Unhappy with the Bose Committee recommendations, are Distributors and Mutual Funds companies crying wolf?

When you need certain products like groceries, fruits, and vegetables, do you need any persuasion to purchase them? But when you go out shopping for clothes, your choices are influenced by the suggestions of the salesperson, the current trends, the price versus value, etc. Going one step ahead, when deciding to buy a car, we seek some serious, expert advice to ensure we're investing in the most suitable vehicle.

Expectedly, the one who recommends a product to you, keeps in mind your expectations and understanding of it as well as its suitability in your life. Imagine a salesman suggesting that a corporate-yuppie buy a pair of semi-casual trousers instead of the classic formal one with the "it's a new style/trend" pitch. A gullible buyer may fall for it without realizing how inappropriately dressed he will look on Monday morning. You may wonder why a salesperson would do this in the first place. It is simple: the salesperson earned a higher commission from selling the "new style" and clearly didn't understand or meet the buyer's need.

Let's take the case with the selling and purchasing of Mutual Funds. If you found out that a mutual fund broker deceived you, how would you react? Step one, you may change your broker. What happens if the second MF broker dupes you too? Naturally, if this happens several times, you will slowly but surely lose faith in the Financial Advisors' community. The report of the Sumit Bose Committee says exactly this, "A recurring complaint about the three investment products, insurance, mutual funds, and pensions has been the inability to increase their reach to Indian households. Related to this, the sale of these products is fraught with mis-selling." The committee was set up to recommend measures to curb mis-selling and rationalise distribution incentives in financial products.

Now the report is out and product manufacturers are protesting the recommendations of the committee, which are pretty straight forward. Before we see what mutual funds have to say about the report, let's take a quick look at the key recommendations:
 

• Upfronting of commissions should be totally removed. There is a current cap of 1 per cent that comes from the fund house capital or profits. This too should be removed.
   
• No category of mutual funds should be exempt from the zero upfront (when it is put in place).
   
• Distributors should not be paid advance commissions by dipping into future expenses, their own pro?t or capital.
   
• Competition has not reduced costs much below the expense ratio, that was ?xed when the AUM of the industry was much lower. The regulator should lower the cost caps as the AUM rises over time.
   

The committee also recommended that mutual funds shouldn't be allowed to charge more nor pay higher commissions for selling products in small towns.

Mutual funds are unimpressed. The general atmosphere in the industry is:

• The Sumit Bose Committee recommendations are impractical and unworkable in developing markets like India, although they might work in mature markets
   
• If these recommendations are accepted, it might become unattractive for mutual fund distributors to run their business and eventually, many distributors may shut shops.
   
• In absence of a definitive commission structure, mutual funds will have to stride forward to reach to their potential customers as well as existing customers. With this, cost of client acquisitions and retentions will go up
   
• The recommendation of reduction in expense ratio also hasn't gone well with the industry
   

The Government has welcomed comments from all stakeholders till October 5, 2015.

PersonalFN is of the view that if the government accepts all major recommendations of the committee, it would be a huge step forward in introducing reforms in the financial sector. The recommendations of the Sumit Bose committee are comprehensive in nature, and touch almost all of the important aspects of financial products, right from the product structure to distribution incentives and disclosures. The attempt is to bring similar financial products on par, leveling the disproportionate benefits available to a particular product category.

Speaking about product specific recommendations, in case of mutual funds, the committee has hit hard on the commission-driven nature of the industry. Myopic approach of some distributors to make people churn their portfolios unnecessarily, recommending high-commission yielding products to investors without taking into consideration their suitability, has now boomeranged.

Mutual funds may now have to work harder to reach out to investors. So far, they have tried a time-tested technique of launching New Fund Offers (NFOs) when markets are doing well, and then aggressively promoting them through agencies and distribution networks. Commissions were the driving force for the sales. Now the fund houses will have to convince investors with their performance rather than just launching NFOs during clement weather and creating stories around them. As in the past, the "India story", "Infrastructure story" may not work now.

PersonalFN has always believed that there is a need to educate investors in order to improve penetration of financial products. PersonalFN has worked incessantly on various platforms to educate and empower investors. Having said this, PersonalFN believes the government will have to relook at how to remunerate the distributors. It would be unfair to the fund houses and distributors if they were denied a definitive and predictable long term policy framework. It remains to be seen which recommendations of the committee see the light of the day.

Add Comments