Shrinil Shah on Sun, May 26th, 2013 10:13:57 am
If advisor has to pay for everything then why advisor should remain as functionary? The major role is played by the Advisor to look into the portfolio of the investor. At the end the investor is going to make the advisor responsible and not the agent. The advisor is responsible to Fund House, SEBI, Investor. Dont youthink he is eligible for that larger share? Please give your comment ma'am.
Abhinav Gulecha on Sat, May 19th, 2012 10:46:44 am
Thanks a lot for the three part series. It was very informative and gave me several new perspectives.
Also thanks to Mr. Srikanth from Funds India for a very well thought out comment and alternate perspective.
Srikanth on Sun, May 6th, 2012 8:52:22 pm
Uma,Thanks for the series of articles. It presents a reasonable argument for a fair financial product distribution architecture.
However, there is atleast one structural flaw, and a few practical issues with this model.
The structural flaw is about self-service clients. You touch upon this briefly in the third part, but the solution that you propose in passing is inadeqate. Your articles assumes a very clean three tier structure in the form of manufacturer, agent and advisor. In reality, the picture is more cloudy. Sometimes, the manufacturer influences the decision of the buying directly (ads, NFOs, index funds, structured products like lifestyle funds etc); sometimes, a client does their own planning, asset allocation and product selection. In between these there are other methods such as social influences, advise from newspaper columnists (I'll plead guilty to this one), and many more. Your suggestion is to treat all this as one and create a separate product class for such situations with less managment fees (by eliminating trail). What will end up happening is that once there is a cheaper variant available, everyone (including the advised client) will always want that variant resulting in a negotiation with the advisor or the advisor will have to hide this detail from the client. Then, the client will feel grieved later that the advisor sold him an expensive variant when a cheaper one was available.
Also, there are situations where there are packaged and programmatic recommendations provided to clients by smart systems. At FundsIndia (where I work), we have pre-packaged portfolios for several purposes and risk categories available for our investors. We also have a pretty nifty algorithm that takes an investor's profile, requirement, time-frame, and amount of investment to create a personalized SIP portfolio. Anyone can use these methods of getting "advice" from us, and invest. There are other online platforms that do atleast the packaged portfolios for their clients. It is impossible to keep track of who invested after seeing this, and who invested on their own. Our system, at least in such cases, is not a mere order routing system with a pretty interface.
One solution would be to create different classes of investors and sell different classes for funds to each of them. However, it will be very easy to defeat such a system - all you need is one investor in the higher class, and an entire social circle will be able to access our recommendation services. It would be much more elegant to be egalitarian about it and give them all the convenience and a same set of funds.
The reason these alternate methods of advice are important is that we need a scalable advisory model. We need to be able to leverage technology to help advice a large number of clients do proper financial planning, allocate assets wisely, and choose good products in their portfolio. The model that you propose is a human model that is not sufficient currently, and hard to scale anytime soon.
Also, obviously, any advisor would choose to go to the creamiest of clients so that they can make the most money with minimal or focussed effort leaving large segments of middle-class population fending for themselves or as would more often be the case, be sold "differently regulated" products.
The other practical issue relating to your solution is on the business side of the equation. The distribution business is not sustainable without trail fees. As you very well know, the equity broking business is struggling right now due to low trade volumes and the brokers are facing unhappy decisions to up their charges and lose clients. The mutual fund market has FAR fewer transactions compared to equities, and even a scalable technology platform will not be able to sustain as a business without AUM-based recurring fees. The equity broking business can get away with urging their clients to churn their portfolio (sell calls and stop losses and profit bookings and what not) and make up brokerage. In the mutual fund business where we are talking long term holds, that would be a terrible thing to do, obviously.
Also, from an investor's point of view, he is already is feeling that the fund management expenses that he pays are sufficiently high for the services he is getting for forking over his cash. To add another layer of transaction fees to the equation would be completely unacceptable to him.And I am already talking about a scalable technology solution - in your model, you can forget about street-side human distribution network. As it is frequently pointed out, mere distribution agent fees will not even cover the commute expenses.
So, at the end of the day, what will happen is that MF distribution in isolation will cease to be a business and advisors will end up taking care of fulfillment as well - which will get us back, nicely, to the present status quo. Separately, of course, I assume that the model that is presented would be cross-industry - covering insurance related products as well. If not, any implementation of such a model would make the insurance industry very happy.
In summary, let me make these points:
1. Mutual funds are structurally sound products that are well-regulated. Since the ban on entry loads, the arbitrage between high commission funds and low commission funds have reduced dramatically, and churn is minimal. Yes, theoretically, there is an argument to be made for an advisor having a conflict of interest between the manufacturer (who pays him) and client (who is serviced). However, in reality, this concern is overblown. To create a perfect, provably correct system would be a theoretically fulfilling exercise but will have ruinous effect on the market with the impact felt most by the very investors it is trying to shield.
2. Any remnant of churn and consequent investor disservice can be effectively addressed by rationalizing up-front commissions with trail commissions thus aligning the intersts of the advisor/distributor, client and the manufacterer.
3. In the larger context of an industry-friendly IRDA, and an RBI that turns a blind-eye to malpractices and mis-sellings at grass-root bank level, any MF only regulation will be disastrous to the industry.