Incentives for agents on the cards

Incentives for agents on the cards

Mumbai: Investors may once again have to pay agent fees when buying mutual fund (MF) units.

Securities and Exchange Board of India (Sebi) chairman U.K. Sinha indicated on Wednesday that the Indian capital markets regulator is set to make it more attractive for distributors to sell mutual funds by providing them new incentives. He was addressing an annual mutual fund summit organized by industry lobby group Confederation of Indian Industry (CII).

The move is likely in response to sluggish unit sales after C.B. Bhave, the previous Sebi chairman, scrapped entry loads in August 2009. Entry load is an upfront fee investors pay when they buy a mutual fund unit.

The mutual fund industry has been unhappy with the ban, arguing that it has hurt their operations, as distributors migrated to selling other financial products that gave them better fees.

However, investors have saved an estimated Rs2,800 crore since the ban.

“Sebi’s earlier moves have impacted the mutual fund industry. The count of equity folios has come down. Sales by independent financial advisers have come down. Sales of mutual funds in small towns have gone down. Sebi is looking at some way to incentivize the distributors," said Sinha.

“At least in case of first-time mutual fund investors, it is difficult to increase the penetration of the industry unless distributors are incentivized," he added.

To be sure, Sinha gave no hints about the nature of these incentives or whether investors would pick up the tab.

A report by CII and PricewaterhouseCoopers released on Wednesday said that huge redemption pressure had resulted in a netoutflow of Rs494.06 billion from the Indian mutual fund industry in fiscal 2011, compared with a net inflow of Rs830.81 billion in fiscal 2010.

“Lack of adequate compensation has resulted in the disappearance of small distributors, who would have otherwise serviced small retail investors... Pushing sales in the industry boils down to incentivizing the distributor to sell these products. A possible measure that could be looked at is increasing the trail commission paid to the distributor," said the report.

Prior to the ban on entry loads, a distributor could earn a commission of 3-4% on new fund offers and 2-2.5% on existing schemes. This has now been reduced to 0.75-1%.

“As of now there is a Rs100 transaction charge for distributors, which is under proposal with Sebi. It is not attractive. A real incentive would prompt distributors to reach out to investors and sell mutual fund products," said C.J. George, managing director of Geojit BNP Paribas Financial Services Ltd.

“Today’s situation is that there is very little addition of new investors as distributors do not find the business rewarding," he added.

However, not all distributors are complaining.

“We have not had any problems even after loads were taken away, because we charge our clients based on the kind of advice we provide. Incentives can help grow business overall in the mutual fund distribution segment as sales have been down," said Lyna Hebelle, an independent financial adviser who runs Tychee Financial Solutions.

Sinha has formed a Sebi special committee to look into the issues affecting the mutual fund industry.

The committee has recommended that the regulator should allow incentivization of distributors and raise the accountability bar.

In a combative speech at last year’s mutual fund summit, Bhave had taken the industry to task, saying that mutual funds have not been able to collect money because of their poor performance.

Milind Barve, managing director of HDFC Asset Management Co. Ltd, said the industry needs to sell simpler products to increase penetration and Sebi should look at what the industry can do without much regulatory intervention.

“The industry has been obsessed with Sebi. They (Sebi) have been finding us at fault every time we did something. It is painful that as mutual fund companies we are looked down upon by the public," he said.

Sinha also announced a slew of other proposals in his speech.

Asset management companies may have to mandatorily provide investors information on the track record of individual fund managers, Mint reported on Wednesday.

The process of initial public offerings will be simplified, and disclosures should be made intelligible to the ordinary investor, Sinha said. Further, the Sebi chairman said mutual fund houses will have to provide a break-up of their assets under management, between money put in by individual investors and institutional investors, though he did not specify a time frame for this change.

The market regulator also plans to regulate distributors of mutual funds and introduce uniform know-your-customer norms for all activities under Sebi’s jurisdiction.

“Sebi is looking into distributor regulation, but not in a disruptive manner. It will be for a limited number of large distributors," he said.

Currently there is no direct regulation for mutual fund distributors.