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Regulator is making one fatal assumption

Ashish Modani, SLA Financial Solutions, Jaipur

9th February 2016

In a nutshell

Disclosure of absolute amounts of commission in account statements will only distract rather than aid informed investment decision making, and will push intermediation towards a fee based advisory route, which typically is viable only in the HNI segment

Retail distributors' business models are viable only because their top 20% clients cross-subsidize small ticket retail business. Impact on this top 20% will severely impair retail distribution viability.

There is an assumption that retail investors will not be left in the lurch in the bargain, as they will have access to direct, to robo advisors and to e-commerce platforms. This is a seriously flawed assumption. Investors get a good experience not only because someone helped them chose a fund properly, but mainly because someone held their hand during times of market volatility and helped them stay on course when fear and greed take over rational decision making. This is done by the humble IFA on the ground.

The regulator has provided wide choice to investors - to go direct or to a distributor, an advisor, a robo advisor and shortly an e-commerce platform. They need to stop at providing choice and refrain from making regulations that force the choice for the investor by eliminating options for him. Bringing regulations that threaten the viability of retail distribution is certainly not in the investor's best interests.

Commission disclosure in CAS

There is talk about distributor commissions being disclosed in common account statements that go out to investors. There is talk of disclosing the absolute amount of commission earned by the distributor, not just a percentage.

I welcome the principle of disclosure in all cases where it helps investors take informed investment decisions. I wonder about the wisdom of disclosures that do nothing in this direction, but can potentially confuse or distract the investor. From my limited experience, I believe commission disclosures in CAS can only distract rather than aid informed investment decisions by investors.

Its not only HNI distribution models that will be impacted

The HNI model will be impacted severely, if this were to be introduced. Rebating will increase and over time, we could see the RIA model gaining momentum in the HNI space, where advisors will sell direct plans and earn a fee that will be much lower than the commissions they earn. One can argue that this is only fair - after all larger ticket sizes always get a better pricing - in all kinds of businesses.

The problem I see is that this will impact retail business very significantly. However "retail" your business is, ask any IFA and he will tell you that the 80-20 rule applies in his business as well: 80% of revenues come from 20% of clients. And in the retail world, these 20% of clients and the revenue we earn from them, helps subsidize the genuinely retail part of the business. Without the revenues from your top 20% of clients, you simply cannot run a retail distribution business viably.

Cross subsidy is a fact of life everywhere

Disclosure of absolute amounts of commission will impact the top 20% of relationships of every retail distributor just as it will impact HNI oriented distributors. The element of cross subsidy is vital for every retail distributor. We see cross subsidy everywhere around us: higher B-15 commissions are subsidized by T-15 investors. Rich individuals pay higher taxes that pays for subsidies for the less privileged. Why then does our regulator not understand the need to nurture retail penetration by allowing cross subsidy from other market segments?

Will retail investors really be well served by direct and e-commerce platforms?

There is a belief that between direct, robo advisors and e-commerce platforms, retail investors will be adequately served and therefore they are not really being abandoned in the zeal to promote fee based intermediation models through a variety of regulations - including commission disclosures in CAS. I think this is a dangerous over-simplification, which does not recognize basic ground realities.

My personal experience with "do-it-yourself"

Let me share a personal experience before I come to why I think this thinking is misguided.

I have a back ache problem and 6 months back a friend advised that I should do yoga as it would help me strengthen my back and would even help me recover from the back pain. As per his advice I immediately enrolled myself for the yoga classes. I continued my classes for 2 months sincerely.

One fine day, I thought why should I go to Yoga class, I have anyways learnt asanas and will now continue it on my own. I can watch Baba Ramdev and if need be watch the yoga exercises on you tube if necessary. Why should I spend money further on this and on top of it every morning I had to travel to attend that class which otherwise I could have managed at my own home. I thought best would be that I continue my yoga session at home itself.

Soon after I left the classes and started on my own, I continued for few days but then I lost my consistency. Someday I would do it for half an hour and some days I would skip. Getting up for yoga seemed very difficult. And when winters came, it almost became impossible. I started procrastinating and my "do-it-yourself" yoga experiment became a disaster.

What was very critical to heal my back pain was discipline and consistency but I just lost it. Even though I challenged myself but I failed to maintain the consistency. At last I thought its best to join the yoga class again. What became very clear to me is that role of that Yoga teacher wasn't just to teach me yoga but to ensure that I am doing it consistently without fail. At the same time, he kept me on toes and was constantly watching me where I was going wrong. This wasn't possible when I was watching Baba Ramdev on television. He would not come and say that see this is where you are going wrong and this is how you should do it.

I could dodge the television tutor but I could not dodge the human tutor. What applies for yoga is even more applicable for managing personal finances - which is far more complex than learning asanas. When regulators think that direct, robo advisors and e-commerce platforms will help serve retail investors, it is just like saying that there will be hundreds of self-help yoga videos made available from scores of yoga teachers - all at the click of a button. Sure, you get fantastic online lessons and you can commence a "do-it-yourself" experiment with investing, just as I did with my yoga classes. But ultimately, the benefit from yoga comes from diligent implementation, just as the benefit from a financial plan comes from its diligent implementation. And that implementation is where the good old human advisor/distributor adds the most value - just as my yoga teacher did for me.

Retail investors need handholding

When markets turn volatile, when retail investors need reassurance to keep them on track, will AMCs who sold direct plans step up and do the needful or will Flipkart or Snapdeal start contacting every client and engage them at a time they need it most?

I sincerely hope our industry captains are able to impress this basic ground reality upon our regulator. Retail investors need hand holding to make them successful investors - and hand holding is done by the advisor/distributor on the ground. If you want this individual to run his business in a viable manner, please stop any further tinkering with regulations and allow us to focus on our business.

Investors already have choice - now don't force a choice on them

The regulator should be happy that they have introduced a lot of choice for investors: today investors can choose an advisor, a distributor, a bank, can go direct, can go to a robo advisor and in due course can also go to an e-commerce platform. Lets stop at providing this choice - lets not force the choice by making some so unviable that they simply cease to exist. Limiting choice in the name of investor protection is not sensible, is it?

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