BackThe D-word haunts MF sellers: will the customer go ‘direct’?
Right now there is no clarity as to who will offer the direct plan
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The word “direct" is possibly the scariest word in the lexicon today for mutual fund (MF) sellers and advisers. At the receiving end of a series of regulatory changes for the last few years, the unregulated sellers’ community is going through growing pains. The next (and certainly not the last) regulatory directive will kick in on 1 January 2013, when MFs will have to offer two versions of each plan. The regular plan will carry on as before, but now a “direct" option to the existing scheme will be on offer. The only difference between the two plans will be in the cost to the investor. If the current expense ratio for equity funds is between 2.75% and 3% (the expense ratios are yet to settle down post the hike earlier this month), direct plans will be offered at 70-100 basis points less. The Securities and Exchange Board of India (Sebi) has asked fund houses to remove commissions paid to sellers of funds from the expense ratio for investors who come directly to the fund. The regulatory view is that the do-it-yourself (DIY) investor who does not use the services of an adviser or distributor to buy MFs, but selects, buys, sells and maintains her own portfolios, need not pay the distribution cost in the form of commissions that are embedded in the expense ratio. After the exit of loads from funds in 2009, the bulk of the market survives on upfront and trail commissions that the fund house pays out of the expense ratio, few advisers have a fee-only model in India.
There is a lack of clarity on who will offer the direct plan—will it be just the fund house or will Sebi ask every distributor to offer “double net asset value" for each scheme? Not waiting for clarity on this, MF sellers are vocally worried about the regulatory change. They worry about two things. One, older clients with a large portfolio invested in funds will take their accumulated assets and then go direct. Two, the current customers will take the expert advice and then go directly to buy the cheaper product themselves. Though some attrition may happen, for most of the market, the fears look overblown. I believe that sellers and advisers of MFs would worry less if they were more convinced about the value of the service they bring to clients. If they continue to view themselves as just vendors of MFs, they are fully justified in thinking that the customer will walk. But if they look upon themselves as a professional solving a client’s financial problems and offering a long-term (lifetime is good enough) ongoing service, they would be less threatened. From the client’s point of view: do I go to a cheaper doctor or do I look for the person with the best reputation and then pay whatever the fee is? Somewhere, the body of financial advisers needs to build its own sense of self-worth as value creators to be able to take the ongoing regulatory changes in its stride. As the industry grows, there will be regulation and if they look over their shoulder, they’d see that some of the changes have nudged the industry into losing the floating population of product pushers, encouraged a more formal corporate structure and got them agitated enough to form associations. These associations are now being heard by the regulator and the government. Not all bad, is it?
Having said this, I believe that this bag of worries may actually be lighter if Sebi decides that it will be just the fund houses that will be allowed to offer the direct plan. Right now there is no clarity as to who will offer the direct plan—just the fund houses or will each distributor, adviser and online portal need to offer the direct plan. We could look at how the insurance industry has dealt with such DIY investor-friendly product options. Direct plans already exist in life insurance where companies offer cheaper plans (mainly term plans) to customers who want to cut out the agent to get a cheaper policy. With insurance commissions on term going up to 35-40% of the premium in the first year and about 5-7.5% thereafter for the life of the policy, a DIY investor finds it cheaper to buy online. The i-plans (these are offered mainly through the Internet) are not offered through any agent or broker. Online search portals will throw up the best-fit plan but will then direct the customer to the website of the insurance company. The customer must then do all the work herself to buy the policy and must remember to pay the premium each year. The insurance companies now have efficient reminder systems that do the job that some agents did—of reminding the policyholder to renew. It works for the insurance companies because a younger, more aware customer base comes on its own to buy a long-term life cover. It works for the customer who gets a much cheaper price and is agile enough to use technology to service himself. Maybe Sebi could leave the direct plan as an offering just through the fund house—both online (through the fund’s website only) and walk-in—and let the sellers keep the trail by making then offer only the non-direct plan.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com
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