AMCs, please walk the talk

15 Sep 2014

The straight talking Brijesh Dalmia, who has never minced words when discussing distribution practices that need to be reviewed, strengthened or changed, makes some important points for AMCs to reflect on, on business practices that they perhaps need to review. A lot of the learnings from excesses of the last bull market were acknowledged readily in recent years, raising hopes that we will all learn from history and avoid repeating the same mistakes. However, as Brijesh points out, there are some disturbing signs of history beginning to repeat itself. The industry is doing many things right, he says – but if we can smoothen out some of these rough edges quickly enough, we can work together to take the industry to newer heights.

Markets are at all time highs. Mutual fund industry AUM has breached the 11 lac crore mark. Investors confidence is back. Business environment looks good for distributors. Surely, good times have come.

Keep walking, as they say. What next ? For the industry to reach further scale from here we need to tighten out seat belts, review current business practice and take path defining decisions.

In the past, a lot has been spoken and written about what investors and distributors should do. A lot has been discussed about where the industry has gone wrong, which is important, so that we can learn from history and avoid making the same mistakes.

While mutual fund houses deserve a lot of credit for making continuous efforts to grow the industry, they also need to sit back and analyze some of their practices. On examining closely the activities of AMC’s, I find some of them are not consistent to what they talk. I will highlight some of them here and hope AMC’s will take it in good spirit and do their bit to remove these anomalies.

Flurry of NFOs – AMCs not walking their talk

At most forums AMCs suggest that inflows in equity funds are directly proportionate to highs and lows in Index, meaning that more money comes at higher index levels and less inflows come in when market bottoms out. They advise distributors to do the opposite. However, most AMC’s actually do not walk their talk. The recent surge in NFOs is a clear indication that AMCs are also in the race of increasing their assets under management in good times. They also do a lot of data mining (choosing arguments which favour them ) and make their case to distributors as to why they should sell their NFOs. Some of these NFOs may be worth their salt but most are not.

Worse still is the fact that almost all such NFOs come with a huge upfront commission and no trail. This induces the distributor to aggressively sell and over-selling such funds, which can lead to mis-selling. The question is that why can’t they offer low upfront and trail rather than high upfronts even if they have to launch NFOs? Clearly, the answer is that they know they will not be able to garner huge AUMs without huge upfronts. Bucking the trend, there are a few AMCs who stick to their philosophy of fewer funds and promoting existing schemes rather than coming out with several NFOs. Kudos to them.

Promoting performance, defying prudence.

Again, several presentations are made by fund houses that winners rotate. Schemes which did well last year may not do well in the current year. They suggest distributors not to go overboard in schemes which have already gone up in the recent past. They caution investors and distributors not to look at the rear view mirror, but rather look ahead.

AMCs again are not walking the talk here. It has been noticed that many times (including the last few months) many AMCs promote schemes which have done extremely well in the last 1 year by offering higher commissions (mostly through upfronts) to distributors. Many AMCs aggressively promote these funds through advertisements that focus on last 1 year performance. Many distributors are thus induced to sell such funds and increase their current income. While the steam may still be left in such funds, prudence says otherwise. The point is, AMCs advocate at open forums not to chase recent performance but promote their own performance by paying higher incentives and too through upfronts.

Peer group pressure, exit loads and pricing strategies

Everyone knows that equities are for long term. To get returns investors should hold for longer periods. AMCs show a lot of data that the holding period of clients is not going up substantially. They ask distributors to promote longer term investments. However, exit loads and pricing strategies of AMCs are not in sync with this. First of all, while they advocate that distributors should build their model on trail income, most AMCs still offer high upfronts. Their argument of offering both upfront and trail model for the distributor to choose will not hold because this induces distributors to go for upfronts. If not immediately, AMCs can reduce upfronts regularly in due course of time so that the distributors adjust to this change and prepare themselves to build their business on trail. Here, it is worth acknowledging the bold step taken by some AMCs to have come out with only trail model. While they may be seeing some business being lost to competitors, this is definitely a good move and they will be rewarded in due course.

Further, why can’t AMCs increase exit load period from 1 year to 3 year or more to discourage churning and redemptions? The reason of not doing so seems simple. If a particular fund house will increase exit load period, they may not get inflows as distributors and investors will prefer other fund houses. The point is – who will bell the cat first. It’s an industry level problem. All AMCs need to come together and formulate a forward looking and mature strategy in the interest of all.

Investor Education – IFA enablement Programs

One thing that regulators have done well is the allocation of 2bps of recurring expenses to be spent on investor awareness programs (IAP’s). Today, 100’s of IAP’s are being organised across the country. This will surely bring positive results in the near future as well as long term. While it is a positive step, I find a corollary here. Suppose, millions of new investors will want to invest in mutual funds, who will service them? Today, there are less than 20-30 thousand IFAs and if we add another 30-40 thousand distributors from banks and alternate channels, it is still much less than 1 lac feet on street. We all know one distributor may not be able to advise and service more than 100-200 investors. This means, industry is not geared up to service more than 1-2 crore investors. Even among the current distributors, a lot of them lack the expertise to advise clients in the right way. In my opinion, apart from IAP’s, regulators and AMC’s also need to spend considerable time and money to empower existing distributors as well as create more distributors in this profession. One way to do this may be by allocating a part of allocation made towards IAP’s ( say 1bps or 0.5 bps). If AMC’s find merit in this argument they can approach regulators to do something about it.

To conclude

I am sure AMC’s have their own challenges and it may not be easy to implement all suggestions they receive. I just hope they do their best by taking cognizance of above points.

Most distributors (specially in B15 cities) rely heavily on AMC’s to build their business models, make sales pitch, etc. As such, it becomes all the more important that AMC’s become more careful and responsible – and, to walk the talk.

The above issues however, do not take away the credit AMCs deserve in reaching where the industry stands today having faced so many serious challenges in the past decade. It is their sheer persistence and hard work that have seen the industry through. Several AMCs are spending a lot of money and resources on distributor training. Some are introducing innovative schemes for distributors, safeguarding their families by assuring trail even if the distributor in no more. Some are providing world class technological platforms to help distributors strengthen their business at no cost. We must applaud the good work done by the AMCs and as we look into the future with optimism, I hope they will weed out the smaller inconsistencies in their approach and take the industry to a new high.

Leave a Reply