Mutual fund distribution is a terrible career choice!

Published: May 11, 2015 at 1:19 pm

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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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
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