for them.  To make things worse, these qualified MBAs would each come with their own ideas and churn the client's portfolio many times and get multiple credits towards their sales targets. Next they would get a job promotion based on this (churning) performance and the new MBA would take his place with his bright ideas and rape the investor again with another few churns.
Some greedy IFAs joined this circus and sold equity as a 'short-term' instrument and wrongly taught investors that 'share funds have to be bought and sold quickly' - they did not inform the investor that they merely have to make an 'asset allocation' and the fund manager will be doing the 'buying and selling' for them.
Thus I maintain my stand that it is not merely 'education/educational qualifications' that will revive the industry but rather 'dedication' - let the investor decide who is dedicated and who isn't!
SEBI, too, messed up over here. When MFs set the exit load on share funds as 1% for those who exit before three years (gestation period of equity product) - SEBI in its benevolence to become popular among the investors reduced this to one year - this move encouraged churning after one year - thus doing more harm than good to the industry, which is suffering from too much short-term money and views.
5. SEBI lands its death blows:
A person is satisfied and gives his best if:
a. He is well-paid - if you pay peanuts you will get monkeys - why should you attract a qualified and dedicated force consisting of the brightest minds if the payment is inadequate? Not only was the payment made inadequate, the upfront brokerage was hastily abolished without setting into place international 'best practices'.
b. He is sufficiently motivated - SEBI and the media continuously focused on the unethical practices of a few distributors. The whole distributor community got demoralised and was viewed with suspicion - as cheats. How can you expect performance from a demoralised force?
c. He has the necessary job security - SEBI has released a diarrhoea of circulars and the entire MF industry is of the view that they all need to go on a long holiday. With the goalpost continuously being shifted, the IFA is totally disoriented and refuses to sell - this has rubbed on to the investor who is resorting to selling to invest in bank deposits and properties.          
Let me elaborate:
a. 'Investor Going Direct' is an injustice to a distributor:
A person approached me for the investment of a huge sum. I explained mutual funds to him in great detail. He wanted MF portfolio reports and performance comparisons - these were sent by email. He wanted a detailed plan with a suggested asset allocation - these too were promptly sent to him. After four months of discussion and deliberation - on 4 January 2008 I received an email 'Happy New Year - I heard that now we can now invest directly in mutual funds. Thanks for all the help and advice.'
Now do you think this is fair??? Why on earth should I spend hours of my time on an investor when I do not know whether I will be adequately remunerated? So thanks to this move of SEBI I have turned tight-lipped and sketchy in my explanations, I now give only 10% of myself - as against 120% previously and new investors are strictly taboo (at a time when SEBI wants them popularised).
Thus thanks to SEBI I am no longer doing justice to the investor community. This move to let the investor go directly is retrograde, with the abolishing of the entry load it has become obsolete - but SEBI will not remove it from the statute book as they will be losing brownie points.
b. The international 'best practices' remuneration structure was not put in place before abolishing loads and commission - death for the small investor:
The international practice of the investor and distributor mentioning a mutually negotiated commission rate on the application form and both signing against it should have been put in place before commissions were abolished. This would have resulted in a smooth transition to the new regime. The move on the part of SEBI of only implementing half the job has won a lot of investor brownie points, a place in the history books but has destroyed the remuneration and motivation of IFAs and has rattled the whole MF industry.
Mutual funds were formed to mobilise the savings of the small investor. But with no upfront brokerage and with the laborious and expensive billing process, who would be interested in the small investor who wants to make an SIP below Rs5,000 per month or invest an upfront amount of Rs5,000 to Rs25,000? The billing would cost more than the revenue earned. Thus this populist move has been self-defeating - the small investors are rejected and no longer welcome!
c. All financial products cannot be marketed on the same remuneration:
SEBI has not understood the marketing of financial products and it is for this reason I am most thrilled they were unsuccessful in taking over ULIPs (the most expensive and mis-sold con product in the financial world - which need drastic distributor cost restructuring for some profitability to emerge).
Here is an explanation:
i. Shares and stocks are sold by giving recommendations/tips - it requires no servicing/discussions. All servicing is done by the investor directly with the demat bank/institution. It is a high-volume business with hundreds/thousands of transactions conducted daily on a low remuneration.
ii. Mutual funds required detailed explanations relating to risk control, liquidity, profitability over a gestation, tax benefits, working, etc. Regular servicing for change of address, change of name due to marriage, change of bank details, death of holder, valuation & tax statements, account statements requests, year ending account statements requests, etc, etc - take up a majority of a working day. Such services are generally rendered free although they take up a lot of time and cost much money.
Thus transactions are few and require a higher remuneration.
iii. With insurance a person sells the insecurity of death - which is a hard sell.
iv. With ULIPs they sell a combination of mutual funds and insurance. Both insurance and ULIPs have only a few strikes (if at all) in a month - so how on earth can all these products be sold and remunerated in a similar way? They each have their own dynamics and remunerative structure to retain quality talent. If SEBI took over ULIPs they would become extinct like the dinosaurs and crumble like the MF industry!
d. Unnecessary focus on commissions:
When SEBI abolished the entry load and upfront commissions and focused on commissions, it did the following:
i. Created huge entry barriers due to which bright and clever minds could not enter the industry. The commission given by mutual funds out of their own resources was too low - new entrants did not have the ability to charge a fee.
ii. Around 80% of the IFAs disappeared (100% would have disappeared if trail brokerage commission was also abolished) and enrolled in employment exchanges or joined call centres. With a depleting force how can there be increased market penetration?
iii. All expansion plans into rural areas and branch expansions, etc, were abandoned.  In fact many of my colleagues shut down branches.
iv. The lack of remuneration de-motivated persons from getting professionally qualified thus stifling the quality of growth in the industry.
v. The whole focus was drawn to commissions, compiling commission sheets, etc rather than reading news articles, studying portfolios, learning/using tools of financial planning, meeting clients needs, etc - the quality of advice deteriorated as more time was spent on such useless activities.
The SEBI chairman does not pin his salary structure on his shirt, Value Research or any financial magazine does not mention how a big article was published due to the support of an advertisement - so why should a mutual fund distributor reveal his (now - token and miserable) commissions when he meets an investor? In fact, the task is daunting and could take months to prepare - as the commissions on 'all competing schemes' need to be displayed i.e. thousands of schemes - an impossible task! This is how the bureaucracy burdens you with burdens nobody can bear - so that they can crucify you anytime!
All this shifts the focus from the client's needs to the commission structure - thus getting everyone 'out of focus'. With the current rule even the best scheme attracts the suspicion of the investor if it pays the most commission!
It would save a lot of time if instead the regulation provided that:
a. The investor can log into CAMS/Karvy/AMFI and find out the commissions payable by all schemes by entering the distributor code.
b. Each mutual fund scheme is rated by CRISIL (or any other rating agency). And only those selling funds below a certain rating should be forced to reveal the commission received thereon and competing schemes. My 25 years experience in this line tells me that focusing on commissions is a bad idea, puts the emphasis on the wrong thing and get everything 'out of focus'.
vi. The distributor also suffers from the stigma of other injustices in relation to commissions, e.g.:
a. While everyone is exempt from service tax for service income up to Rs10 lakh, the mutual fund distributor's commission is subject to service tax deducted at source from Re1. Why is SEBI not acting in this matter and making representations to the government? It is now three years and this injustice continues - distributors earning more than Rs10 lakh have lost more than Rs3.6 lakh due to this move.
b. A manufacturer does not ask a wholesaler how much of the produce he is going to personally consume and charge him a retail price thereon. An Insurance Distributor gets a commission on his own policy!
So why has an MF distributor to disclose his personal investments and not be paid thereon? It does not make sense especially since upfront commission payment from investor money has been abolished.
This rule was introduced so that persons would not become distributors merely to earn commissions on their own investments. With the professionalization of the distribution business this provision has become obsolete and needs to be abolished.
c. AUM (Assets Under Management by a distributor) is tantamount to goodwill created, as an investor is free to change his broker if he is not happy with him. Thus AUM is nothing but 'retained assets' i.e., goodwill. However there is no uniform mechanism to transfer the AUM on change of the organisational structure, for the distributor to sell the AUM on retirement, for the heirs to sell the AUM within a reasonable time after the death of the distributor. Thus the distributor's 'gold nest' can easily get frittered away and is without any legal protection.
          
The fact is that for the mutual fund industry to succeed two things need to be done:
a. SEBI, MFs and distribution channels need to work ethically together as a team.  Right now there is a major conflict with SEBI. And SEBI is hated by MFs and distributors with all their might (and rightly so!).
b. The investors must be given proper product knowledge and MFs must be sold ethically. Each investment must be tied to an investor's need - so that he remains invested with a purpose.
Until this comes about, the MF industry is not going to expand but will instead stagnate.

c. He has the necessary job security - SEBI has released a diarrhoea of circulars and the entire MF industry is of the view that they all need to go on a long holiday. With the goalpost continuously being shifted, the IFA is totally disoriented and refuses to sell - this has rubbed on to the investor who is resorting to selling to invest in bank deposits and properties.           
Let me elaborate:
a. 'Investor Going Direct' is an injustice to a distributor:
A person approached me for the investment of a huge sum. I explained mutual funds to him in great detail. He wanted MF portfolio reports and performance comparisons - these were sent by email. He wanted a detailed plan with a suggested asset allocation - these too were promptly sent to him. After four months of discussion and deliberation - on 4 January 2008 I received an email 'Happy New Year - I heard that now we can now invest directly in mutual funds. Thanks for all the help and advice.'
Now do you think this is fair??? Why on earth should I spend hours of my time on an investor when I do not know whether I will be adequately remunerated? So thanks to this move of SEBI I have turned tight-lipped and sketchy in my explanations, I now give only 10% of myself - as against 120% previously and new investors are strictly taboo (at a time when SEBI wants them popularised).
Thus thanks to SEBI I am no longer doing justice to the investor community. This move to let the investor go directly is retrograde, with the abolishing of the entry load it has become obsolete - but SEBI will not remove it from the statute book as they will be losing brownie points.
b. The international 'best practices' remuneration structure was not put in place before abolishing loads and commission - death for the small investor:
The international practice of the investor and distributor mentioning a mutually negotiated commission rate on the application form and both signing against it should have been put in place before commissions were abolished. This would have resulted in a smooth transition to the new regime. The move on the part of SEBI of only implementing half the job has won a lot of investor brownie points, a place in the history books but has destroyed the remuneration and motivation of IFAs and has rattled the whole MF industry.
Mutual funds were formed to mobilise the savings of the small investor. But with no upfront brokerage and with the laborious and expensive billing process, who would be interested in the small investor who wants to make an SIP below Rs5,000 per month or invest an upfront amount of Rs5,000 to Rs25,000? The billing would cost more than the revenue earned. Thus this populist move has been self-defeating - the small investors are rejected and no longer welcome!
c. All financial products cannot be marketed on the same remuneration:
SEBI has not understood the marketing of financial products and it is for this reason I am most thrilled they were unsuccessful in taking over ULIPs (the most expensive and mis-sold con product in the financial world - which need drastic distributor cost restructuring for some profitability to emerge).
Here is an explanation:
i. Shares and stocks are sold by giving recommendations/tips - it requires no servicing/discussions. All servicing is done by the investor directly with the demat bank/institution. It is a high-volume business with hundreds/thousands of transactions conducted daily on a low remuneration.
ii. Mutual funds required detailed explanations relating to risk control, liquidity, profitability over a gestation, tax benefits, working, etc. Regular servicing for change of address, change of name due to marriage, change of bank details, death of holder, valuation & tax statements, account statements requests, year ending account statements requests, etc, etc - take up a majority of a working day. Such services are generally rendered free although they take up a lot of time and cost much money.
Thus transactions are few and require a higher remuneration.
iii. With insurance a person sells the insecurity of death - which is a hard sell.
iv. With ULIPs they sell a combination of mutual funds and insurance. Both insurance and ULIPs have only a few strikes (if at all) in a month - so how on earth can all these products be sold and remunerated in a similar way? They each have their own dynamics and remunerative structure to retain quality talent. If SEBI took over ULIPs they would become extinct like the dinosaurs and crumble like the MF industry!
d. Unnecessary focus on commissions:
When SEBI abolished the entry load and upfront commissions and focused on commissions, it did the following:
i. Created huge entry barriers due to which bright and clever minds could not enter the industry. The commission given by mutual funds out of their own resources was too low - new entrants did not have the ability to charge a fee.
ii. Around 80% of the IFAs disappeared (100% would have disappeared if trail brokerage commission was also abolished) and enrolled in employment exchanges or joined call centres. With a depleting force how can there be increased market penetration?
iii. All expansion plans into rural areas and branch expansions, etc, were abandoned.  In fact many of my colleagues shut down branches.
iv. The lack of remuneration de-motivated persons from getting professionally qualified thus stifling the quality of growth in the industry.

v. The whole focus was drawn to commissions, compiling commission sheets, etc rather than reading news articles, studying portfolios, learning/using tools of financial planning, meeting clients needs, etc - the quality of advice deteriorated as more time was spent on such useless activities.
The SEBI chairman does not pin his salary structure on his shirt, Value Research or any financial magazine does not mention how a big article was published due to the support of an advertisement - so why should a mutual fund distributor reveal his (now - token and miserable) commissions when he meets an investor? In fact, the task is daunting and could take months to prepare - as the commissions on 'all competing schemes' need to be displayed i.e. thousands of schemes - an impossible task! This is how the bureaucracy burdens you with burdens nobody can bear - so that they can crucify you anytime!
All this shifts the focus from the client's needs to the commission structure - thus getting everyone 'out of focus'. With the current rule even the best scheme attracts the suspicion of the investor if it pays the most commission!
It would save a lot of time if instead the regulation provided that:
a. The investor can log into CAMS/Karvy/AMFI and find out the commissions payable by all schemes by entering the distributor code.
b. Each mutual fund scheme is rated by CRISIL (or any other rating agency). And only those selling funds below a certain rating should be forced to reveal the commission received thereon and competing schemes. My 25 years experience in this line tells me that focusing on commissions is a bad idea, puts the emphasis on the wrong thing and get everything 'out of focus'.
vi. The distributor also suffers from the stigma of other injustices in relation to commissions, e.g.:
a. While everyone is exempt from service tax for service income up to Rs10 lakh, the mutual fund distributor's commission is subject to service tax deducted at source from Re1. Why is SEBI not acting in this matter and making representations to the government? It is now three years and this injustice continues - distributors earning more than Rs10 lakh have lost more than Rs3.6 lakh due to this move.
b. A manufacturer does not ask a wholesaler how much of the produce he is going to personally consume and charge him a retail price thereon. An Insurance Distributor gets a commission on his own policy!
So why has an MF distributor to disclose his personal investments and not be paid thereon? It does not make sense especially since upfront commission payment from investor money has been abolished.
This rule was introduced so that persons would not become distributors merely to earn commissions on their own investments. With the professionalization of the distribution business this provision has become obsolete and needs to be abolished.
c. AUM (Assets Under Management by a distributor) is tantamount to goodwill created, as an investor is free to change his broker if he is not happy with him. Thus AUM is nothing but 'retained assets' i.e., goodwill. However there is no uniform mechanism to transfer the AUM on change of the organisational structure, for the distributor to sell the AUM on retirement, for the heirs to sell the AUM within a reasonable time after the death of the distributor. Thus the distributor's 'gold nest' can easily get frittered away and is without any legal protection.
           
The fact is that for the mutual fund industry to succeed two things need to be done:
a. SEBI, MFs and distribution channels need to work ethically together as a team.  Right now there is a major conflict with SEBI. And SEBI is hated by MFs and distributors with all their might (and rightly so!).
b. The investors must be given proper product knowledge and MFs must be sold ethically. Each investment must be tied to an investor's need - so that he remains invested with a purpose.
Until this comes about, the MF industry is not going to expand but will instead stagnate.
 
(Ms S Rodrigues is a financial and investment consultant based in Pune. She has, of course, used a pseudonym).