Ramesh Chand Maloo, winner of the Wealth Forum Distributor of the Year 2015 - North Non Metros Award, is concerned about sales practices he has seen involving direct plans, which lead him to believe that AMCs are perhaps sacrificing investor interest, in their eagerness to push sales. In this open letter to AMCs, Malooji raises 10 pertinent questions which he asks AMCs to think about. The questions he raises call for a mature and responsible handling of such situations, to ensure that we collectively stay focused on creating more happy investors.

I am working in this industry since 1992 and have more than 15,000 investor folios in mutual funds. I love working in this sector because it gives me an opportunity to help people manage one of the most important matters of their lives - that's Money. I love to do this as it gives me an eternal satisfaction that I'm helping making people's lives better.

Ramesh Chand Maloo receiving the Wealth Forum Distributor of the Year 2015 - North Non Metros award

But recently I had a distressing case of my client Mr. Ajay which shook me. Mr. Ajay back in 2008 used to invest through Post Office schemes, Fixed Deposits etc. After making him understand the benefits of investing through mutual funds I shifted his portfolio from Post Office and Banks to Mutual Funds. His portfolio had nice returns and we shared happy relations with each other.

Some two months earlier he read about Direct Plan of investing in mutual funds in a newspaper. I taught him about direct plans thoroughly as it was my duty to do so. I did it sincerely and everything went well.

But recently he invested a large sum of money in a mutual fund through direct plan. And I was really disheartened when I came to know that a person from that particular AMC came to his place to make him invest and receive documents.

I asked myself "Is this an Asset Management Company or an Asset Gathering Company"? I asked the regional manager if he went or sent someone there at my client's place to make him invest in a mutual fund and he totally disagrees to this. Regional manager tried to convince me that they work only with distributors. Whereas my client shows proof with a CCTV camera recording in his office that someone from the AMC came to him. In another incident that happened with my advisor friend, he came to know that his clients were provided with movie tickets and restaurant coupons by the AMC to invest directly in their particular funds.

I have the following questions for AMCs:

1. What does direct mean? Does it mean that investors will come to you direct through the internet or to your offices, or does it mean you will go direct to investors offices and homes to sell your funds?

2. If AMC staff provide movie tickets and restaurant coupons to incentivize investors to purchase their funds, how come the AMFI code of conduct that specifically prohibits such practices by distributors, does not apply to AMC staff?

3. If AMC staff go across to investors' homes and offices, what due diligence are they conducting before concluding a sale? How are they satisfying themselves about product suitability? What documentation are they creating and archiving to establish that a proper sales process has been followed?

4. Who is going to audit the sales processes followed by AMC staff when they sell direct to investors? Large distributors and IFAs are subject to an annual due diligence audit. What about direct sales force of AMCs?

5. Is the employee EUIN of the AMC salesman recorded in the application form? If not, why not? Why is EUIN mandatory if the employee works for a distributor, but not mandatory when the employee works for an AMC?

6. Why has AMFI not come out with a code of conduct for AMC sales persons? Should we not have a standardized process that defines how AMCs will engage with direct investors?

7. Direct plans are cheaper because distribution costs are removed from total expenses. What about selling and marketing expenses incurred by AMCs for direct clients? Why is this cost not added into TER of direct plans?

8. We all know that AMCs focus on number games. If AMCs start chasing direct business as part of their number games, will this not induce mis-selling by AMC sales persons? Is this in the investors' best interests? The industry has introduced commission caps to curb mis-selling by distributors. How will the industry curb mis-selling by AMC sales persons?

9. Most of the retail investors tend to invest in overheated markets, which gives them subsequently a poor investing experience. Distributors have adopted various processes like asset allocation, financial planning and risk profiling to help reduce the negative impact of this very common investor behavior. AMCs have been encouraging distributors to adopt such measures and some have also offered training inputs to help upskill distributors in these aspects. When AMC sales persons sell direct, how will AMCs ensure that similar safeguards are offered to direct investors?

10. When a distributor's client's transaction gets rejected for any reason - signature mismatch, ECS mandate not in place etc - the AMC gets in touch with the client directly, but does not keep the distributor informed. It is the distributor who is best placed to help the client handle this situation and make the necessary rectifications. Why then does the AMC ignore the distributor and communicate directly with the investor?

There is an issue here about different standards being enforced on investor protection. This is wrong, and must be corrected immediately. There is also another issue which I think AMCs should consider seriously. The way things are going, it looks like distributors job is to bring new investors into the mutual fund industry, educate them and get them comfortable and confident about mutual funds. Once this happens, many migrate to direct plans, because of the price advantage. Is this fair on the distributor who did the hard work to bring the investor to a level where he gains comfort and confidence in the mutual fund product? Practices that are obviously unfair do more harm than good for the industry. I am sure our AMC leaders recognize this.

I suggest that the AMCs come up with a concept similar to royalty payment to address this situation. When an investor migrates to direct plans, let the first distributor earn a small fee on all subsequent direct transactions of this investor, to recognize his effort in bringing in this investor into the industry.

Another issue that AMCs must consider is who is going to support direct investors when markets turn volatile and fear takes over. The main role of an advisor or a distributor actually comes when markets turn bad and when clients rush to redeem in panic. When they have nobody to turn to for advice, clients often take wrong decisions, which leaves them with a poor experience of mutual funds. In their enthusiasm to sell direct to investors, are our AMCs creating a situation where more investors may leave this industry with poor experiences because they never had anyone to counsel them? Can this industry afford such a situation?

I believe in their enthusiasm to sell direct, AMCs may actually be doing a dis-service to investors, without even realizing this. We need a more mature and responsible handling of this situation, to ensure that all of us stay focused on our common goal of creating happy investors.

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