Will incentives to mutual fund distributors have much of an effect on fund inflows?
Moneylife Digital Team 23 June 2011

It is not just banning entry loads in haste by SEBI that has led to reduced interest in mutual funds. There are many other reasons which exchanges and SEBI tend to ignore

In August 2009, then Securities and Exchange Board of India chief, CB Bhave, introduced the ban on entry load. Nearly two years later, after an outflow of Rs19,549 crores from equity funds (between August 2009 and May 2011) and a decline of 22.61 lakh equity-oriented mutual fund accounts (April 2009 to March 2011), the new SEBI chief, UK Sinha, is planning to incentivise distributors in order to provide "organised and sustainable growth of the mutual fund industry".

This 'experiment' by SEBI has cost the fund industry dearly. But incentivising distributors is just part of the solution to the problem of fund flows. The fact is, retail investors are not interested in equity markets for a variety of reasons, a fact that the stock exchanges and SEBI refuse to acknowledge. SEBI will have to look into other issues as well, attract investors to the fund industry and the securities market as a whole.

One of the main objectives of SEBI is to regulate and develop the securities market. But the apex body has fallen short in doing that and Mr Sinha has admitted as much.

The entry load for mutual funds was banned in order to make it fairer. The move was intended to reduce the cost for investors. But, was the cost for starting investing the only reason for the lack of retail participation? Unfortunately, the SEBI board failed to look at other factors. Among some of the other factors that deter retail investors from putting money in the markets are the unexplained volatility in the market, manipulation of IPOs, poor performance of 40% of funds, several counts of mis-selling, lethargic complaint redressal and lack of financial awareness. A majority of the population, therefore, finds it safer to keep cash lying in savings accounts or fixed deposits. In 1990-91, 32% of household savings was invested in bank deposits. Now that figure has climbed to 51%.

SEBI made the decision to ban entry load in haste, without adequate research, survey or discussions with investors. It failed to judge the cause of the problem. Will SEBI make the same mistake all over again?

We know that the number of equity folios has declined along with the huge redemption of funds, but is the lack of incentives to distributors the main cause for this? Unfortunately, there is no comprehensive research to support the case. For sure, this is one of the reasons, but the board has to address other issues as well.

The SEBI chief also plans to look into the regulation of distributors, disclosure of track record of fund managers by asset management companies, the break-up of institutional and retail money of fund houses and simplifying the KYC norms across its domain. These are good signs that the board intends to take active steps towards regulating the market. But whether the implementation of these plans will attract retail investors back is to be seen.

Moneylife has published numerous articles pointing out the declining retail participation in mutual funds. You may be interested to read: ("Retail interest in equity mutual funds is shrinking";) ("Huge mutual fund outflow points to a much deeper malaise")

Comments
Krishna Gopal Gupta
1 decade ago
It is true and well established fact that regulators like SEBI, IRDA are biased ones and are making decisions in favour of institutes such as banks, post? How these regulators will control the mis-selling is yet to be seen. But majority of mis-selling is happening at banks only. They wish to collect fees from distributors and to make them week financially had enhanced fees and renewal fees many folds. They do not listen to the voices raised by individual distributors. It is really a joke that most of the insurance companies have been established by banks (Owners), wish to remain in the business of distribution (Distributors) and wish to avail services of independent distributors at FREE of COST as majority of the plans do not have any commission beyond 5 years and he has to serve the customer, how? No body seems to be bothered. I had heard that commission in developed countries are more due to toughest job of selling insurance but in India, it is just opposite. No adequate reward for selling insurance.
Suhas Varadkar
1 decade ago
Exactly Stancy. They dont want retail to join Stock Market & Mutual Fund Industry and Finance Ministry wants the retail to stay with Banks/RBI Bonds/Insurance /postOffice, so that Govt can get easy/cheap/disturbance free money. Thats why all these hassles for MF industry / Investors / Distributors. These useless policy changes will surely kill the morale of die hard investors/distrubutors.
Stany Dsouza
1 decade ago
I don't think AMCs will get their business back even if they start entry load and pay commission to distributors because ofter the entry load ban many distributors started to sell other financial products. Some of them are happy with their present business. For mere 2.5% upfront commission they may not sell mutual Fund products again.
rajivahuja
Replied to Stany Dsouza comment 1 decade ago
I think you are correct in your observation that mere entry load is not going to solve MF's problems.They should be accountable as well then.
Suhas Varadkar
1 decade ago
SEBI was too fast in its act to abolish commission for MF Distributors, whereas it did not considered the fact that MF products are the most difficult to sale considering non guarantee of return of capital or returns. On the top of that it wants distributors to charge for such advice, which itself is a joke, especially when there is loads of commission paid in othe financial products like Insurance/Post Office etc. Requirement of KYC is another hurdle is selling MF products, there is no level playing field if u consider other financial products. How can retail investors turn to market/MF with such tactics?
Roopsingh
1 decade ago

Roopsingh 7 seconds ago in reply to Rajivahuja
Dear sir Rajiv ahuja,why u blaming mutual fund advisors for selling ULIPS when debate is for entry load which exists in MF industry-why dont u ask IRDA to remove commission from LIC policies?
and why u blaming all MF advisors as culprits when SEBI has no gudelines for fund managers and their performance?better ask SEBI to make similar guidelines of preformance based renumeration for AMC guys and not to target distributors-
again u have been talking about commission as not a legitimate right of distributors-dear sirji please tell me a single product in the world where a professional or businessguy asks for 2 different cheques for a single service or product-have u ever paid 2 cheques to mobile shopwala one for Nokia co and other for shop owner?
have useen any salaried person asking his employers not to pay him salary but should go and ask his customers to pay him salary or service charge(i am not talking about undertable bribe).
if not anywhere in the world such system exists then why everyone asking to remove entry load-
and though MF advisors have not objected for dual system of direct and through distributor route-then why you bent on removal of entry load-
do you want to take all lunches free of cost (only for MF and you will pay all fees for other financial or professional services?)
RNandakumar
1 decade ago
There was no real intention of helping the investors. Otherwise then SEBI chairman would not have experimented with a budding industry that was trying to wean investors away from the boring products of National Savings and Insurance into an Equity Oriented ,most transparent and and fairly safe investments. Instead of controlling the asset managers SEBI negatively targeted mutual fund distributors. And is paying the price for it now. SEBI in effect has killed the initial and enthusiam and vigour of the whole tribe of distributors many of whom had to adopt alternative source of revenue going away from mutual fund distribution. SEBI had killed the proverbial golden egg laying duck.
PANKAJ
1 decade ago
Sebi will learnt lot in due course. They will start with say 100 per form and term it as transaction cost. If an honest person wants to sell mf ... he has to book 5 clients to earn 500/- a day. Damage is already done and crack has already been created. Now let them take stand as how this is incentivised. I await who pays this incentive fund house or investor. If it is left to investor we are back to square one. Mfs can't pay per transaction. Let's see how things move.
manoja
1 decade ago
Will incentive to mutual fund distributors have much of an effect on fund inflows??? If ever there is a contest for dumb questions, this would be contending for the top spot!!!

Any moron will tell that when there is an incentive for performance, the performance will improve. Same applies to mutual fund industry too. Unless the guy who goes out in the market to sell the funds gets his dues, you can see no performance from him. Why should he? He is making the investor rich, mutual fund houses rich, the fund manager rich but he is left with nothing!!! Is there any other situation as skewed as this??

I still remember the time when entry load was abolished. I had recruited 6 fresh MBAs to market financial products in my firm. But unfortunately, even before they could join, I had to write regret letters informing that I could not take them on since there was no revenue generation from this activity. With Rs.15,000 as monthly salary plus the incentive, there was no way I could afford to take them in my company without relevant commission payouts. Consequently, 6 jobs that could have been created was lost.

Even now I am not hopeful about the incentive structure the SEBI Chairman is talking about. Once you make people used to free lunches, they do not want to pay for the same at a later date. Interesting scenarios in coming times. Let us wait and watch.
rajivahuja
Replied to manoja comment 1 decade ago
Is 2.25% entry load justified.? I think SEBI did the right thing by banning them.
Pankaj
Replied to rajivahuja comment 1 decade ago
Rajivji do u know 2% / 4% commission on postal RD ( a debt product ) Return (IRR ) Last 15 Year is 1996 to 2000 is 9.76% , 2001 to 2005 7.31% & 2006 to 2010 6.54 % Vs Mutual Fund SIP same period return ( IRR )is 20.68% 70.26% 21.50%
manoja
Replied to rajivahuja comment 1 decade ago
The question of justification can be debated endlessly. For instance, what is the justification for yearly increments to salaried people when they continue to do the same job? Are they bringing anything new to the table? Or for that matter, what is the justification for the year end bonus? Are they not getting salary to perform their duty? Why extra incentive at the end of the year? Another question. Every salaried employee gets a certain number of days of paid leave in a year. Why should he be paid when he has taken leave?? Employee benefits, right??

From where is this money coming to pay the salary & other benefits to the employees? From the consumers who pay for the product, right? Why not cut down the salaries & benefits so that the final product price is reduced thereby passing on the benefit to the end user???

Everyone needs to be compensated for the work they are doing. Somebody gets it in the form of Salary and some body gets it in the form of commission or brokerage.
rajivahuja
Replied to manoja comment 1 decade ago
Is entry load equaliant to employee benefit?
manoja
Replied to rajivahuja comment 1 decade ago
Entry load is a way of remunerating a hardworking distributor so is employee benefit. Still the question lingers, why should there be increment when there is no job content??
rajivahuja
Replied to manoja comment 1 decade ago
Sorry I did not understand that entry load was a way of remunerating a 'hardworking' distributor.The so called distributors except a hand few always sold ulips to senior citizens.Were crazy for their commissions made from unfair & misspllings financial products. They belonged to leading MNC banks whose name I don't want to take.Many leading Indian Banks are also part of this scam. They took their pound of flesh through unathical means.
Roopsingh
Replied to rajivahuja comment 1 decade ago
Dear sir Rajiv ahuja,why u blaming mutual fund advisors for selling ULIPS when debate is for entry load which exists in MF industry-why dont u ask IRDA to remove commission from LIC policies?
and why u blaming all MF advisors as culprits when SEBI has no gudelines for fund managers and their performance?better ask SEBI to make similar guidelines of preformance based renumeration for AMC guys and not to target distributors-
again u have been talking about commission as not a legitimate right of distributors-dear sirji please tell me a single product in the world where a professional or businessguy asks for 2 different cheques for a single service or product-have u ever paid 2 cheques to mobile shopwala one for Nokia co and other for shop owner?
have useen any salaried person asking his employers not to pay him salary but should go and ask his customers to pay him salary or service charge(i am not talking about undertable bribe).
if not anywhere in the world such system exists then why everyone asking to remove entry load-
and though MF advisors have not objected for dual system of direct and through distributor route-then why you bent on removal of entry load-
do you want to take all lunches free of cost (only for MF and you will pay all fees for other financial or professional services?)
manoja
Replied to rajivahuja comment 1 decade ago
I heard this from a friend of mine who is in restaurant business. Whenever they "invited" people for an event in their place, the "invitees" always turned up right on time to binge of booze and food because it was free. Whenever there was an event in the same place where people were expected to pay and the same set of people were informed of the same, they never turned up. The reason why I am saying this is because those who are used to getting things for free in life will never pay for them when it is time for them to pay!!!

Same applies to financial advisory services too. SEBI, in all its foolishness, expected people to "pay" for the services they take from the distributors / advisors. We all know the result. The investors want someone to come to their doorstep, give them advice on the best funds available, collect the forms & cheque, service them at the time of redemption etc., But they dont want to pay the advisor! In a scenario like this, how does a distributor work??

There has to be some form of remunerating the distributor, if it is in the form of entry load, so be it.

We all have heard of malpractice etc of big banks and financial institutions. So the way forward is ban them from selling any financial products. Why should a bank, which is in the business of lending money and collecting deposits be in the business of selling financial products? Why should a post office sell mutual funds?? Ban them and automatically misselling will reduce.

But this is no reason for not giving an advisor what is his due.

By the way, I have asked this question of salary increment whenever someone talks of entry load. Till now no one has answered that question with logical reasoning!!!
Santosh Pawar
Replied to manoja comment 1 decade ago
I dont agree with you on what you say as Free Lunch. You must be knowing that Mutual Funds charge something called Expense Ratio on investments made via them, no matter if I get positive or negative returns.
Manoja
Replied to Santosh Pawar comment 1 decade ago
Santosh,

When I said Free Lunch, the context was the free service given by the distributors to the investors. As of now, if I come to you to sell a mutual fund, I dont get any money from you directly. Entire amount of investment you do will get into the fund. When people are used to this free service, any fee based service, they will definitely oppose.

Expense ratio is altogether a different thing. The expenses incurred to run the fund house is setoff has to come from somewhere? Since investors are getting the benefit of the investment, it is only natural that they have to bear the expenses.
Roopsingh
1 decade ago
I am amazed to read a SOFT tone for Mr U K Sinha in this article-he is in the office since last 4 months-but still nothing concrete has been done so far-everything is in dolldrums-if he really intended o revive things he can do them without much debate-he can reinvent the idea of entry load along with direct investing without entry load(who will question him for his moves?),IRDA never removed the commission for insurance selling,neither corporate bonds-then why all SADHUS (godman) accumulated in SEBI and that too only to benifit investors of mutual funds only(as if mutual funds are run for charity of small people only) and that IFAs should give only SEVA to them.
Vikas Gupta
Replied to Roopsingh comment 1 decade ago
I also agree that Rules for all Financial Products should be similar whether it is Life Insurance Policies, Mutual Funds or Postal Schemes. The Persons buying/ selling these products should get similar incentives & Services.
Pankaj Khandelwal
Replied to Vikas Gupta comment 1 decade ago
Mr.U.K.Sinha pls be note that 2% & 4% commission on Postal RD ( a dabt product ) PLS STOP THAT IMMEDIATELY IF U CAN
Krishna Gopal Gupta
1 decade ago
I agree in full for all the reasons mentioned herein. Besides this, the entry fee and renewal fee to be a distributor has been enhanced many folds. It pinches a lot when the business is not there. Further, AMFI does not force to recognise the distributors ID by RTAs. RTAs harass distributors and ask to produce written consent from the client each and every time even if the business is sourced by them. KYD was another irritant for distributors as if they were criminals. Nothing has been done to make the performance based fee to fund managers. They are enjoying even if they are damaging the wealth and the distributor have to bear the burnt of the client for no fault of him.
Vikas Gupta
Replied to Krishna Gopal Gupta comment 1 decade ago
I totally agree with ur views. Firstly The service Standards from RTAs towards Investors as well as Distributors should be monitered. Secondly, Fund Managers should be paid as per their performance only.
Michael Duarte
1 decade ago
In Aug 2009 when SEBI came with the mindless decision of doing away with entry load the whole Financial Media welcomed it as a Good move in the interest of the small investor. As if the Distributor getting commission to bring in business, was the ONLY culprit of mal-practice in the industry.
Distributors cried themselves hoarse that this was not the solution but you (the financial press) along with the Fund Houses chose not to see sense and ignored our voice.
Today when this move has back fired on the industry, Why are you still looking for other excuses to justify why the Mutual Fund Industry is bleeding?
Test the waters – Pay the distributor his rightful commission to get business (money back into the industry) then address the other issues.
The patient is in the ICU friend…Revive him first rather than have useless discussions around the coffee machine in the Hospital waiting room !!!
rajivahuja
Replied to Michael Duarte comment 1 decade ago
I think Sharad is right.
sharad
Replied to Michael Duarte comment 1 decade ago
You seem to be new here. Before shooting your mouth off, pls go back and read moneylife articles on the topic. start with this
http://www.moneylife.in/article/cleaning...


Michael
Replied to sharad comment 1 decade ago
This article came in Dec 2009 4 months after exit loads were abolished. By then everyone knew the move was not a good one.

Distributors were trying to make this point all along but no one supported thinking they were only addressing their personal income loss.

Just highlighting a bigger reality...
Not trying to run down "ML" Agree that it is one of the sane voices in the Financial Press
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