Client’s Well Wisher OR Client’s Wealth Wisher

I had promised to do a post on how to find out the right advisor (the most challenging part) and here I am doing it at a lightning fast speed. I need more of such 4 day holidays. Please Stars! Do align accordingly more often. The previous post on Mutual Fund Distribution was about me being a free messiah. Here I decided to do some role reversal and act like the devil’s advocate.

Warning: Many in the distribution fraternity who liked my earlier post may find themselves befuddled with this one. The good news is, that was also true and this is also true. The bad news is, earlier truth was easy on the palate and this one is going to be tad difficult to digest.

The asset breakup of Indian Mutual Funds shows a very interesting trend as per broad categories:

Category	Equity Assets	Fixed Income Assets
Retail	42%	3%
HNI	42%	26%
Institutions	16%	71%

In a 13 lac crore industry, the retail investor stands at a meagre 15% at 2 lac crores. Retail investors hold 170000 crores of equity assets but only 24000 crores of fixed income assets of the mutual funds. These are rough estimates. There must be something egregiously erroneous in our approach from the very beginning as to why the numbers look so despondent. With us, I mean AMCs and Distributors. Since the beginning, when regulations were also not stringent, not much has anyways been done to reach out to the real retail investor. To put it plainly, no one has ever bothered about them.

More than 90% of financial savings of an average Indian household are in Fixed Income Instruments like Bank FDs, NSC Certificates, PPF, Kisan Vikas Patra, Post Office Saving Schemes, etc. His investment into direct equities has only come down. But, when it comes to mutual funds, it is evidently clear that an average retail investor has only been sold more and more of equities with great disregard to asset allocation or his personal needs and preferences. Though it is also true, that such investors should only hold equities through mutual funds for several reasons (please google). Clearly, if he later has a bad experience in the funds, it leads to an investor lost eternally for the industry to other assets like Gold, Real Estate, Bank FDs and blah.

The elusive retail investor is like a star which shines bright, they are in abundance and everyone wants to reach them, but they are too far (read scattered everywhere). Also, they are so tiny that it is not worth the effort to approach (read not remunerative). We rather focus on the easy money. And continue to serve the well served.

In the race to gather AUM and climb the ranking charts, few AMCs in collaboration with select few in the distribution fraternity are guilty of indulging into unhealthy practices. Why bother with a slow tortoise race when there are many a hares eager to run fast and reach the finishing point using shortcuts.  

The Collective Distorted Motto: 

Show the rich, the well informed and the well served investors; even better

ways  of getting rich and extra informed to serve them the best

Like they say a few rotten apples, spoil the barrel. Similarly, few participants (be it the distributors or the AMC) give the entire Mutual Fund Industry a bad name. This post is not supposed to be a rant, but in a commercial/luxurious trips/five star meets driven distribution network, even those distributors who try to do genuine good work by wanting to learn, enhance their skill set and get trained while simultaneously educating their clients, will go unnoticed and remain discredited.

It has always mesmerized me as to why; Not always but most of the times, a new skeptical investor into mutual funds is not introduced through the fixed income route? Why don’t we let him have a positive experience of positive returns through fixed income funds and later graduate him to equity funds?

Clearly relatively poor revenue in those funds is the culprit. So much for investor protection (or brokerage protection)!

The average working class Indian does not know much. I say this out of experience. Doesn’t know the products, doesn’t know the markets, has faint idea of his / her goals. Most don’t know the importance of saving right though we definitely know how to save. We Indians are expert at it.

So then how can a true blue retail investor be sure whether the trusted distributor he is dealing with has his welfare in his heart and not the brokerage warfare in his mind, when he himself is clueless many a times about his own financial goals?

Instead of telling investors what to look for, I think they should know what to watch out for as signals that you need to RUN. Run really far and wide from cronies who will portray the role of an advisor in the garb of pushing the maximum revenue products.  Also, the ones in this profession should do a serious reflection and contemplate whether they are guilty of the same and are they willing to alter their client approach in the future. As a client, RUN when you see these:

·   

•  He promises you that he can deliver a magical CAGR of 18% to 20% on all your investments year after year. If he does, he is serious competition to Warren Buffett.
•  He mindlessly loves NFOs / IPOs / New launches. All of them. These actually give him a professional orgasm and he loves to sell you at par value, saying how cheap it is.
•  He easily recommends funds without spending time with you, trying to understand your investment horizons, investment psyche, risk appetite and risk profile. 
• He has never bothered to know your insecurities, goals, long term plans, desires and aspirations. He is just interested in knowing how much money you can spare at the end of the month, what salary hike you received this year and how can you top up that SIP.  In short, what you have with this person is a transactional relationship, while what you need to have is a transformational relationship. Starkly different. 
• He never bothers encouraging you to save or discouraging you from needless spending. He never counsels you on EMIs, credit card spends, etc. 
• Meeting often?? Hell, Who does that as long as the investments roll in and the brokerages are trailing. 
• He recommends only Equity fund, Direct Stocks (typically multi baggers) or ‘safe high accrual’ funds in Debt.  
• Psychometric test for the client!!! Ehhhh….what is that??? I am a psycho and also a metric pass. 
• Action, action and more action. Re-balancing, churning, booking profits, booking losses is always recommended. It then becomes quite easy to justify his ‘value’ to the gullible retail investor. 
• Every investment recommended is the best investment advice of the year. Also it cannot be postponed. It cannot wait. It has to be done NOW. Else, you will be too late as the golden goose of an investment which has to lay golden eggs will run away to some other planet.
• Shows you excel sheets of great past performance. Trust me this is the easiest and the dumbest way to recommend. Continuously chasing five star rated funds only make third grade distributors and investors. 
• Always agrees with you whenever you wish to invest, especially in equities. He always thinks it is the right time. As no time is wrong time to make higher commissions, right?
• Tax planning, Insurance, a holistic financial plan is something he only dreams of for you.

     In short, what I just mentioned is what financial advisors / planners are made of. But, in my opinion the consumer in our country is not yet prepared to dish out fees for such financial planning and thus it is the inherent duty of a distributor to double up as a financial advisor.

    

     Word of mouth really helps in identifying a good advisor. Also, if the correct thing to do is to not do anything at the moment, a good advisor will tell you the same. He is supposed to address your worries, concerns, calm your nerves when you see volatile markets. Mom! He / She is your Financial Mom. What clients need is a Saarthi, the Krishna – a Mentor who can guide them towards attaining financial independence.

How many in the distribution community can live up to such expectations? It is going to be a survival of the fittest.

Mutual Fund Distribution : Pride or Penalty

Since the time the latest SEBI regulations have come on disclosures, a lot of water has flown under. A lot has been written, argued and some Twitter experts have already passed their judgement on how this is the best thing to have happened to the country after Mahatma Gandhi. Oh wait or is it Rahul Gandhi!!!

On a more serious note, disclosures are all good.  How much? Is the key. Imagine a burqah clad woman and you will be intrigued with what is behind the robe. You never know there could be a man dressed as a woman. Opacity is surely bad. But does she need to bare it all completely, to prove that she is a woman? If she does then that my friends, becomes X-rated material. Too explicit for comfort. This is what the latest guidelines have done. They have completely stripped the distributors of comfort. So the account statement will not just mention the brokerage he has made but also tell you the difference between expenses of direct and regular plans. So much porn, sorry I mean so much fun.

The intention is noble, but the action seems not.  

We have a strange habit of aping the West. We look up to the USA as a benchmark for everything that we do. So we have experts comparing costs, load structures of US mutual funds with Indian mutual funds. Ever tried comparing the mutual fund penetration, existence of different share classes and disclosures for distributors/ advisors in the USA or incomplete knowledge is convenient?

How about some statistics:·       

•  An average 45% of US households own mutual funds in USA compared to 2% of Indian households.
• Total Mutual Fund assets in US were at 241 Bn$ in 1981, India in 2016 is at 200Bn$. This data will make no sense until you compare it with the GDPs of both economies. In 1981, US GDP was 3.211 Trln $, which means US MFs were at 8% of GDP. In 2014 US GDP was 17.41 Trn $, the MF assets were a whopping 91% of the GDP at 15.85 Trn$. While as per 2014 data, Indian MF assets stand at 9.75% of 2.05  Trn$  Indian GDP.

Source : ICI Website

So in terms of penetration Indian mutual funds stand almost 

where US mutual funds were in 1981.

The only reason I mentioned these numbers was to highlight, how we try to blindly compare their practices with ours without giving a thought as to how developed that market is and how grotesquely under penetrated we are. Be it the loads, expenses, rush for ETFs (Exchange Traded Funds) or the RIA (Registered Investment Advisor) model.

Why an Advisor / Distributor:

When we need a haircut, we go to a salon. When we need medical help, we go to a doctor. When we need to file a law suit, we go to a lawyer. When we need a well stitched suit, we go to a tailor. Sadly, when it comes to seeking investment counselling, everyone thinks he/she is an expert. The DIY (Do it Yourself) investors who seem abundant on Twitter, must realise that they are a negligibly feeble minority out there. I have conducted many an investor education workshops to come to the conclusion that most people need help. And how on earth can we reach out to masses without enabling distributors?

I shall not make the distinction between an advisor and a distributor at this juncture as I feel we as an economy are not educated and exposed enough to appreciate the difference. The entire notion that a distributor is only interested in making higher commission and an RIA will be holier than thou is a flawed one to my mind. Many IFAs trying to do genuinely good work for their clients are berated for suggesting regular plans. 

RIA model remains the best, but to try endorsing it so aggressively so as to succumb the distributors, we need to understand that a developed market will automatically gravitate to low cost funds and efficient advisory models. Trying to coerce investors by force feeding them information on expenses of direct and regular plans, brokerage payments may only help alienating the investors in an industry which is just trying to find its legs, forget walking or running. I am concerned that ill informed investors may try to do it themselves and hurt their portfolio in the long run My whole worry is the big fish, the so called private wealth managers and private bankers shall still remain unhinged but the small time distributors will suffer.

Ever checked the bill when you pay for any service? The consumer always bears the service tax. When it comes to mutual fund distribution, this tax is also paid by the distributor. Now, if the regulator has decided to disclose his income to the investors, they must also allow the distributor to mention his electricity bill, rentals for running the office, and other costs of running his setup. Why show only the income to the client who will feel entitled to ask for this money back in case he is not asking for it already.

On US Mutual Funds:

Do we know the different share classes for mutual funds in US do not yet allow a small time retail investor to buy without paying a higher entry load or in case of zero loads fund without a higher expense. The investors who can manage a higher amount get benefits of Class 1 shares (similar to our Institutional Plans). Also to benefit on lower expenses, most funds need commitment for a minimum number of years. RIAs though are entitled to buy for clients under Advisory account where expenses are lowest.

Too many permutations and combinations, but the common theme across is: Use a distributor or advisor and pay him or we pay him. Or have bulk amounts for investments to gain the benefit of lower expenses. This is one big reason why low cost ETFs have gained immense popularity in the US. Not to mention the huge data to support how active funds there have been underperforming ETFs.

Coming Back to India:

As a country, we are averse to paying tips unlike most developed countries where tipping is not just a norm but compulsory. Be it in a restaurant, at the valet parking, salon services or any place you can think of, we are bad at making voluntary payments. I know people who do not want to go to good doctors because ‘He is expensive’.  What then makes us think that the people who do not even think beyond Real Estate and Gold will move to financial services easily by ‘paying’ fees? Who then, will educate and inform the prospective investors about the benefits of mutual funds? Why will they not move to more toxic products like market linked insurance plans or to exotic investments for their wealthy clients?

Somewhere, we as an industry need to share the blame for such tough regulations as we have encouraged and endorsed many unhealthy practices (some still do) to gather AUM. Our own malpractices are now coming back to haunt us with such regulatory moves.

 A liquid fund has not been sold as an alternative to current account but as the best fund

 compared to that of the competition.

I also still have to understand the Maths of  Retail = Long Term = Equity

In a country, where more than 90% of financial savings are in fixed income products like Bank FDs, NSC Certificates, PPF, Kisan Vikas Patra and more, no attempt has been made by the industry or distributors to popularize fixed income funds to retail investors due to their poor margins.

Investor education fund was a great idea by the regulator, again not used to the full potential by our brethren. Instead of making the distinction between expenses of different plans available on account statements, it would have been better if the regulator had bought more entry barriers into who can act as an advisor or distributor. By ensuring a minimum qualification as to who can distribute mutual funds. Qualification may not always bring ethics, but in the least it will bring some responsibility to the role. Thus, AMCs, Distributors, Regulators are all collectively at fault for where we stand today.

We have done away with loads, high upfront payments which are all very healthy. It is only in India, that an investor investing Rs 5000 or 5 crores is charged the same expense. This does not still happen in USA, the most developed market. But, in the bargain of administering healthy practices, we are hurting the small time distributors the most who are the only one who can help get the true retail investor. The big wealth management firms and private bankers anyways do not care for a hard core retail investor. They are busy rubbing shoulders with the big and the wealthy. But a school teacher, an IT professional, a pharma co manager, these kind of people who really need help and need to be catered to will get alienated. There will be a risk of them being served more and more insurance policies over mutual funds.

Though, I would like to maintain that finding a right distributor or advisor is the biggest challenge. And how to identify one, has been covered Here

But the way things stand today! For any mis-selling after October of toxic investment products or insurance policies, can the distributor be solely blamed?

Disclosure : I am neither a distributor nor an advisor for Mutual Funds