March 11, 2012 6:33 am
Indian IFAs call for fees ban rethink
By John Sedgwick
India’s mutual fund industry has struggled in the past two or three years,
with assets under management falling in 2010 and 2011. This is partly
attributable to volatility in stock markets, both in India and worldwide.
But it can also be traced to the move by the Securities and Exchange Board
of India (SEBI) in August 2009 to ban front-end load fees on mutual funds. A
distributors’ transaction fee introduced by the SEBI in August 2011 is
considered too low to offer adequate reward, and distributors are hoping
further initiatives will be considered to help stimulate the industry.
Sanjay Matai, promoter adviser of The Wealth Architects, an independent
financial adviser based in Pune, west India, says education for both investors
and distributors is needed. He suggests a central fund could be established to
promote investor education and to train sales agents on business and ethics.
The fund could be funded by pooling together 0.1 per cent of assets under
management of all asset management companies operating in India, adds Mr Matai.
He also calls for a reintroduction of entry loads, although not on direct
investments, and proposes a closer monitoring of distributors in the industry.
“Nobody is monitoring the agents,” he says. “I believe if there was some
organisation in place that could monitor the agents on a regular basis and
bring about some better ethical standards on the part of the agents, this would
give investors better confidence in the industry.”
SEBI’s goal in introducing the ban on front-end load fees was to encourage a
move to fee-based advice and improve the quality of advisory services to deter
the mis-selling of products. However, the move had limited effect. Distributors
stopped selling funds and shifted to other products, such as unit-linked
insurance plans, which still provided commissions earnings.
Shiv Taneja, London-based managing director at Cerulli Associates, says the
ban effectively killed off a significant section of the market that has yet
fully to recover from several years of unsatisfactory sales.
“They were caught unprepared, and a significant proportion of the
distribution market was put out of play almost overnight,” he says. “I think
they wanted to try and move 10 steps, and it would have been better to move
more gradually.”
Before the commission ban came into effect in August 2009, fund providers
added upfront charges of 2.25-3 per cent to funds to pay commission to
distributors. Many thought this led to a focus on short-term gains, misleading
advice, unreliable new fund offers and churning or commission-seeking.
Mutual fund assets managed by India’s fund management companies fell 2.4 per
cent in 2011, from Rs6.263tn ($125.6bn) at the end of 2010 to Rs6.114tn at the
end of 2011, according to a report by Morningstar. In 2010, AUM fell by 5.8 per
cent, mainly due to net outflows of Rs907.1tn.
As for the transaction fee introduced last August as an incentive for
distributors to sell funds, fund sellers say it is too low and want a system of
variable loads involving bigger fees for higher-ticket transactions. Funds can
charge a fee of Rs100 per subscription, with an additional one-time Rs50 charge
for first-time mutual fund investors.
“It is not adequate, the commission was much higher,” Mr Matai says,
although he acknowledges it at least covers some of the administration costs
incurred by distributors.
A survey by Cafemutual, an Indian mutual fund news and analysis service, in
the month after the transactions fee was introduced showed just 9 per cent of
the IFAs polled viewed the incentive as favourable, while 55 per cent saw it as
too small.
However, the survey showed distributors were moving to a fee-based model,
with 50 per cent charging a fee to some of their clients, while 42 per cent of
those not charging fees said they would seriously consider doing so.
Mr Matai says the introduction of transaction fees was a move in the right
direction, but agents have to start being suitably compensated or the fund
industry will continue to suffer.
“The alternative that the agents negotiate a fee with the investor does not
work in India,” he says. “The concept of paying fees for financial advisory
services is alien to India and, hence, there has been a lot of reluctance on
the part of the investors to pay their agents for the advice and other services
offered by them.”
John
Sedgwick is a reporter for Ignites Asia, a Financial Times publication, where
this article first appeared