Skip to main content

See Your Money Work

A column that I recently wrote in the magazine where I work

Distributors will now, rightly, be paid for the service they give

FROM 1 August, when you go to buy a mutual fund (MF), you will not have to pay upfront commission, or entry loads, as they are called, typically, around 2.25 per cent. These loads are commissions that are presently coming from the amount that you invest with your fund and get passed to your agent. But market regulator Securities and Exchange Board of India (Sebi) has mandated that your agent and you will now have to mutually decide upon an amount that you would like to pay him and he will also have to disclose his commission.

A sweeping impact...Understandably, agents are finding this tough to swallow. A senior manager of one of India’s largest distributors said that if customers don’t ask what the retailer’s commission is when buying a washing machine, for instance, then why has Sebi asked distributors to disclose commissions to investors.

He may be right, but comparing a financial product with a consumer durable is a stretch. It is true that as customers we do not, and are not qualified to, ask white goods salesmen pertinent questions about the products and swallow whatever sales pitch they throw. This, however, doesn’t mean that we have to be similarly unquestioning about our financial products as well.

Moreover, there is no doubt that commissions play a big role in any kind of sale. I hear that one of India’s largest private sector banks does not pay any commission to its investment advisors who sell debt funds to customers. It’s quite evident that even when the interest rate scene is bullish, this bank’s investors would hardly be getting the right advice.

MF distributors also claim that their income will drop significantly. That is true. Small-time agents will find the going tough, but only initially. In the new scenario, your agent will have to justify the fees he charges. By writing out two separate cheques, one for investment and one for the agent, investors will be aware of what they are paying for and, more importantly, how much. Discount brokers—those who merely give out forms with insignificant advice, will, and should, be wiped out.

With entry loads curbed, agent commissions could have been shifted to and clubbed with exit loads. But, as a pre-emptive tactic, Sebi has put a cap of 1 per cent on exit loads. This will prevent distributors from arm-twisting MFs into raising exit loads to compensate for the entry load losses, if any.

Value additions. What most agents and distributors fail to realise is that it is not as easy for an investor to make do without agents as it sounds. Picking and choosing the right fund from out of over a thousand available, filling multiple forms all by yourself, going to a Registrar & Transfer agent’s office before the cut-off time with as many forms and copies of PAN card and all the paraphernalia documents, isn’t easy at all. Even if one knows which fund to invest in, the paperwork and physically delivering the forms and supporting documents is itself a task. This last process may not be worth 2.25 per cent, but it sure is worth some charge.

What a discussion between investors and agents over commissions will do is that price discovery for various types of services, rather than a fl at fee for all, will now begin.

Interestingly, India is not the only country where agent commissions are being made transparent. The same week that Sebi passed the order, big changes were also seen in the UK and Australian financial markets where upfront commissions are being banned and agents will be required to clearly communicate their commissions. Finally, fees is replacing commissions.

Comments

  1. I disagree that discount brokers should be wiped off. Today with unbiased advice available from media, as well as research tools available on websites, investors can do independent research. So discount brokers can help them merely execute, without charging them and will help in new scheme of things from August 1, 2009. If at all gullibel bank advisors should be wiped off. These advisors to maximise their incentives churn investors portfolio.

    ReplyDelete
  2. By discount brokers, I meant only those brokers / agents, if you want to call them that, who merely give out forms on roadside racks where IPO forms are also available.

    Those agents that give out forms and are willing to deliver them or have them picked up and get them deposited with your MF, should be encouraged.

    Infact, in this same column, here's what I have written under 'Value Additions': "Even if one knows which fund to invest in, the paperwork and physically delivering the forms and supporting documents is itself a task. This last process may not be worth 2.25 per cent, but it sure is worth some charge."

    Hope this clarifies.

    ReplyDelete

Post a Comment

Popular posts from this blog

US-64 DRAWS TO A CLOSE; WHAT SHOULD YOU DO?

As the country oldest mutual fund scheme, now US-64 Bonds, are set be redeemed, it’s tough to find an equally alternative investment. There are some that come closeThe oldest mutual fund scheme in India, Unit Trust of India (UTI)’ Unit Scheme – 64 (US-64), will soon be no more. After more than 40 years of existence, curtains will fall on the US-64 bonds that mature on 31 May 2008. UTI has already sent out letters to all bond-holders about the redemption; investors are told to submit their original certificates, take their money back and leave.

For investors like Kolkata-based, Kumaresh Mukherjee, 72 it’s the end of an era. Soon after he retired from Philips India, he invested his provident fund corpus in fixed – return instruments like company fixed deposits. An electrical engineer by profession, in 1995 he also invested Rs 12 lakh or around one-third of his retirement corpus in the erstwhile US-64. After years of above-average returns, then trapped doors and turmoil that shook the Ind…

Pay Credit Card Bills Through ATMs

Tired of being ignored by ICICI Bank credit cards by being left out of their premium services despite being a loyal customer, I got myself a new credit card by HDFC Bank. It's another thing that HDFC Bank promised me a gold card with a higher spending limit, but then threatened to give me a silver card. When I strongly protested to their ways, they issued me a gold card, but with a much-lower-than-promised spending limit. I think the credit card companies ought to be made more accountable through stricter laws that are widely publicised (I recently read an RBI advertisement in the paper that if a credit card company rejects your application for a credit card, it has to give the reasons in writing; I never knew that!!!) and ought to made to pay for promising one thing, but delivering something totally different. SBI Cards too chased me for a month last year and promised to give me a platinum card with a high spending limit. What I finally got was a much-watered down Gold Card with …

Teachers at Hindi Vidya Bhavan

Being a huge fan of the late Behram Contrator, the founding editor of Afternoon, I have read many of his legendary column, 'Round & About'. In one of them, he makes a poignant irony: that although teachers are our torch-bearers throughout our school and college days, give us education and make us capable of facing and surviving in this world, they would always remain in that one place, while their students would go places in thier lives. Like a teacher would still be at the bus-stop waiting for the bus, all throughout thier lives, while the child will grow in status and stuture and pass by in car. I found that to be very true, so I look back - the least I can do, and appreciate the teachers who have taught me and have a hand to make me who I am today. And while I am at it, let me also tell you about some of them who, unfortunately, I did not like.

I did my schooling (SSC)from Hindi Vidya Bhavan (HVB), Marine Drive, Mumbai. I passed out my school in 1992, so this post will …