Mutual fund distribution is a terrible career choice!

SEBI is a trigger happy regulator. In its desire to help investors, it seems to have thrown a spanner in the works . The actual benefit to the investor from many of its diktats pales in comparison to the havoc created in the financial services.

Here is why aspiring to become a mutual fund distributor today seems like a terrible career choice. The same is true for distributors who are yet to 'establish' themselves - meaning they don't have a large enough assets under management earning trail. Since the term 'distributor', like 'agent' sounds yucky, they are referred to as independent financial advisors.

Here is a list of regulations that have come about in the recent past.

Removal of entry load (Aug. 2009)

This is a good move from the point of view of the investors. It meant lower churning and lower sale of NFOs. It got rid of non-serious distributors (the market slump also helped). Only those who wanted to prove their services to investors on long- term basis stayed on. However their revenues suffered too.

Introduction of direct plans (Jan 2013)

Again good for the investors. A serious threat to distributors. The main problem is, mutual fund penetration is quite low in India (only 2-3% of the population invests in mutual funds). The direct slice of the pie within that 2-3% is growing fatter steadily.  With so much information freely available online, this is inevitable.

Distributors can sit and crib/argue that this information is flawed, that direct investors will run away when the market tanks and all that sort of thing. That is a waste of their time. If they wish to survive, they will have to mobilize the 97% populace which do not trust mutual funds. The trouble is that this could again be a waste of their time.

SEBI adviser regulations (2013)

1) Distributors cannot offer investment advice other than incidental advice (bizzare!)

2) financial planners cannot distribute (SEBI keeps talking about conflict of interest but does not care if their family members distribute! Again bizarre)

3) distributors who deal in "shares, debentures, bonds, derivatives, securitised instruments, structured products, units of AIF, REIT, InvIT, etc." must be registered with SEBI.

3) Can a distributor sell insurance ? SEBI is vague on this one. Perhaps because IRDA is involved!

This means there is no motivation for distributors to 'upgrade'(?) themselves as registered investment advisers or financial planners.

What is incidental advice? A good chunk of financial planning is goal-based investing advice. It is clear that this is the job of a registered investment adviser. So naturally a distributor cannot provide such advice.

How can they suggest products if they don't understand the goals of the investor! Beats me.

As investors, the most prudent thing to do is to steer clear of this mess and DIY.

Cap on upfront commissions (Feb 2015)

Once again good for the investors. Upfront commissions cannot exceed 1%. Earlier there was no cap and it widely varied among amcs. For closed-ended funds the upfront comm. was quite high (6-7%).  Since there is a cap on expense ratio,  the amcs would pay the distributor out of its own pocket to get aum guaranteed for 3 years and then recover it from the NAV.

Capping the upfront commission will not decrease the total commission paid out, but will affect sales.

Reintroduction of service tax for distributors (April 2015)

The finance ministry is responsible for this. There was a lot of debate as to who should pay this tax. AMFI has directed the distributor to pay up. This is nonsense. Only the end-user should pay for services. Meaning the investors who use regular plans must pay the service tax. This would mean a higher expense ratio for regular funds (making direct fund more attractive). However, the amcs, for some reason, dont want this.

They want the distributors to suffer. The could have absorbed the service tax into their expenses and taken a small hit in profit, but they don't want to. The poor distributor will have to pay service tax for a service that they provide!

Even at 12%, this is a significant loss.

Survival of the fittest

It is clear that these regulations imply that only a small group of distributors who have accumulated a significant aum;  who have the competence to sell, come what may; who have belief in their abilities can survive this onslaught.

In a recent discussion thread at AIFW, Dr. Uma Shashikant had mentioned that adviser must be able to manage a portfolio and limit downside risks. This requires quite a bit of skill and experience. I think only a few in the adviser community can pull this off.

I think the advisor associations should organize advanced training programs by people like Dr. Shashikant without the sponsorship of any amc. Is this happening already?

It is also clear that a distributor cannot survive by complying with everything that SEBI says.  Who knows what they are up to next!

Do you really think distribution is a good career choice for someone just starting out?

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23 thoughts on “Mutual fund distribution is a terrible career choice!

  1. K B Raut

    True it is difficult for distributors who have small AUM. They will have to strive hard to increase to it. Trail income will be the main income now onwards which incidentally proportional to AUM. All classes distributors have been affected and now its becoming less appealing as a career. We may see drop in ARN Renewals henceforth. But then one needs to fight for survival ....nothing comes easy in life....... even as a distributor.....

    Reply
  2. K B Raut

    True it is difficult for distributors who have small AUM. They will have to strive hard to increase to it. Trail income will be the main income now onwards which incidentally proportional to AUM. All classes distributors have been affected and now its becoming less appealing as a career. We may see drop in ARN Renewals henceforth. But then one needs to fight for survival ....nothing comes easy in life....... even as a distributor.....

    Reply
  3. Srikanth Shankar Matrubai

    WOW!
    Pattu supporting an IFA??
    Cant believe!!
    It has become THAT difficult to be a Mutual Fund Distributor.
    I have seen so many of IFAs who have jumped into Insurance bandwagon selling ULIPs.
    Now, who is the loser?
    Investors isnt it?
    Because the IFAs has to look after his family so if Mutual Funds does not pay him...........he will obvioulsy jump to Insurnace.........
    God help the Mutual Fund penetration

    Reply
    1. K B Raut

      Dear friend,

      I do not sell insurance. I do trade the markets for a living. Its an addtional income for being an MF distributor. Its always been an investor's market nothing changes it.

      Reply
  4. Srikanth Shankar Matrubai

    WOW!
    Pattu supporting an IFA??
    Cant believe!!
    It has become THAT difficult to be a Mutual Fund Distributor.
    I have seen so many of IFAs who have jumped into Insurance bandwagon selling ULIPs.
    Now, who is the loser?
    Investors isnt it?
    Because the IFAs has to look after his family so if Mutual Funds does not pay him...........he will obvioulsy jump to Insurnace.........
    God help the Mutual Fund penetration

    Reply
    1. K B Raut

      Dear friend,

      I do not sell insurance. I do trade the markets for a living. Its an addtional income for being an MF distributor. Its always been an investor's market nothing changes it.

      Reply
  5. Syamantak Pati

    I feel, keeping the service tax on the distributor is actually helping the distributors themselves. after paying the service tax, they still have remaining commission with them. If this goes on the investor, certainly the difference in expense ratio between the direct and the regular plans will increase. At times, a knowledgeable investor, intentionally chooses the regular plan because the difference between direct and regular plans are not worth of his efforts of doing things himself. Increase in this difference, would probably make him to think if he really needs the service of a distributor. Now if I had been a distributor, I would have preferred to pay tax and keep something for me than losing the whole commission, while cribbing about the service charge.

    Reply
  6. Syamantak Pati

    I feel, keeping the service tax on the distributor is actually helping the distributors themselves. after paying the service tax, they still have remaining commission with them. If this goes on the investor, certainly the difference in expense ratio between the direct and the regular plans will increase. At times, a knowledgeable investor, intentionally chooses the regular plan because the difference between direct and regular plans are not worth of his efforts of doing things himself. Increase in this difference, would probably make him to think if he really needs the service of a distributor. Now if I had been a distributor, I would have preferred to pay tax and keep something for me than losing the whole commission, while cribbing about the service charge.

    Reply
  7. Syamantak Pati

    and I love to laugh at this "direct investors will run away when the market tanks". Seeing my portfolio going down, if I myself do not find the motivation to stay put, why would I have inclination towards what my distributor says, when I know he earns a small chunk of what I put in the fund.

    Reply
  8. Syamantak Pati

    and I love to laugh at this "direct investors will run away when the market tanks". Seeing my portfolio going down, if I myself do not find the motivation to stay put, why would I have inclination towards what my distributor says, when I know he earns a small chunk of what I put in the fund.

    Reply
  9. Vishal Doshi

    Indeed it makes no sense these days to be an IFA....IRDA still allows its agents to make 20% of first year premiums but SEBI has an issue with its IFA making 2 - 3%. On one hand SEBI/RBI wants financial assets to gain share in a retail investors savings portfolio. On the other hand it makes the distribution of Mutual Funds difficult. MF's are perhaps the best financial assets any retail investor can have in its portfolio but thanks to weird regulations no AMC is making money and from now on no distributor will make money. Everybody bow to the regulator...Hey Mogambo

    Reply
  10. Vishal Doshi

    Indeed it makes no sense these days to be an IFA....IRDA still allows its agents to make 20% of first year premiums but SEBI has an issue with its IFA making 2 - 3%. On one hand SEBI/RBI wants financial assets to gain share in a retail investors savings portfolio. On the other hand it makes the distribution of Mutual Funds difficult. MF's are perhaps the best financial assets any retail investor can have in its portfolio but thanks to weird regulations no AMC is making money and from now on no distributor will make money. Everybody bow to the regulator...Hey Mogambo

    Reply
  11. Jaideep Shirali

    The fact that critics and market experts, be it Pattu or Dhirendra Kumar from Value Research, have had to comment on the IFAs in the mutual fund industry, speaks volumes. It's quite easy for investors to poke fun at IFAs, but the media and regulators treat IFAs like whipping boys anyway. Maybe they need to understand that inspite of relentless inflation, the IFA business has seen incomes, tremendously regulated, dropping steadily. IFAs, unlike some smug investors, have neither a definite income, nor increments, like the salaried class. IFAs pass certification exams and keep themselves abreast of developments in their field, because their profession demands they service investors properly. I do not know any other profession where commissions are declared and limited to 1% annually, when inflation is higher than 10% at the street level.There are black sheep among IFAs, like in any other profession. We scarcely bother whether our vegetable vendor earns 5% or 50% per deal let alone annually, on the vegetables we buy, or whether the 500% profit on our medicines are justified, but we grudge an IFA earning a measly 1% per annum, "a small chunk", as someone says in his mail below, for his efforts. Maybe we need to look at IFAs as people who try to earn a livelihood for their families, inspite of many constraints.

    Reply
  12. Jaideep Shirali

    The fact that critics and market experts, be it Pattu or Dhirendra Kumar from Value Research, have had to comment on the IFAs in the mutual fund industry, speaks volumes. It's quite easy for investors to poke fun at IFAs, but the media and regulators treat IFAs like whipping boys anyway. Maybe they need to understand that inspite of relentless inflation, the IFA business has seen incomes, tremendously regulated, dropping steadily. IFAs, unlike some smug investors, have neither a definite income, nor increments, like the salaried class. IFAs pass certification exams and keep themselves abreast of developments in their field, because their profession demands they service investors properly. I do not know any other profession where commissions are declared and limited to 1% annually, when inflation is higher than 10% at the street level.There are black sheep among IFAs, like in any other profession. We scarcely bother whether our vegetable vendor earns 5% or 50% per deal let alone annually, on the vegetables we buy, or whether the 500% profit on our medicines are justified, but we grudge an IFA earning a measly 1% per annum, "a small chunk", as someone says in his mail below, for his efforts. Maybe we need to look at IFAs as people who try to earn a livelihood for their families, inspite of many constraints.

    Reply
  13. NewEntrant

    Hello Sir,
    I am a new entrant to Distributor career (choosen this path to earn additional income) and already working for a corporate. I am not a CFA, I am selling (suggesting) the Mutual fund based on the knowledge acquired from public forum and website like freefincal and etc.,
    Is there any risk involved in sole distributor mode. In any case my actions will go wrong w.r.t current rules & legulation

    Please share risk involved in the distributor career cho

    Reply
  14. NewEntrant

    Hello Sir,
    I am a new entrant to Distributor career (choosen this path to earn additional income) and already working for a corporate. I am not a CFA, I am selling (suggesting) the Mutual fund based on the knowledge acquired from public forum and website like freefincal and etc.,
    Is there any risk involved in sole distributor mode. In any case my actions will go wrong w.r.t current rules & legulation

    Please share risk involved in the distributor career cho

    Reply
  15. Pattabiraman Murari

    That is the problem with information. If you didn't have it, no one will bother. Once you do creeps like me will jump and down. The regulator is taking its investor friendly mandate too seriously for the IFAs own good.

    Reply
  16. Pattabiraman Murari

    That is the problem with information. If you didn't have it, no one will bother. Once you do creeps like me will jump and down. The regulator is taking its investor friendly mandate too seriously for the IFAs own good.

    Reply
  17. Jay

    Thanks Pattu for writing about IFA community. Good bad or ugly outsiders are more worried about us. I wonder teaching in IIT has become a part time job so even profs are looking to become IFA.

    Reply
    1. freefincal

      One lesson I learnt from blogging in personal finance: never choose any career which involves a trigger happy regulator like SEBI. So no such intentions.

      Reply
  18. Jay

    Thanks Pattu for writing about IFA community. Good bad or ugly outsiders are more worried about us. I wonder teaching in IIT has become a part time job so even profs are looking to become IFA.

    Reply
    1. freefincal

      One lesson I learnt from blogging in personal finance: never choose any career which involves a trigger happy regulator like SEBI. So no such intentions.

      Reply
  19. Mani

    Hi,

    I would like to become Mutual Fund Agent/Advisor. Could any one share what is the procedure to become the same.

    Reply

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