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If advisor is really zaroori, please stop this injustice

Col Sanjeev Govila (retd)

CEO

HFI Wealth Creators Pvt Ltd (Brand name: Hum Fauji Initiatives), Delhi

Is the MF industry fair on us?

This week, a retired Air Force officer contacted us for managing his existing portfolio. He has a Rs 60 lakhs portfolio, consisting of various mutual fund schemes. He was concerned because his present distributor was not responding to his calls, was not communicating with him and he therefore was growing anxious about whether his retirement savings were safe or not. He had heard about us and therefore came to us with a request to take over his portfolio and become his advisor.

We reviewed the portfolio, reviewed his needs, gave him the necessary comfort he was seeking, and told him that there was no need to churn his portfolio as his funds were very fine presently. We also agreed to transfer his holdings into our broker code, which would then enable us to service his portfolio and attend to all his queries. There were no additional funds to be deployed, and none expected, at least in the near future.

This new client went back satisfied, peaceful that his retirement savings are now in good hands. Did we do right by him? Yes. Did we do right by the fund houses? Yes – we didn’t churn anything, we reassured an anxious investor, we ensured that his money stays invested in funds that were performing satisfactorily.

Has the MF industry done right by us? No. Here is an investor whose distributor was earning trail commission though no service was being rendered. When he comes to us for better advice and service, we get nothing because of AMFI’s continuing insistence on not allowing trail commission to be paid to the new ARN holder in a funds transfer case. The bad distributor gets paid, the good one does not. And worse, the distributor’s trail commission goes to fund costs of the fund house – effectively into the fund house’s pockets. All because we did what was right by the investor and the fund houses. Is this fair?

The better you are, bigger is the injustice

I did a quick back-of-the-envelope calculation after that episode: our firm today has approximately Rs 30 crores of AUM that has over the years been transferred into our ARN code by clients who came to us seeking better advice and better service. The list of investors coming to us from big banks is growing by the day – and our book of zero income assets is growing along with it. We choose not to churn just for turning a non-earning AUM into an earning one – and we get penalized for it. Those who churn, get instantly rewarded by fund houses who are the recipients of such unethical practices.

An AUM of Rs 30 crores and growing, of transferred AUM, means a loss of over Rs 15-30 lakhs of annual income to us – for no fault of ours; in fact, for the only reason that we offer superior client service compared to where the AUM came from. Now this Rs 15-30 lakhs would otherwise have been debited to the schemes as commission expense. No such debits are happening – which means fund houses can use that money for other marketing purposes. They can for example, advertise the direct plans of these schemes with the amount they save on not paying any distributor – old or new. Is this fair?

Not in the interests of all three stakeholders

The situation is so strange that the fund house whose assets are retained by the new ARN holder is the one which is unfair to him. If the new distributor were to churn these funds to get his revenue meter ticking, every fund house would readily pay him a competitive brokerage. So, the worst off in such a scenario is an ethical distributor and next worst off is a fund performing well. Is AMFI’s decision not to pay trail commissions on transferred AUM in the best interests of investors, ethical distributors and funds with sound performance? No, on all three counts.

Is “AuM buying” still an issue?

I am told the genesis of this decision was that some unscrupulous distributors had in the past resorted to “AUM buying”, where they approached HNI clients with offers of “cash back” for transferring AUM into their codes – which was easily funded from the commission meter that would immediately start upon the transfer getting recorded. To probably discourage these malpractices, AMFI decided to come with a sledgehammer decision of stopping all trail commissions in perpetuity on all transferred AUM.

I think it is high time AMFI relook at this issue and come up with a more balanced decision which will truly be a win-win-win rather than the current one which is a win-win-lose. Today, the dynamics in the market are completely different – direct plans have made deep inroads into the HNI world, which means these unscrupulous distributors will have very different conversations with such “deal-savvy” HNI clients now on direct vs regular plans rather than “my code vs his code”. There is, in my view, a strong case to repeal this decision and allow trail commissions to be paid to the new ARN code for AUM transfers.

A practical mid-way solution

If for some reason there continue to be fears around promoting malpractices by repealing the decision in toto, there is clearly a need to make suitable changes to ensure that the fund industry does not fail those distributors who do the right thing for the investor and the fund houses. One solution that could be explored is as follows:

  • No trail commission to be paid to the new ARN code for a period of 12 months from date of transfer. Trail to be paid from the 13th month onwards only.
  • During this 12-month period, an amount equivalent to this forfeited trail be transferred from the respective schemes to the SEBI mandated investor education fund – to ensure that fund houses do not get their hands on that money, which rightfully does not belong to them. Let that money go towards educating investors if it cannot come to us.
  • This rule should be applied on retrospective basis so that the distributors who have acted ethically so far and completed 12 months of such a cooling-off period post-transfer, do not continue to lose and are rewarded for their fair dealings even in the past.

A 12-month “cooling-off” period will deter any “AUM buying” expeditions of unscrupulous distributors, as they will have to dip into their own pockets to fund their “cash back” offers which I am told were rampant in the past. For ethical intermediaries like us, a 12-month scenario of zero revenue is far better than one of zero income in perpetuity. We believe in long term relationships with our clients – we can take a cooling off period in our stride. But we cannot, and should not, be made to take in our stride the injustice of not earning anything for good service rendered, and worse, having to see fund houses using money that was rightfully ours, to fund their expenses.

Can AMFI’s committee please demonstrate that advisor indeed zaroori hai?

I would urge AMFI’s Committee on Certified Distributors to take up this issue in its next meeting and find a solution that is truly win-win-win. I am encouraged that the Committee is headed by a very distributor focused CEO, Ms. Radhika Gupta – one who believes “Advisor Zaroori Hai”, and has as its members, a galaxy of very experienced sales heads who are undoubtedly fully aware of ground level realities. I am sure this committee can put their collective wisdom to good use to find a satisfactory solution that works for all – especially for those who uphold ethics and investor service above all else.

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