4 devils of distribution business
Ashish & Manish Goel, Vista Wealth, Delhi
Direct Dil Se
The letter D seems to have special significance in the lives of IFAs. We thought we were advisors, financial architects, financial angels – but we have been reminded that we cannot call ourselves anything other than Distributors!
Devil # 1: Direct
As Distributors, we confront 4 Ds on a Daily basis – the first of which is Direct. Direct is getting bigger and bigger with each passing day. We operate in the retail space – which we were told is immune from direct – but every month, we see some clients migrating to direct, after seeing some articles or advertisements. Even among those who choose to remain with us, we are seeing more and more conversations around direct, conversations where we explain the merits of handholding through their investment journeys, conversations that are taking more of our time with each passing month.
The concern here is less about impact on our business, but more on the inappropriate way in which investors are being led to believe that direct is a better option. There are numerous advertisements from online intermediaries which focus only on one aspect – lower cost of going direct. People who get lured solely by lower costs are most likely mis-buying and this is detrimental to their own interests, because nobody is telling them about what it will really take for them to handle their investment journeys all by themselves.
Dangerous side effects: We are reminded about the huge ad campaign a couple of years ago on i-pill – the tablet that promised to stop unwanted pregnancies. When the claim was made by the company, it looked like freedom from a lot of worries and concerns for women and young girls, and many unsuspectingly took to it in a big way, until somebody brought out the facts around the dangerous side effects of the pill on the body of women. Once this news became public, the makers of i-pill had to withdraw their ads immediately.
We believe our industry has to similarly come out with more well-rounded communication on the pros and cons of going direct. Investors must be made aware of the side effects of popping the direct pill, about the harm to their financial lives that it can cause if they are not adequately equipped to handle the ups and downs of an investment journey. Merely promoting lower cost is mis-selling – just like i-pill was mis-sold until the makers were forced to take down their ads.
Devil # 2: Disclosure
After we have had exhaustive conversations with clients and successfully convinced them to remain with the distributor and not go direct, we confront the next D – disclosure. We continue to see each year the completely meaningless yet extremely damaging disclosure of total commissions paid out to each of the large distributors. All that is mentioned there is total AuM and total commission paid out. What no investor sees is the blood, sweat and toil over decades that each one of us has put into building a business that generates a particular gross income. What nobody sees is the investment we make in our business and the expenses that we incur in the hope of generating income that will earn us a profit. What is true for large distributors on their aggregate income for the year is true for every distributor in the CAS statements that go out to their clients – which again only contain gross commission paid out and not net income earned by the distributor.
Demands which is unjustified and ethical: When investors are presented selective data to make an impression in their minds, the impression is made. And that impression then leads to unhealthy conversations around passbacks. Truth is that passbacks have increased significantly ever since heightened commission disclosure has been implemented. Investors and intermediaries are openly engaging in conversations that the regulator themselves deem inappropriate and unethical. No distributor starts a conversation on passbacks – he responds to demands made by investors who make these demands because the regulations present them with lopsided information that leads them to incorrect conclusions.
Devil # 3: Due diligence
Distributors who are able to fight direct and disclosure and still run viable businesses then confront the next D – due diligence. Due diligence questionnaires have been made with a bank distributor or a large ND’s model in mind, yet the same questionnaire is administered to IFAs whose business model is completely different. What exactly is being achieved when you ask a single IFA about how he has clearly separated the functions of research from sales and service? And what kind of an investment committee do you expect him to set up which will independently shortlist funds to offer to clients? Why is nobody within the regulatory framework or within AMFI even bothering to look at the relevance of this process for IFAs? Having seen this process for some years now, we still are struggling to understand exactly what purpose this is achieving.
Devil # 4: Disruption
Those who surmount direct, disclosure and due-diligence then face the big D – Disruption. Disruption by market forces is what we all have to live with. But what we can certainly ask for is less disruption from regulatory changes. So many changes have been made so rapidly in recent years that it really becomes difficult to settle down with your business model and focus on growth. We had so many bouts of KYC and FATCA related changes, now product changes and their nightmares due to the fact that R&T agents and back office software providers haven’t been able to match the speed of change in product categories. Then we have the ongoing saga on regulatory efforts to try and separate distribution from advice – which we have always maintained is practically impossible. But in their efforts to achieve this goal, different sets of directives were announced and distributors kept trying to keep pace with changing goalposts. First there was an SIDD requirement for those who wanted to offer advisory and distribution services, then they were told to hive off the advisory unit into a subsidiary and now they are being told that they actually can’t do both and they have to give up one. This confusion is simply not allowing intermediaries any visibility on business model, which obviously impacts plans to grow and serve more investors.
Depriving the common man: In its efforts to do what it thinks is protection of 2 crore MF investors, SEBI is not enabling us to go out, reach out and get 20 crore more investors into the MF industry. Micro-managing never allowed any industry to grow – light touch regulation is the only thing that has worked for growth in any country, in any industry. India’s IT has become world class because it had the least regulatory oversight compared to manufacturing sector in India that gets caught into red tape at the municipal, state and central levels.
The other disruption is from technology. Technology that pushes everyone to improve customer service is welcome, and frankly, MF distributors should be grateful that our business has not got disrupted by technology the way so many other businesses are getting disrupted.
But what is not a welcome move is PE funded tech driven intermediaries attempting disruption by simply targeting existing MF investors, luring them with a lower cost proposition of direct option with absolute no plans whatsoever of handholding these investors during periods of market strife. It is a well established fact that the investor’s biggest enemy against wealth creation is the investor himself – his inability to control his emotional impulses. This is where a steadying hand is required, this is where a distributor/advisor adds maximum value.
Diluting the true advisory: The biggest fear here is that in the name of disrupting business models, what is really being disrupted is the investor’s faith. Aggressive advertising promoting “best performing funds” through direct plans lures thousands of gullible investors to pump money into mid and small cap funds. Nobody was there to ensure product suitability, which every intermediary is supposed to take responsibility for. And when the correction came, nobody is there to calm their nerves, to help them get a context of market cycles, to provide them data that proves the benefits of staying invested through corrections, and most importantly, to simply hear their concerns and offer a reassuring hand of support.
We IFAs are dare devils – we face up to all these 4 devils of distribution every day, we fight the odds, we overcome challenges, we continue to serve our clients even better. Its like trying to face the pace and fury of Brett Lee, but without a helmet, without pads, without gloves and even without an L guard!
Debility: The point is that it is great to think of ourselves as dare-devils, but we must understand our shortcomings. Why is it that we don’t have all the protective gear that is required to play in today’s game? So much has changed in our game over the last 10 years and yet we have been unable to insulate our business models in a meaningful way from all the regulatory and unhealthy market disruptions we are seeing every day. We haven’t been able to build a powerful enough lobby for ourselves that will make itself heard in the corridors of power, that will make people think carefully and consult widely before making any far-reaching changes. We don’t have that one voice across the country that will protest unhealthy practices and curtail them.
Develop or Disappear: Being dare devil in spirit is great – but we don’t want to go the way our ancient maharaja’s troops went. They were brave warriors but were equipped only with swords. The English came in with guns. Despite all the valour of our brave warriors, we all know what happened on the battlefield. The English took over and ruled the country for two centuries, because our maharajas could never unite and face up to the British as one. It was only when the country came together as one, when leaders of from across the country rallied behind one movement, that the country got its Independence.
Despondency deep inside: Today, many IFAs are dejected, disillusioned and are getting increasingly desperate as they see themselves without any voice at the table where decisions are made. They see themselves becoming increasingly challenged to compete against the 4 devils of distribution. They fear that they may slowly become inconsequential in the MF industry’s growth journey.
The devta amidst all these devils
Amidst all these devils, there is one devta – one shining star that is working tirelessly for the IFA and that is FIFA, led by another D – Dhruv Mehta and entire FIFA team. FIFA is doing a phenomenal job of raising the voice of the IFA in the corridors of power. Its report on expense ratios forced the regulator to rethink its stance on Indian expense ratios being the highest in the world. It brought the right context to the debate, and helped all stakeholders get a fair perspective on an issue that was being polarized with incorrect data. Its tireless efforts on the RIA discussion drafts have successfully made the regulator think carefully before rushing into another round of changes. Its numerous meetings with Government officials, AMFI, SEBI and MoF are for the first time raising awareness in the bureaucracy about the contribution of the IFA fraternity and the challenges we face. Its efforts in engaging with IFA associations in Europe and US and sharing some best practices not only with our IFAs but also with regulators is helping bring a much better perspective into discussions around regulatory development.
Discouraging numbers: For a trade body that is doing such a wonderful job, it is indeed a pity that less than 2000 IFAs have joined FIFA as members. There are at least 30,000 active IFAs in the country, for whom mutual funds are a sizeable share of their income. Why then have less than 10% of IFAs joined FIFA?
Desire: It is our humble request and appeal through this article on Wealth Forum, to all IFAs and IFA associations across the country, to please strengthen FIFA hands by uniting as one, under one umbrella. Please don’t give up your local associations – by all means continue with your activities at the local level for IFA development. But join FIFA and work through FIFA for all regulatory engagement aspects.
DFDA contribution and joining model: We can share our own example at DFDA. We have our distinctive business agenda, we are a very close knit group, we do a lot of activities for IFA development, we plan many business initiatives together. But at the same time, each one of DFDA members is a FIFA member in his own personal capacity, most of us are either Founder or Life members. All of us are committed to ensuring that FIFA has enough resources – few of us who were just members are becoming life members and life members are becoming founding members. The least we can do is contribute to the coffers of FIFA to enable it to continue working on our behalf on regulatory engagement. The money we invest in FIFA will come back many times over to us over time in the form of balanced regulatory developments that enable us to drive our business models with confidence.
Determination: For every IFA in India who is a FIFA member, our appeal is simple – please upgrade your membership to founder and make it your priority in the next 15 days to bring 3 more IFAs from your city into FIFA. And for every new FIFA member who joins now, make your first contribution to this common cause by bringing in 3 more IFAs.
Demonstrate Unity: And finally, one simple but blunt message to some IFA associations and groups: We really respect you and appreciate your work but if for whatever reason you still don’t want to join FIFA, at least stop undercutting and undermining FIFA’s efforts to forge unity. We will have some say only when we have a single voice. FIFA has most ably demonstrated its capability to be that voice. Let there not be multiple voices for IFAs in regulatory engagement. Let there be one voice – the voice of FIFA. By all means, maintain your independent local associations and local activities – but for all our sakes, come together for regulatory engagement by enrolling as a FIFA member.
To join FIFA, click here
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