It is always the transition generation that finds it the most difficult to adjust to change. I was a rookie business journalist in 1992 when the Harshad Mehta scam broke and the securities market reform began. I remember talking to a small stock broker in Delhi discussing the incipient changes. Sitting far away from the trading floor and with my livelihood not at risk, I found it easy (though a bit callous, on hindsight) to tell him that his business was history. That the market would corporatize. That costs would come down and unless he either expanded very fast or became an employee, business was over. With the size of business he serviced, on the new brokerage structure that would emerge, he would not be able to survive.
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Out of the shambles of the stock market scam emerged new institutions that looked at more order in the markets. Screen-based trading, depositories, brokerage disclosure were all new concepts that were resisted every inch of the way by the market incumbents. The stock market was a closed club of brokers. I still remember the cantankerous old fox of the Delhi Stock Exchange explaining the bhai-chara (brotherhood) system to me in his Punjabi-twanged, expletive-filled narrative. The sub-text of the story was: They were all broker-brothers who were able to sort out all their problems. Investors? Well, they bought at the highest price of the day and sold at the lowest price, since the outcry (guys gesturing and hollering at each other to make the trade on the floor of the stock exchange) system prevented the investor from knowing at what time and what price the trade got executed. Sounds primordial today, doesn’t it? Investors wanting 100 shares were looked at as if they were beggars, charged rates that were more than 5% of the trade. And service? Well that was for the big boys.
One issue that got the brokers really worked up was the decision to get them to declare their brokerage on the contract note. There was a violent reaction, brokers threatened to go on strike. They prophesied doom for the markets. For the economy. For the National Stock Exchange (NSE). Employees of NSE actually got threats after they found a trail of money from the brokers leading to the underworld. Now, almost 20 years later, India has one of the most efficient markets in the world, brokerages are down to 20-40 basis points (you pay 20 paise each time you transact Rs100 worth of shares) and the time when delivery of shares (if you were lucky enough to get your signatures matched) took more than a month, seems like from another planet.
Judging by the activity just under the surface in the mutual fund industry, it’s Season Two time. By gradually tightening the commission norms, the Securities and Exchange Board of India (Sebi) has tried to nudge the industry for the last three years towards performance-based selling to the retail market. Throwing money at the distribution chain and chasing corporate and high net-worth customers was not the way it was supposed to be. With mutual funds going no-load (you no longer pay the embedded cost in the price), the reactions in the industry are as expected. While some fund houses (the product manufacturer) are giving public statements opposing the move, privately they are laughing. For too long the tail twisted the dog—there are stories of how large distributors would not even take calls from mutual fund heads unless they were promised a commission of 8%. Other fund houses that target assets under management, are hiring lawyers, chartered accountants and sharp-shooter compliance officers to find that last remaining loophole that will allow them to still milk the system. That one last time.
The 55,000 mutual fund distributors plus banking distribution chains are working on two fronts. Defensive and offensive. The lowest of the low-life used all of July to heavily churn their customers (you). Check your July statement to see the transactions for the month. Each time the bank or your agent bought you a fund, you paid the bank/agent/advisor Rs2.25 on Rs100 of transaction. Do this three times on a corpus of Rs10 lakh and they made at least Rs60,000 off you, just in a month. If you found you’ve been churned, find another point of sale. If this was defensive, the offensive strategy is to quickly cobble together an association, lobby with the ministry of finance, the Prime Minister’s Office, or whoever would listen, and go to court. A New Delhi-based distributor-led attempt to litigate against the no-load order fell flat on its face, first when the fund houses refused to pay for the legal fees and two, when the court threw the case out. If history is any beacon to the future, it will settle down. You will end up paying less, in a more transparent manner, the market will expand and the occasional jay walker will still get hit, but the systemic problem will get over.
What you have to do: There are no free lunches. Sebi is not saying that you can buy funds for free. All it is saying is, by making mutual funds no-load, the person servicing you will really be your agent, rather than the agent of the mutual fund. And as your agent, you need to pay him directly for the service he gives. You pay your doctor, your lawyer, your shrink. Now you pay your financial adviser. If you’ve been happy with your adviser, begin paying for that service. Or get shoddy service and get hit by products that harm. Advice from a Mumbai-based value-for-money distribution house: Look beyond the glitz of the sales team and examine your statements carefully. If not, well, it’s your money, no amount of regulation can help you.
Monika Halan is a certified financial planner and is currently working as adviser, Pension Fund Regulatory and Development Authority. Your comments and personal finance queries are welcome at email@example.com