Stringent regulations helped mutual fund industry evolve

By Morningstar |  03-01-19 | 
 

Monika Halan, Consulting Editor, Mint Money, shared her views at the Morningstar Investment Conference held in Mumbai on October 23 & 24, 2018. Below is an excerpt from that discussion moderated by Ajay Bagga, Executive Chairman, OPC Asset Solutions.

Can you take us through a few broad changes and their implications from the recent expense ratio and distributor incentive regulations?

The regulator’s direction is clear. Securities and Exchange Board of India, or SEBI, is clamping down on fund houses that are misusing or smart-analyzing the regulations and finding loopholes to keep costs high. There was enough evidence to understand that while the institutional investors benefitted from the growth in assets under management retail investors were actually cross-subsidizing. For instance, income funds had higher expenses because these are usually positioned for retail investors.

Thus, the benefits of scale were not being passed on to retail investors. Since the industry didn’t lower cost the regulator had to step in. Upfronting of commissions has also stopped so that there is no incentive to push certain products.

If investors do well, each participant will do well. While SEBI is tightening regulations, we are seeing the growth of the industry. When the entry loads were abolished in 2009, everyone predicted that the industry is over. But the ban didn’t deter growth. It helped distributors evolve themselves by upgrading their knowledge. On the other hand, the regulations are not investor friendly in insurance sector and the product push continues.

So stringent regulations have benefited the mutual fund industry. As a result, we have monthly SIP book of Rs 7,500 crore.

How do you see the industry evolve? Distributors today don’t get the same respect as doctors and surgeons despite having years of experience. Is the entire issue about pricing?

You will not get well-known for being a great distributor. But you will be recognized for solving people's financial problems. Let me cite my personal example. When I began my investment journey in Delhi, there was a distributor who sold a product and said there is a cashback. Rebating was prevalent at that time. He said I'm waiting for the day when you pay me. This was about 20 years ago. It was unthinkable that the customer would pay because rebating was the norm. For all practical purposes, I did not take the rebate. Rebating still happens in the high net worth individual and institutional market.

Investors will keep coming back to financial advisers. It's not one sale or sale for a few years; you have a lifetime of your customer and their families with you. That should be your business model. And the transaction execution can be outsourced to technology like exchange platforms so that advisers are able to focus on their core competencies.

Mutual funds help investor solve most of their requirements – liquidity, retirement, saving for short term goals, etc. Distributors should work with families for the entire lifetime. They should be able attend client’s birthday parties, weddings, house-warming to truly understand their clients.

Is there a need for a self-regulatory organization, or SRO, for mutual fund distributors?

Possibly, yes so that the industry gets the full dignity. An SRO will have far more seriousness to the concerns and the suggestions of this industry.

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