imgbd Game Changers: Dealing with disclosure

The best way to deal with commission disclosure

Ashish & Manish Goel, Vista Wealth, Delhi

11th May 2016

In a nutshell

Rather than falling prey to extreme pessimism or just avoiding the uncomfortable thought of dealing with disclosure, Vista Wealth did an exhaustive bottom-up review of their entire client base to clearly define the magnitude of the challenge at hand and to pin point where the pain could lie and how to deal with it proactively - before the CAS statements land in client houses this October. The Vista Wealth template, which Ashish and Manish are sharing for the benefit of the wider distribution fraternity, is a very useful way for every distributor to deal proactively and sensibly with this new challenge - before it actually hits you.


Unwarranted additional disclosures

We had discussed on Wealth Forum our thoughts on dealing with direct, in the GameChanger series of articles (Click Here). Now, there is another challenge we have to deal with, which is the new format of commission disclosures in CAS statements from this October, which is in addition to the disclosures we have been making. We continue to believe that there is a huge anomaly in direct plans in the way they are priced (The biggest flaw in direct plans). Likewise, we believe that disclosure of absolute amounts of commissions in account statements, along with TERs of direct plans (which clients have not invested in) is unwarranted. We empathize with the frustration of our fellow distributors, we have the same anxieties as other distributors about the impact of this additional round of disclosures, in the format decided.

Proactively introspect and prepare

Our response on dealing with direct plans was twin-track: to raise an issue on incorrect pricing which is anti-investor and maintain engagement with AMCs on this issue, while at the same time, focusing on how we at Vista Wealth will deal with and overcome the challenge of direct plans. Just like we created strategies to deal with direct, we are now creating strategies to deal with disclosure. We have to keep in mind that the first leg of disclosures - AMC senior management remuneration - has already happened despite hectic lobbying by fund houses against it, till the last moment. While we must continue to engage with all stakeholders on commission disclosures, it is also imperative to look within our own businesses and assess logically what is the likely impact and what should be our response to reduce the impact, should commission disclosures happen from October exactly the way currently envisaged.

It is easy, in an overall mood of despondency, to cloud your thinking and start believing that this is the end, and that there is no future in this business. But, if you do some sensible introspection, you will be able to understand specifically how seriously is your own business likely to get impacted. We are a three member think tank at Vista - Ashish, Manish and Ankur. We decided to do a logical impact analysis to try and quantify business risk from this new variable, on the basis of which we can then start preparing action plans to deal with this challenge.

Logical impact analysis at a client-by-client level

We have this affinity for the four quadrant matrix, and we put it to good use again, in the context of dealing with disclosure. Broadly, we believe there are 2 variables which will decide the impact of disclosure on each client:

  1. Level of knowledge, understanding and awareness - of products, markets, financial news flow

  2. **Absolute amount of annual commissions per client

**For the absolute amount of commissions, we looked at an annual commission (Figure in a range of Rs. 50000 to 150000) below which we feel is relatively insignificant.

So, what we tried to do, is to look at each client of ours and assess impact of disclosure on both these parameters - awareness and amount involved.

Results of the bottom-up impact analysis

When we completed this exercise across all our clients, here's how the numbers stacked up:


What came through very clearly as a result of this analysis is that our actions from now until September 2016 (before the CAS statements go out) have to be focused first on Quadrant I clients, followed by Quadrant II clients - which is 2% of our clients, although it's a very meaningful 32% of our AuM. We don't need to take any immediate action on 98% of our client base - which for a retail business like ours, is a relief, as it allows us to focus on the 2% of clients and engage with them individually.

Quadrants II, III and IV

Quadrant IV is where bulk of our business is - in terms of number of clients as well as AuM, and we believe this will be the case for most retail distributors. One can argue that Quadrant II clients might get edgy as they are well informed, but our call at Vista Wealth is that considering the value we add in their financial lives and the relatively low amounts involved these clients are unlikely to either discuss this issue with us or go direct.

We consider Quadrant III as medium risk, more from a medium term point of view. These clients have sizeable assets, which is why commissions are higher than above range. They may personally not be very interested or aware of financial market developments, but they are the variety who will pick up some chatter in cocktail circuits over time and then start taking a little more interest. But, we are quite confident that these clients will either remain oblivious to these disclosures or will take it very lightly.

Strategy for Quadrant II and III Clients

We continue to engage with them as we discussed in some detail in our articles on dealing with direct: Selling yourself correctly, Sasti cheez mehangi pad gayi and Penny wise, pound foolish. We believe that if we continue to engage with them in this mode, these clients will see value in remaining with Vista Wealth, despite whatever more disclosures are required by regulations.

Quadrant I

That leaves us with Quadrant I: 1% of clients, but a huge 21% of our assets. Here too we would like to divide them further into 2 categories.


We discussed internally each of these clients to see what action we need to take to protect these assets. In our view, about 18% out of this 21% is from old relationships - clients who have grown their assets with us over the years, where the relationship is now far beyond professional and quite personal, and where we have added value to them, not just in their financial portfolios, but otherwise too. Our belief is that this set of clients will want to remain with Vista Wealth, as the relationship is much more than just mutual funds. These are anyway our largest relationships, which anyway receive our highest attention. Our strategy here is to be aware of a potential risk, but not to do anything specific (other mentioned above) right away in trying to "manage" the situation.

The balance 3% of our AuM in this category is what we believe is seriously at risk. We will need to find ways to deal with this situation and our earnings from this segment of AuM will take a hit, one way or another, like for example if we agree with these clients to move a portion of their portfolios to direct, but continue advising them on the whole anyway.

Bottom-up analysis will clear your thinking

So, in the final analysis, our belief is that the near term impact of the additional disclosure requirement is likely to be on 3% of our AuM. Going through this exercise has helped us define the problem clearly for us, which then enables us to find solutions to the exact problem areas. We would encourage our fellow distributors to do likewise - don't be clouded by pessimism - first do a detailed impact analysis, client by client for your own business, understand how much is at risk and then make your action plans on dealing with the specific risk areas. It's time to go bottom-up rather than top-down!

Change is the only constant

How things will pan out over the medium to long term - nobody knows. Most clients anyway don't read CAS statements, but you can be sure that media reports from October will keep on encouraging them to read these statements. CAS statements anyway over the medium term will become obsolete as more and more clients get access to online platforms that give consolidated statements on demand rather than waiting for them to come in the mail once in 6 months.

All we know is that we have been constantly dealing with regulatory change over the last 7 years, and the experience has only made us stronger and more resilient. We have grown in these challenging times, and continue to remain growth focused. Our job is to keep adding value to our clients, and to keep showcasing to them the value we add in their financial lives as written in our article Selling yourself correctly.

We hope distributors across the country will do a proper impact analysis and create focused action plans to deal with the challenge of disclosures. At Vista Wealth, we remain confident about business prospects, and our ability to deal with and overcome challenges that will always come, from time to time. For those distributors who have anyway made up their minds to throw in the towel, we have only one thing to say - if you want to sell out, we are on the buying side!

The flip-side of dealing with additional disclosures

Having said that, one thing that the industry is likely to witness is the unsavory flip-side of dealing with disclosure, which is very unfortunate, but perhaps inevitable. A lot of right selling practices that distributors had adopted in recent years, can be unwound in a bid to protect the business.

  1. Passbacks are not allowed, but you will find a lot of it happening after October. We are just pushing distributors to violate an obsolete regulation, that has lost its relevance ever since direct plans came into being.

  2. Distributors who have been advocating buy and hold may now want to churn more frequently. When clients see commissions in relation to the original investment amount (and not in relation to current value), there will be a tendency not to allow too much unrealized profits to remain in the portfolios.

  3. For the same reason, goal based SIPs that were started with a 10-20 year horizon will see changes in the schemes, although the monthly investment will continue as planned

  4. Distributors who consciously adopted the additional purchase route to minimize folio proliferation, will now opt for folio proliferation, so that individual investment amounts for each folio looks relatively small, and the commission thereon therefore looks small.

None of these are really in the best interests of investors, but will perhaps happen in a bid to protect business that is being seen as being unfairly put at risk due to an unwarranted new regulation.

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