Of exit loads, fund houses and distributors — 2

Yesterday.

All my troubles seemed so far away,

Now it looks as though they’re here to stay,

Oh, I believe in yesterday.

(Yesterday The Beatles)

This iconic song pretty much sums up the mood among several mutual fund distributors. For distributors habituated to attractive compensation structures and easy money, the new-look mutual fund industry has come as a rude shock. In one deft move (scrapping entry loads), the regulator changed the rules of the game. Further, the provision for uniform exit loads plugged the loophole that some would have liked to exploit.

Newspaper reports suggest that fund houses pleas to roll back/modify the entry load provision has been rejected by SEBI. Some fund houses have decided to compensate distributors by paying them an upfront commission in any case. Distributors on their part are tweaking their business models. Fee structures are being charted out; new value-add offerings are being introduced. Terms like unbiased, independent and research-driven are now liberally used in communication. Clearly, the mutual fund industry is in unchartered territory and wait and watch is the new mantra .

Despite the gloomy picture being painted by most, it would be safe to state that the scenario isnt as bad as it is made out to be. In fact, things could become markedly better for all the participants i.e. investors, fund houses and distributors.

Conventionally, distributors have worked on the assets under management model i.e. more investments their investors made, higher was their pay-off. Broadly speaking, the latter came from the entry load, the trail commission and ancillary compensation/benefits provided by fund houses. While entry loads have been done away with, distributors can now demand compensation from investors directly. Also, unlike loads, this compensation is not regulated. It has been left to be mutually determined by the investor and the distributor.

Distributors argue that investors are unlikely to be willing to compensate them. There is some merit in that argument. Investors habituated to filling mutual fund forms and writing cheques for the investment amount, might resist the new arrangement initially. However, once they are convinced of the value that the distributor adds to the investment process, the resistance will subside.

The importance of quality advice and service cannot be overstated. The distributor has a vital role to play in aiding the investor achieve his financial goals. Making an investment plan, successfully managing and tracking an investment portfolio are no mean tasks. And once the distributor effectively communicates how his services can aid the investor, theres no reason for the investor not to come on board.

Sure, distributors who fail to add value and work in the investors best interests might see their business dwindle. But that would only be a fair and natural consequence.

From the fund houses perspective, its an opportunity to have access to serious, long-term money. It isnt entirely uncommon to see ill-advised investors invest monies simply to ride the rising markets. With quality advice being made available to investors, we could see the rise of a breed of informed investors who are willing to stay invested for the long-haul. Investors who dont panic when markets experience downturns; instead they see the same as an opportunity to make investments at attractive prices. Now wouldnt fund houses love to have such investors investing in their funds? Also, it would be fair to assume that fund houses will handsomely compensate distributors facilitating serious investors and long-term monies, for their efforts.

As for the investor, it’s options galore. Some distributors will operate on the transaction model i.e. use technology to offer investors a low-cost platform for making investments, others will bank on providing quality advice and then there will be those whose USP will be personalised service. In most cases, there will be an overlap. From the investors perspective, the importance of being aligned with the right distributor has never been higher. Investors will have to thoroughly evaluate the proposition offered by each distributor and select the one that best works for them.

For instance, if a distributor boasts of his research set-up, quiz him about the same, the size of his team and their experience. If a distributor claims to be independent, enquire how he ensures that his independence is not compromised with. If low-cost investing is the platform on offer, find out how the same compares with other distributors. The onus to conduct a thorough due diligence and make an appropriate choice lies with the investor.

It wont be surprising if investors choose to be associated with multiple distributors; for instance, the advice could be sourced from one distributor and transactions made with another.

As mentioned earlier, the mutual fund industry and its participants are in unchartered industry. However, despite what the naysayers would want you to believe, it need not be all gloomy. Remember the adage about its not the cards you are dealt, but how you play them. The how you play them part could hold the key for the mutual fund industry, going forward.

Here comes the sun,

Here comes the sun,

And I say it’s all right,

Little darling, it’s been a long cold lonely winter,

Little darling, it feels like years since it’s been here,

Here comes the sun, here comes the sun,

And I say it’s all right.

(Here comes the sun — The Beatles)