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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

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