New Era of Mutual Fund Intermediaries

What more could you have asked to end the financial year 2018-19, by celebrating The Financial Advisor’s Day and on the 1st Day of the new Financial Year you have the New TER structures getting implemented along with a consultation paper by SEBI on SRO.

Welcome to The New Era of Intermediation!

I go down the memory lane back to 2009 trying to visualize the trends in the industry, the direction it is moving and how the regulations are evolving. Let me list down a few but important ones from 2009 which had directly or indirectly impacted either the clients or intermediaries or manufacturers including some which have redefined the way we conduct our business or design business models.

2009:

The Year 2009 as we were recovering from the global crisis and amidst the bottoming of the capital markets, it all started with Ban of Entry Loads in Mutual Funds (overnight), issuing Guidelines of Change of Broker to Disclosure of Commissions to clients and finally making Online Transactions a reality by allowing & activating Exchanges for facilitating mutual fund transactions.

2011:

The Year 2011 we saw the Introduction of Distributor Due Diligence which aims to regulate large distributor’s and put in place a due diligence process to be conducted by the AMC’s with an aim to protect the interest of investor’s by satisfying fit and proper criteria. The distributors were expected to follow certain guidelines like evaluating customer risk and investment objective, evaluating MF schemes and its appropriateness to various customer risk categories, defining customer relationships and transactions along with defining advisory or execution only, disclosure of conflict of interest, compliance, risk management and transparency of information and last but not the least AMC’s to disclose commission earned by these qualifying distributors.

2013:

The Year 2013 as I see is a game changer year where we saw the Introduction of SEBI Investment Advisers Regulation and Introduction of Direct Plans. On one side, Regulator defined “investment adviser” as any person, who for consideration is engaged in the business of providing investment advice to clients. I won’t go deep into Consultation Papers but the fact remains that yes we have a category now which is called Advisors and we have a category which is called Distributors. On the other side, Direct Plans came into existence which means now you have a different NAV for the same fund. Direct Plans have lower expense ratio than the Regular Plan as there is no component of commission paid to intermediary and hence it means a higher NAV.

2015 & 2016:

The Year 2015 and 2016 while intermediaries were trying to reshape the practices either as RIA’s or MFD’s, Capital Markets started their next bull run. All the forums, events, gathering had this discussion trying to answer the real penetration of Mutual Funds, how to bring in New Investors and create more Awareness. Yes, we had the answer in the form of 2 BPS of AUM allocated towards Investor Awareness and we saw “Mutual Fund Sahi Hain” Campaign which had such a huge impact on behavior of investors that conversations from Mutual Fund Kya Hain to Mutual Fund Sahi Hain became a reality. While the industry was celebrating this huge success here comes another circular which introduces new column in Statement of Account and Commission was Disclosed in Absolute Amount along with disclosing the NAV of Regular and Direct Plan.

2017:

The Year 2017 capital markets were booming making their way to new highs and we all could see strong inflows into the industry. We also saw a clear trend and Emergence of New Intermediation Models like Fintech’s, Start-Ups, Robo’s advertising ZERO commission products and how much saving will happen if you invest in Direct Plans. Wealth Managers/Bankers becoming Entrepreneurs, Stock Brokers entering Mutual Fund Distribution, Wallets, Research Firms also making their way into the industry. Clearly the Popularity of Direct Plans was increasing with the emergence of new age distribution and advisory models. The same was reconfirmed by looking into the industry data of overall gross inflows and its % of Direct plans v/s Regular plans.

2018:

The Year 2018 we saw Reintroduction of Long Term Capital Gains for Equities and Tax on Distributed Income through Equity Mutual Funds was introduced. We also saw a tough year both for Equity & Debt Mutual Funds along with volatility seen in capital markets during the year. Implementation of Categorization and Rationalization of Mutual Fund Schemes and Benchmarking of Scheme’s Performance to Total Return Index. Time will prove about Alpha Generation Possibilities or Emergence of Low Cost Products like ETF’s and Index Funds and how it shapes up in the country. 22nd October 2018, in order to bring in transparency in expenses, reduce portfolio churning and mis-selling we saw a circular on Revised TER where some of the most important points were complete ban of upfront commissions and adoption of full trail model along with no payments directly or indirectly in cash or in kind including no contests or clubs etc. to any intermediary. While the trainings and programs is allowed but with a strict mandate of not misusing it for providing any rewards or non-cash incentive and the rest is history now.

2019:

The Year 2019 as the capital markets is moving towards a new high and general elections around the corner suddenly the mood becomes bullish and client’s conversations changed. We saw regulator Defining Retail Investor’s with a modified definition and floating the Consultation Paper for SRO which is expected to do the same due diligence which is done by AMC’s today on large intermediaries to audit them and make sure they are following the processes which they are supposed to follow as a part of code of conduct. New TER gets implemented with new Financial Year and time will prove again the impact of the same and the extent on intermediary’s revenues (Add in GST, Income Tax and the Operating cost of running business), overall has the revenues gone down and will they continue to go down?

Some of the Challenges Intermediaries can face over the next few years would be:

✦ Lower Margins and Reduced Commissions, in short lower bottom line
✦ Increase in Operating cost for running businesses
✦ Operational challenge in Fee collection mechanisms
✦ Compliance will continue to become more stringent, costly and universally applicable
✦ Increase in Popularity of Direct Plans
✦ Client becoming more demanding and sophisticated
✦ Need for sophisticated portfolio management skills and tools
✦ Need for Diversified Asset classes and solutions
✦ Scaling practices will be challenging and difficult due to disconnected systems
✦ Transitioning business models and practices
✦ Availability of affordable and effective technology to achieve business scale

Given the above background where:

Rules and Regulations are changing at a pace never dreamt of and forcing all of us (AMC’s and Intermediaries both) to think and rethink again and again on redefining our practices and business models. Clients are more Informed Empowered & Demanding now in the new age of digital world with access of every possible information on their hand phone’s making an easy choice of choosing b/w being a DIY or having an Advisor with certifications, qualifications, expertise and experience and hence, Intermediaries now have to become more Knowledge Driven, Compliant and focus on Adding Value in their client acquisition, retention and engagement processes, Adopt Technology & Tools which would help them in

✦ CRM pre and post sales
✦ Risk Profiling, Financial Planning or Goal Planning
✦ Client Acquisition (KYC and Account Opening)
✦ Multi Products & Solutions depending upon client’s requirements and Risk Appetite
✦ Defining and Demonstrating measures based on Performance, Risk, Behavior
✦ Implementation of various Investment Strategies, Model Portfolios
✦ Doing Research and Analytics before and after Investment
✦ Implementing Machine Learning for scaling and intelligence
✦ Choosing the Right Revenue Model which is controlled by Intermediary
✦ Lastly tracking all of above till the financial goal or the objective of investment is achieved

We have to change with Time and We have to make sure that we are Future
Ready and we have ring-fenced our practices to not get Disrupted!

Taking cues from Progression of Economic Value, Technology has got its whole new meaning which forces all of us to think that adoption is not sufficient (Online Transactions, Reporting, Online Login to clients is already commoditized).

We don’t use Pagers, Radios & Walkman today, they are outdated and hence it’s time for evolution of New Technology, New Tools, New UI / UX, New Measures, New Screens, New Models now have to be implemented and maintained in this ever changing dynamic environment. With commissions going down, compliances becoming stronger, clients becoming more demanding, flows continuing into financial assets, competition heating up, we continue to dream of adding those 0’s to our AUM’s.

It’s time to redefine the way we engage clients and create practices which will remain for generations. It’s time to adopt to new technology, new interfaces, new reports, new tools, new UI & UX and Be Future Ready.
Let’s show the world that we have the Best of Financial Advisors and yes the Best Deserves the Best in Everything.

My Best Wishes for a yet another Great Financial Year! Happy Investing!

Aakash Bansal

CEO & Cofounder, Mercury Financial

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Passionate to make Independent Financial Advisors Future Ready.