Wednesday, August 25, 2010

Of Mutual Funds, PMS schemes and the seller

There is a lot of shout that mutual funds are not able to increase their assets. The answer is simple. They are not paying the salesman enough money. Investor preferences have absolutely NOTHING to do with money not coming in to equities. Investors have no clue about where to put their money and need some push. Pushed hard enough, they will put money in to fixed deposits of companies with no credit rating or low credit rating, dubious real estate PMS schemes or plantation schemes. They need just one nudge from the distributor and they will do it. The retail and the HNI investor are the ideal clients for any smooth talking sales guys.
Just last week, one foreign bank raised over Rs.1,000 crores (Yes, a thousand crores) for a PMS scheme. At the same time, ‘experts’ are saying that mutual fund inflows have dried up due to market valuations getting stretched and equally other inane reasoning.
I went a little behind the curtains to see what the distributor got. He got a four percent up front commission for selling this PMS. The PMS itself had a very simple structure. An upfront annualised management fee of two percent, and exit load of two and a half percent if redeemed within twelve months and a profit share if the returns crossed two digits! There was no link to the market performance. If the market returns were thirty percent and the PMS delivered twenty, the PMS Manager still got an incentive. It is typical of most PMS structures. And of course the return is measured before tax and not after tax. Recently, I saw a PMS, where the value of a five lakh investment had gone up by Rs.1.45 lakh, but all of it was short term gains. Removing 30% tax, the gain shrunk to under one lakh rupees. The PMS Manager also deducted his incentive on the gross gain (around Rs.0.29 lakh). The investor was left with around Rs.0.85 lakh! The more interesting part was that the money was invested three years ago. The value, after tax and incentives etc is today below Rs.5 lakh, which was the original investment. If one takes the churn in to account, the broking firm has made a handsome return. The investors got totally screwed.
Why I am giving the example is that the said investor again put money in to the PMS of the foreign bank that I mentioned above.
So, if we look at it, the investor is a fool and no amount of reading or counselling makes a difference to the guy. All that matters to him is a slick distributor making a sexy power point presentation and perhaps treating him to a drink or attacking some other weakness of his. The distributor knows this and attacks. In any case, neither the investor nor the distributor understands the product. What the distributor knows is that by selling this he makes four percent up front. So, he sells this. For the investor, it is ‘long term’ investing advised by an ‘expert’.
So, as I see it, it is the distributor who is key to expansion of any market. By taking him on, SEBI has killed the reach of the mutual fund industry. No mutual fund can build a distribution system of its own and survive, given the paltry amount that is available to meet expenses. To top it, we are seeing a toothless and mindless agency like AMFI trying to dob the distributor with a ninefold increase in ‘registration’ fee. I do not know why a distributor has to have a registration with AMFI, which is only a trade body of mutual funds. Their inability to do anything meaningful has been demonstrated by the fact that even the test they used to hold for distributors, was a sham and the same has now been transferred to an agency of SEBI. In this context, why should AMFI have any nexus with the distributors? In fact, I would urge the distributors to simply ignore AMFI and have their own trade body. AMFI is irrelevant for the distributor. Of course, SEBI is trying to push AMFI in to the corner by making it a ‘Self Regulatory Organisation” or a SRO. I do not know if that is any answer to expanding the market or any use for the distributors.
If I were a distributor, I would simply not sell a mutual fund product. I can sell PMS or insurance and make my living.

4 comments:

Oracle said...

Nice article. PMS will still sale as they are very effective machinery to sell the investments and rich ppl or investor want to do something different than other folks like retail investors. ( Mutual funds main to sab invest karate hain.. to hum kaise alag huye..) kind of class who can afford Rs 5 lakhs to 25 lakhs in one shot and they think that they will better returns.

Fonz said...

I think the post showcases the true perspective of a financial product salesman. At least here we actually see the acknowledgement of the fact that the so called "financial advisor" or the halo carrying "wealth manager" is nothing but a mere salesman & all he cares about is his income. Do hell with the investors concerns...

I specially like the sentence where you have called an investor a fool...

Seperb!! Finally someone comes out of the closet!!!

Now imagine these so called product peddlers want investors to pay them a fee for their advice. After reading this blog, one thing is for certain, investors better start educating themselves & manage their own wealth or these financial rogues will truly rip us off our money.. not only will they earn a commission but also enjoy our fee & yet keep calling us fools....They forget their underwears come from our money!!!!

Kaleidoscope Financial Planners said...

Sir
I just had client meeting, client paid my cousultancy fees but when we discussed equity, MF investments he chickned out saying he is getting all this free of cost from brokers then why should he pay me fees?
Rajesh joshi

Frustrations Amalgamated said...

@ Rajesh;This is a real problem. Brokers give advice to churn and earn. What they have may not be the best. If they do that, God bless them. Ultimately, after a year, the client would realise, hesitate to admit though.
The bus model one has to look at is an advisory package fee alone. Do not force customer to buy from you. That way conflicts avoided. But easier said than done, I guess.
We will take a long time to evolve. Too many sellers seemingly offering everything 'free' is bound to confuse the customer.