While distributors are worried over the consequences of a direct plan, AMCs say they do not foresee investors rushing towards direct plans.
SEBI’s move to introduce a direct share class structure with a lower expense structure has raised anxiety among distributors. The main concern is whether their clients, over a period of time, will bypass them by shifting to a direct plan to take advantage of a lower expense structure. Distributors, both institutional and retail, fear that this move would hit their business.
While the AMCs could save commissions, they'll face challenges to service direct customers if a large number of investors start investing directly. The move could raise costs for AMCs. “It’s not feasible for us to reach out to a vast number of investors directly. Communicating through mass media is much costlier than paying commission to distributors. Additionally, we have to set up offices and appoint people to service direct investors.” says the sales head of a large fund house.
Fund officials are of the view that even if investors invest directly they’ll require the guidance of distributors. “Distributor’s advice is important. Investors who become aware of a direct plan could move to earn slightly higher returns but they’ll still come back to distributors for advice. Investors might not always take the right investment decision,” says Waqar Naqvi, CEO, Taurus Mutual Fund.
More than 90% investors currently invest in mutual funds through distributors. Many institutions invest directly with AMCs in liquid funds. Some say that distributors catering to institutional clients will have a tough time. “Our entire business model is based on institutional clients. It could wipe out our business in one day if implemented,” says a business head of a brokerage firm.
Some are of the view that savvy investors could even ask for a rebate from trail. Distributors also doubt whether the move could actually rope in more investors in mutual funds.
Dhruv Mehta, Chairman, Foundation of Independent Financial Advisors (FIFA) believes that this measure will force IFAs to remodel their entire business and will lead to reduction of availability of investment advice to investors.
“We believe that the introduction of a direct plan would have a deep impact on the IFA community as a whole. The proposed change in regulation for introduction of a direct plan could lead to a significant remodelling of business model of IFAs across the country which will have a deep impact on distribution similar to the ban of entry load. With the enforcement of the proposed regulations, even investors investing through distributors will start demanding rebating of distributor trail commissions, which will further reduce the remuneration of IFAs. This will further reduce the number of distributors servicing investors. We believe that while it is debatable that the regulation will benefit the large clients it has unintended consequence of reducing the availability and accessibility to investment advice for a significant number of predominantly less affluent customers,” says Dhruv Mehta.
Ramesh Bhat, President, IFA Galaxy has a radical thought. “Why not introduce direct plans on BSE and NSE platforms for buying and selling of shares and let all mutual funds save that cost of buying/selling shares directly to construct the portfolio?,” asks Ramesh Bhat.
While distributors are worried about the consequences of a direct plan, AMCs say they wouldn’t encourage direct investments.
“Unlike buying an airline ticket through an agent, the service provided by advisors is not limited to a transaction. It’s an on-going relationship. No investor, however intelligent he/she may be, will have the wherewithal to track markets and choose investment avenues and rebalance portfolios. Constant monitoring of portfolio is required from distributors. Currently majority of direct inflows comes in liquid funds through institutions. AMCs will not encourage direct investments,” says a retail channel head of a leading fund house.
However it must be pointed out that quite a few AMC officials doubt if they will be compulsorily required to offer direct plans in all their schemes. Also, some believe that SEBI may not specify the cap on expenses in direct plans. These officials feel that distributors should wait for the detailed SEBI guidelines to come rather than jump to hasty conclusions.
