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Note- This letter contains my own views and opinions. Some of you may not agree with some of the points. My intention is not to defame anyone or pass uncalled for derogatory comments on any one. I want to however put across my thoughts to you, as honestly and bluntly as I can. I have given 25 years of my professional life to the MF distribution business, and am pained to see my profession being discriminated against so unfairly by the very entity who is supposed to ensure fair play in the industry I operate in.
So finally the regulators have decided to disclose the commission we earn. For every investment that our client makes or has ever made in the past. And alongside that, the total expenses of regular and direct plan versions of the fund he invested in, will also be disclosed.
We are being stabbed by our own regulator
We are standing on the verge of doom in our profession as mutual fund distributors. We've all been working hard, most of us, since so many years but if we do not act now, we might be too late to act later. Some of us may be of the opinion to go with the flow but how can we sustain so many stabs one after the other, right through us. Sorry to be so dramatic, but we are really being stabbed, by our own 'regulators'. I have written several times on Wealth Forum, and my messages have all been constructive, with a view to see how we can all work together to serve investors better. I am sorry, but I am unable to find any positive angle to talk about today.
Why talk about "energizing" distributors if you want only RIA?
Our regulators want only the direct plans to prevail over the regular. That's what we all know. If they had stated clearly that they do not want distribution as a model and that they want only direct plans and RIA model to exist, whether we like it or not, at least there is an honesty around it. But saying that distribution development is important, coming up with "reforms" to "energize" distribution and simultaneously working overtime to find more and more ways of diverting investors away from distributors towards direct plans - how can this behavior be justified?
How can we save our own businesses? Are the regulators actually taking the right decision by doing this? I've a few points to make here and would like to share them with you all.
Go out and understand ground reality: While going to my village a few weeks ago, driving through NH 8, a long, well developed national highway, which crosses through various magnificent cities of our country, I witnessed how much our country has developed in these decades. But when we get 10 kms inside the highway into the real India- it's villages, they haven't developed much since Independence. The government which ruled had their own plans for the 5 years they were in power and did they actually witness what happens at the ground level? No. They have their own benefits for which they do what they do, not for the benefit of the citizens. Same is with our 'regulators'. They don't witness what's happening actually at the ground level but just decide to take decisions on their own, sitting in their large boardrooms. So these regulators, do they actually know what their decisions will prove to a huge lot of distributors? Yes, they do know. But still.... "Peed Parayi kya jaane" ( How can they know our pain?) Is this a democracy: We live in a democratic country. Oh, Do we? Where the 'regulators' take silly decisions to crush a lot of people of the industry (distributors), and we don't even have our say? Wow. So they can do whatever they want. And we? We won't do anything. Most of us will just go with the flow, try to change ourselves and compromise. Why do WE have to compromise? Why does it always have to be us? In my consideration, every stakeholder, AMC employee, distributor and anyone who as an EUIN should have a right to vote for a particular cause or agenda before letting it pass. Or the other solution might be that, we should have our own representatives who have a say in decisions that are taken. Because we don't know what's going to happen in the future. We may change ourselves and adapt to this too after bearing so much since the last decade, but who knows what more decisions are in store for us. We're just the subjects of a monarch. Even the great kings earlier used to change appearance and go in their cities at ground level to understand what are the problems their subjects face. They didn't create problems for their own subjects at least. The 'regulators' committees of Amfi, Sebi who make decisions should at least work 3-6 months with distributors at ground level and then should propose an agenda for voting. Some people of the kingdom might do wrong things, but did the King order to kill everyone? Customer is king: Investor is king and we all should do whatever we can for investor's benefit. To protect customers is the work of regulators. But regulators neglect us and make us vulnerable which isn't fair. Just to explain with an example, reservations were made in our country after independence so that the backward classes can come forward and be the part of development. That was the original motive. But it has lead to something different. It's just a vote capturing mechanism now. So, this act to disclose commission might prove to be a disaster. There is a stated reason, but what may transpire in reality may be totally different. Who knows? It's clear. Regulators want to develop the RIA model. But is it going to achieve the purpose of penetrating mutual funds across the country, which is the industry's primary objective? No. We are a country where shoppers don't like paying 10 rupees for carry bags after spending thousands of rupees on shopping. And we expect the same people to willingly pay RIAs advisory fees every quarter, irrespective of whether the portfolio went up or down in that quarter? Our regulator is far removed from reality. Sure, there are some investors who are paying the couple of hundred RIAs who are in the business now. But, if the market was willing to pay, how come there are still only a couple of hundred RIAs instead of thousands of them, even when we all know that the regulator wants to impose the RIA model? Ultimately, businessmen will gravitate to where they see business prospects. Ultimately, consumer demand will create mechanisms for delivering what they want. We have a situation where the RIA model is in existence for a couple of years now. There is no great demand, there is no great supply. But there is a regulator who disregards lack of demand and supply and says this is the way we should go. It is supposed to be in the interests of the investor - who is not demanding it anyway.
RIAs are riding two horses: The bitter reality of RIA's is that they have two pair of teeth like an elephant, one to show and the other used to eat. Most of them have a distribution set up either within a corporate structure or within the family circle. How can someone possibly live on an earning which is less than that of a maid or a washerman? RIAs also know this, and are riding both horses. Those distributors who don't have a corporate structure and a team cannot ride two horses. Is SEBI not aware of this basic discrimination against small intermediaries? If you are large, you can opt for a hybrid model. If you are small, you cannot. And you are also not supposed to have any arrangements with any distributor. Why is a large distributor allowed to have an arrangement with another department within the same company after giving due disclosures to the investor, but a small RIA is not allowed to have a legitimate arrangement with a distributor and disclose this to his invest or? 80:20 rule applies to retail distributors: We earn 80 percent from 20 percent of our clients, and serve to the other 80 percent from that earning. If we lose our set of 20% clients, how will we be able to serve the 80%? How is MF going to penetrate to these small investors? Learn from Patanjali: Brands like Patanjali (BABA Ramdev) have grown so much in just few years and surpassed other brands like HUL and ITC, which had so much money and reach. The reasons why Patanjali has grown so much is because they actually understood the people's sentiments of India. Most of the people believed and had a mindset that Ayurvedic and household remedies are better than chemicals. Patanjali also saw significant growth because it tapped people with the point that the products are national and made in India. But our regulators don't understand the current mindset and capabilities of common Indian people. MF can grow and penetrate only when we all as an industry understand investor sentiments. And most of the investors is our country don't have either the mindset or the ability to pay fees. Are you really stopping mis-selling? Okay, so a reason to promote RIA and Direct plans is to stop mis-selling. But the actual mis-sellers are the AMC's and banks. In the rat race to beat every other AMC, fund houses come up with NFOs, promotions, quarterly incentives for specific funds, junkets for selling specific schemes in specific periods. They have their own targets to accomplish - none of these promotional activities are done keeping the investors interest in mind. Banks opt for a hybrid model and have one set of people who offer advice while the vast majority of their sales teams continue to do business as usual - sales targets with incentives that are based on revenue generated for the bank rather than service delivered to the clients. In contrast, an IFA with his 100-200 clients knows very well that his livelihood depends on earning and retaining goodwill of his existing clients. IFAs act in the interests of their clients because they know they will be out of business otherwise. But who is the person who is going to bear the brunt of these new regulations? Is it AMCs? Or banks? Or the IFA? Whose business model is threatened most? Who is being forced to adopt a different model and abandon his existing model, even when he knows there is no demand for the new model? Think of impact on retail investor: Think of how a typical retail investor will react when they see the new CAS from October. You are focusing their attention not on how they are doing vs their goals, but how much it is costing them to invest in a mutual fund. Then you show them two options - one is cheaper than the other. Do you show the benefits of both options? No - only the costs. So, what would a typical investor do? Go for the lower cost option. We the distributors are suddenly interested parties in this decision of his, since it is a question of us vs direct. Is there any guidance from a neutral party - like a regulator - which spells out the cost vs benefit of both options? No. So, with the information available to the investor now, he will go direct. Not only that, since you have now got his attention focused on the cost of the product rather than the benefits of the product, he will start exploring cheaper options. Suddenly the 5 paisa brokerage offer of stock brokers will look appealing. Why pay even 1.5% when I can pay 0.05%? You have, in the name of investor protection, suddenly made the investor a shopper for the cheapest access route to the stock market. Wow! What a well thought-out move by the regulator! Fantastic move towards investor protection! As I said before, a ground level reality check is needed before people who are not in this business, who don't engage regularly with investors, decide what is good for them - without consulting either the investors or people who engage with them constantly. In all this we forget what our real work is. Imagine a government school teacher, who really wants to improve herself and teach her students well so that they have a strong foundation set for their life ahead. But instead of improving her own knowledge and reading books, she's given the task to monitor Panchayat Elections or do census work. She can't teach her students as she gets no time for self improvement. How can we possibly talk about education level improvement? Similarly , our real work is reaching out to more and more retail investors, teach them the fundamentals of saving and investing and put them onto the road to become successful investors and help them achieve their dreams and aspirations through disciplined investing. But what we do right now is multiple rounds of KYC forms filling, FATCA declarations and now, from October, we will have discussions on how much we earn from fund houses rather than how we can help investors earn more from their savings. This will only serve to distract from the main goal which we as distributors have aligned with fund houses to achieve - of converting the retail Indian saver into a successful investor.
What now?
What should we do? Write a letter to finance ministry? Or maybe just stop working to protest for a week PAN India? But then many of us won't. Many won't keep aside their short term monetary gains for a long term better stay. We in India have an unhappy history of looking at only our near term interests of the day and not considering how our actions undermine our future. The British exploited this well with their divide and rule policy. And we let ourselves be ruled for hundreds of years. It took a great leader with a radically different idea - of peaceful civil disobedience - to ignite the collective minds of the nation, forge unity and fight for our rights - in a manner that no fight had ever been fought before in the world.
Friends, we now stand at the crossroads. We either continue to console ourselves, and keep looking at how to adapt even though the writing is clearly on the wall that the regulator is pro RIA and anti distributor - without any evidence that this is what investors really want. Or we think of how we can unite and get our point across - not through the means we have tried for several years and failed - but in a very different way. It is for investors to judge what they want. It is not for the regulator to foist a choice on them. I want all of us to think rationally and come up with an action plan that we believe has a good chance of success rather than just creating some noise for some days and then lapsing back into business as usual. I will eagerly look forward to your inputs on the way forward for us.
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