On 18th June ’09 SEBI announced that henceforth, no entry loads will be applicable for mutual fund transactions (click here for details). This has set the cat amongst the pigeons. The agent fraternity is ‘up in arms’ and words like a ‘regulator-induced lay off’ are being use to describe the possible after-effects.
While I can understand the antecedents of the reaction, unfortunately, it is not a simple & easy thing to either support or oppose this view. Let us understand the background –
SEBI thinks the investor and investment advisor should come to an agreement on what is the fee to be paid for a particular transaction and this is a ‘fair practice’. This is something that is (perhaps) agreed upon by the entire industry – AMCs, distributors et al.
However, the hue & cry being raised is not the ‘negotiation’ aspect of the fees to be paid. It is the method and manner in which it is to be paid by the investor to the advisor/agent. According to SEBI, the investor should henceforth, pay the agent separately. So far, the practice has been that the entry load is deducted from the amount invested by the fund house and paid to the agent.
Most AMCs – though they’ll not admit publicly, and agents are outraged or should I say ‘shaken by the prospect of an uncertain future’; but, for different reasons. Understandably so….let’s examine why?
Typically the investor approaches a MF agent/distributor asking for their recommendations on how or where he should invest his money. The agent dutifully shares with the investor, what, according to him is the ‘best’ way to invest his money and the reasons for the same. The investor feels obliged by the help provided by the agent. Hence he does not mind paying for the entry load; he understands this is towards the commission earned by the agent for his efforts.
So far so good! However, there is a twist, as always.
MFs are managed by intelligent people. They are hired to contribute an ‘alpha’ to the job they do. Let’s say this ‘alpha’ is the ‘extraaa’ that the guy brings to the table. So what does Mr. Extraa do?
He puts together a concoction of strategies resulting in multiple product launches. Some of them may be identical to each other but are launched as “New International Lux”….ok, ignore the FMCG parallel!
He plans a roll-out which catches the imagination of the investor; and, has a mouth-watering gravy train for the agent. The rewards are not restricted to the entry load paid by the investor. Plenty of other rewards in kind follow - which makes the agent go weak in the knees, he succumbs to it, going all out to achieve targets.
I lay particular emphasis on the last word – I am sure in this context, it will not be difficult to understand where the agent’s loyalties would lie – with the investor or the MF.
The agent/distributor community has allowed itself to be ‘used’. It is the role of a regulator to remove any (actual or perceived) unfair practice exercised with the help of an undesirable clout which a manufacturer may have over its distribution channel. Please remember what the ‘I’ in IFA (Independent Financial Advisor) stands for!
I suspect SEBI has specifically tried to remove this. However, as in so many other areas the articulation that should have preceded the actual implementation has left a lot to be desired. Part of the reason could be the regulator’s efforts at conducting ‘intelligent communication’ using the media to mould mass opinion is fairly limited in comparison to that of the Mutual Fund houses.
I have been an agent/distributor for more than a decade. Over the years one has seen how the average agent’s vision and mission of doing business has got thoroughly distorted. He has lost his ability to think independently. He is completely dependent on fund house inputs to decide on what to recommend to clients. The removal of entry load has almost, as he sees it, pitted him as an adversary of the investor.
He is completely missing the point. He is supposed to play a collaborative role with the investor in helping him create long term savings and wealth.
However, I will not blame the agent entirely. Many a time, investors behave in a short-sighted manner. This creates a sense of insecurity in the agent about the ‘lack of loyalty’ factor. Most importantly it contributes negatively, discouraging the agent from improving his service delivery and advisory practices.
We have to understand that all of us – investor, agent, mutual fund house and the regulator; are part of the same eco-system. We have to work together in ensuring the eco-system is strengthened…that, we are ALL able to achieve our objectives through sustainable practices and win-win solutions.
A better way to handle the abolition of entry-load would have been to abide by a time-frame for the change-over. This would have provided sufficient room to all stakeholders to thoroughly understand the pros and cons of such a change and take appropriate measures for adjusting to the same.
While I can understand the antecedents of the reaction, unfortunately, it is not a simple & easy thing to either support or oppose this view. Let us understand the background –
SEBI thinks the investor and investment advisor should come to an agreement on what is the fee to be paid for a particular transaction and this is a ‘fair practice’. This is something that is (perhaps) agreed upon by the entire industry – AMCs, distributors et al.
However, the hue & cry being raised is not the ‘negotiation’ aspect of the fees to be paid. It is the method and manner in which it is to be paid by the investor to the advisor/agent. According to SEBI, the investor should henceforth, pay the agent separately. So far, the practice has been that the entry load is deducted from the amount invested by the fund house and paid to the agent.
Most AMCs – though they’ll not admit publicly, and agents are outraged or should I say ‘shaken by the prospect of an uncertain future’; but, for different reasons. Understandably so….let’s examine why?
Typically the investor approaches a MF agent/distributor asking for their recommendations on how or where he should invest his money. The agent dutifully shares with the investor, what, according to him is the ‘best’ way to invest his money and the reasons for the same. The investor feels obliged by the help provided by the agent. Hence he does not mind paying for the entry load; he understands this is towards the commission earned by the agent for his efforts.
So far so good! However, there is a twist, as always.
MFs are managed by intelligent people. They are hired to contribute an ‘alpha’ to the job they do. Let’s say this ‘alpha’ is the ‘extraaa’ that the guy brings to the table. So what does Mr. Extraa do?
He puts together a concoction of strategies resulting in multiple product launches. Some of them may be identical to each other but are launched as “New International Lux”….ok, ignore the FMCG parallel!
He plans a roll-out which catches the imagination of the investor; and, has a mouth-watering gravy train for the agent. The rewards are not restricted to the entry load paid by the investor. Plenty of other rewards in kind follow - which makes the agent go weak in the knees, he succumbs to it, going all out to achieve targets.
I lay particular emphasis on the last word – I am sure in this context, it will not be difficult to understand where the agent’s loyalties would lie – with the investor or the MF.
The agent/distributor community has allowed itself to be ‘used’. It is the role of a regulator to remove any (actual or perceived) unfair practice exercised with the help of an undesirable clout which a manufacturer may have over its distribution channel. Please remember what the ‘I’ in IFA (Independent Financial Advisor) stands for!
I suspect SEBI has specifically tried to remove this. However, as in so many other areas the articulation that should have preceded the actual implementation has left a lot to be desired. Part of the reason could be the regulator’s efforts at conducting ‘intelligent communication’ using the media to mould mass opinion is fairly limited in comparison to that of the Mutual Fund houses.
I have been an agent/distributor for more than a decade. Over the years one has seen how the average agent’s vision and mission of doing business has got thoroughly distorted. He has lost his ability to think independently. He is completely dependent on fund house inputs to decide on what to recommend to clients. The removal of entry load has almost, as he sees it, pitted him as an adversary of the investor.
He is completely missing the point. He is supposed to play a collaborative role with the investor in helping him create long term savings and wealth.
However, I will not blame the agent entirely. Many a time, investors behave in a short-sighted manner. This creates a sense of insecurity in the agent about the ‘lack of loyalty’ factor. Most importantly it contributes negatively, discouraging the agent from improving his service delivery and advisory practices.
We have to understand that all of us – investor, agent, mutual fund house and the regulator; are part of the same eco-system. We have to work together in ensuring the eco-system is strengthened…that, we are ALL able to achieve our objectives through sustainable practices and win-win solutions.
A better way to handle the abolition of entry-load would have been to abide by a time-frame for the change-over. This would have provided sufficient room to all stakeholders to thoroughly understand the pros and cons of such a change and take appropriate measures for adjusting to the same.
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