31st Aug 2012

DFDA - northern India's premier IFA group with over 100 members from 32 locations - believes that the matter of the direct share class needs to be resolved expeditiously by AMCs, if they are serious about keeping distributors focussed on this business. A group that has always been helping each other stay focussed on and motivated through the challenging times over the last 4 years, is now seeing rumblings within its ranks about seeking greener pastures beyond mutual funds, as there is a feeling that AMCs are not yet grasping the magnitude of business risks that are being unfairly thrust upon the distribution fraternity by SEBI's decision of introducing a direct share class at a lower TER.

DFDA sent out a mail to industry stakehoders (reproduced below) which proposes a 3 step approach to resolve the direct issue - and has followed this up with discussions within the Group as well as with all other stakeholders on the way forward in the new paradigm. DFDA's core team - Gurpreet Singh, Ashish Goel, Hitesh Jain and Bharat Bhushan - share with us the text of their mail as well as the thought processes that Group members are now looking at - as they prepare their Plan B - should Plan A turn out to be actually as bad as is currently feared. It is indeed unfortunate that large and influential groups like DFDA are so disillusioned by SEBI's move - which ironically is part of a package to revitalise the distribution fraternity. The distribution fraternity is looking towards AMFI and the AMCs to work out an equitable solution - and to do so quickly.

DFDA views on the new guidelines form SEBI on introducing Direct Share Class with lower TER.

This is a serious issue and needs active discussion amongst all stakeholders on urgent basis. This single ruling can not only destroy our business model but can also steal the fruits of our old hard and sincere work done in past so many years.

As we understand, if this Direct - Lower TER model is introduced, this shall ethically be required to be disclosed to all clients from our own side or anyway it will get disclosed sooner than later by media.

All investors - small or big will be tempted to switch their existing AUM from higher expense to lower expense option of same funds. This shifting of AUM will be a slow poison for all distributors and a final nail in the coffin.

This is indirect way to stop trail commission. First went Entry Load & now to go - Trail Commission.

We all have to come together to prevent this from seeing light of the day. At DFDA, we are proposing 3 point agenda for AMCs to take up this urgently in AMFI meeting and strongly push with SEBI to safeguard the distribution industry from getting extinct.

We request all distributors and associations to put this forward to all AMCs. The approach has been divided in three parts, namely - Prevention, Immunisation, and finally, Cure or Damage control.

1) Prevention

We are getting similar views from most of the AMC's that direct business is expensive and impossible to run in isolation if there are no distributors to sell. Please read the views expressed by our one of key members on Wealth Forum (http://wealthforumezine.net/Advisorspeak230812.html) to get complete perspective on this issue. We request AMFI to present this view collectively to SEBI that if they want to increase penetration of this industry the existing distribution model is indispensable and level playing field is must. In the absence of level playing field there is no other option left with distributors but to leave this industry or die their own death. It's impossible to run any distribution business in this environment. Hope SEBI will listen and do not bring this kind of regulations.

2) Immunisation

If SEBI does not agree to this and wishes to go ahead & experiment with this, we suggest that AMCs should find ways of ring-fencing the direct proposition - either by introducing it only in a limited number of schemes or by raising the investment threshold - or a combination of the above. We should not have this two TER model across all schemes and across all investment sizes - if that happens, it will be a completely unfair playing field which will only serve to kill distributor interest in mutual funds.

3) Cure

If immunisation cannot be done by AMCs and the disease is allowed to spread across the system - which is something we would have not imagined in our wildest nightmare and the 2 two TER structure will indeed come in all the products, we then need to have a cure in place. We all need to put all our energy to the damage control and protect our old AUM from getting converted into direct to save cost by investors. We are proposing that all AMCs should come out with higher TER distribution plan for distributors and keep the existing AUM in lower TER as it is now. Who ever wants to have higher remuneration to do distribution can sell the new higher TER funds. All others can keep selling the existing lower TER existing fund as it was selling earlier and keep getting lower remuneration as of now. With all existing AUM of all our investors will remain at lowest TER and thus there will be no temptation from investors to convert this in direct. We believe that this solution is acceptable to all stake holders as the talk of low TER or direct surfaced only when there was rumors of increase in the cost to investor which was media coverage by media day and night 24*7.

To conclude

We want to make this very clear that we want level playing field in any mode of distribution be it online or offline. If an online model is any way cheaper which can be provided to investors, we are also ready to distribute the same with our online solution at lower remuneration. We strongly disagree to the kind of model where we are only doing offline application and all online application become direct. It will be counter productive for the industry as all distributors will be in direct competition with manufacturers that too with cost disadvantage. A battle which is lost before it starts. We very well understand and believe that future of this in online and want work very closely with AMC to promote online investments provided our interest are protected. We will only work in this industry till we have level playing field in all modes of distribution. We also need strong message from industry that our interest will be protected in future also to boost the morale of distribution community as we really frightful by these kind of guidelines.

After abolition of entry load bringing it back is politically impossible. Similarly, if trail commission goes once, bringing it back will be next to impossible.

What kind of behaviour are we likely to encourage?

After DFDA sent out the above message, DFDA's core team organised a series of meetings and conference calls yesterday among its members. Anxiety levels are high. The thought that AuM that has been painstakingly built over the years is now vulnerable to be shifted to a lower cost model - for no fault of the distributor - is too bitter a pill to digest. Here are some of the questions that DFDA members are asking :

1. Should we actively diversify away from mutual funds now?

If the business model will change so dramatically and the business risk increases due to an unfair practice being forced upon us, should we actively look at diversifying away from this business to other products ? Does it make sense to remain focussed on this business at all?

2. Should we say bye-bye to a trail model and hello to a full upfront model?

For the last few years, all DFDA members have been encouraging each other to build up a trail based revenue model, and rely less and less on upfront commissions. If the direct share class gets implemented in the manner currently being discussed, and the existing AuM as well as future AuM remain perennially under threat of unfair price competition, should we now reverse focus away from trail and back to upfronts only? At least in the upfront route, you take home the earning from a one-time sale transaction and then don't worry about whether the AuM remains in your code or migrates to direct at a later stage. Is this the kind of behaviour the industry wants to encourage? Should we now start actively looking for closed ended structures that pay a one time upfront commission as the only focus area within the equity MF range?

3. Should we focus only on debt funds in the open ended funds space?

Debt funds are less likely to have this unfair price gap between the two TERs. Customer appetite is anyway higher for debt funds. Should we look at focussing our efforts only on debt funds within the open ended MFs category? Should we really be actively promoting long term investing in equity funds - which only exposes us to more business risks?

It is indeed unfortunate that such kind of thinking is now creeping into DFDA members who have remained focus on building their MF AuM through all the difficult times that we have seen in the last 4 years. If the genesis of this whole direct share class can be traced to concerns on rising costs through increases in TER, and which has been fuelled by media, it is pointless for the MF industry to accept all the relaxations given and ask for deletion of only the direct piece. This will obviously not go down well with SEBI. AMCs should go to SEBI and say that it would rather prefer that the whole package of "reforms" be put away and simply carry on business as it is happening presently. Why should AMCs not go to SEBI and ask for a complete status quo?

As distributors, we are clear that we prefer the existing rules of the game rather than the new rules - which are supposed to revitalise and energize us, but which can actually make us focus sharply on how to diversify away from mutual funds rather than how to help grow the MF industry. It is up to the AMCs now to find solutions that can actually motivate distributors to work harder to grow the industry rather than de-motivate them by being silent spectators when unfair trade practices are being thrust upon us.