How will the revised guidelines on trail commissions from the Association of #MutualFunds in India affect distributors?
Watch Alex Mathew discussing this and more with #WhiteOakCapital's Aashish Sommaiyaa and #CredenceFamilyOffice's Kirtan Shah.
Also read: https://bit.ly/3vcTVJ5
Watch Alex Mathew discussing this and more with #WhiteOakCapital's Aashish Sommaiyaa and #CredenceFamilyOffice's Kirtan Shah.
Also read: https://bit.ly/3vcTVJ5
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TVTranscript
00:00 Hi, thanks so much for joining in.
00:12 You are watching the Mutual Fund Show on NDTV Profit.
00:15 My name is Alex Matthew.
00:16 Now we speak about a number of issues related to mutual funds, but we do not often talk
00:22 about the selling of mutual fund.
00:24 And this conversation, at least the first half of this conversation relates to how the
00:29 mutual fund distributor community is going to be dealing with a change in norms that
00:35 relate to commissions.
00:37 How that affects you is one of the aspects of this conversation.
00:40 But to break things down for you, I have got Ashish Somaiya, Chief Executive Officer of
00:45 White Oak Capital, as well as Kirtan Shah, who is the Managing Director at Creighton's
00:49 Family Office joining in.
00:50 Thank you so much to the both of you for taking the time and for speaking to us on NDTV Profit.
00:54 Let us start with a little bit of context because I think Ashish, Kirtan, a lot of people
00:59 joining in, of course a lot of them because they are watching the Mutual Fund Show know
01:03 the difference between direct and regular, but let us set the context, right.
01:07 There are two types and I will start with you.
01:09 There are two types of distribution models, either as an investor I go to the website
01:14 of an EMC and buy, that is direct.
01:16 How does regular work?
01:17 So Alex, in regular what happens is you are typically working through an intermediary,
01:23 can be a bank or a broking house or a wealth management setup, where you are invariably
01:29 looking at a better advice from that intermediary to help you reach your financial goals and
01:34 for which you are probably willing to let go of or pay a slightly higher expense ratio
01:41 to the mutual fund, right.
01:42 So when you go direct, you probably might end up paying 70 paisa for a particular fund,
01:48 but if you go through the regular mode, that might be higher to 1.2.
01:53 Ideally the difference between the direct and the regular is the expense that you are
01:58 willing to bear to get an intermediary on board, assuming that that intermediary will
02:03 be able to add a lot of value versus you wanting to do it direct.
02:07 Okay, Ashish, from the perspective of the industry, it's a given that most of the schemes
02:13 that are sold are sold through the regular route.
02:16 Why do you think that is?
02:18 So I think first thing, important point to clarify is that as far as asset management
02:22 industry is concerned, like mutual fund companies are concerned, commercially we are indifferent,
02:26 right, whether it comes through direct or comes through an intermediary.
02:30 So the way the regulation is cast, management fee is the same for both and we are absolutely
02:34 indifferent.
02:35 Sure.
02:36 But having said so, it's a regulatory requirement that you should offer both, right.
02:40 You offer direct and you offer the intermediate class, which is regular.
02:44 Now it's obvious that two reasons why regular has more assets.
02:49 One clearly is related to maturity of the market, right, because there are so many people
02:53 who are just about getting introduced to mutual funds, right.
02:56 So it's quite likely that a lot of them hear about it for the first time from a friendly
03:00 neighborhood mutual fund distributor.
03:03 It's about access.
03:04 It's about where do you hear it the first time.
03:07 And second also is important to understand that I say it on a funny lighter note that
03:11 to buy some 300, 400 good companies, we have some 3, 4000 different mutual fund schemes.
03:17 So it's not easy.
03:18 Yeah.
03:19 Right.
03:20 Our industry is notorious for making things nuanced and complex.
03:22 So I think people do need guidance.
03:24 People do need guidance.
03:25 They need to be able to sift through.
03:26 And you know, the best performing fund rotates every two, three years.
03:29 So it's not easy to identify what's the right fund, etc, etc.
03:34 And I think the over the number of years, the regulation has been, kudos to semi regulation
03:38 has been tightened so much that the difference in commission between fund ABC, XYZ, alpha,
03:45 beta, gamma, difference is narrowed down consistently, which means that commission is less and less
03:50 of an influence for a distributor and meritocracy of products and performance and teams managing
03:56 those funds is getting more and more prevalence.
03:58 Okay.
03:59 That's how it's playing out.
04:00 Okay.
04:01 That's a, okay.
04:02 So that's interesting insight.
04:03 It's also interesting because you have the insight from a previous organization as well
04:09 as one that you've set up and that is growing very rapidly.
04:13 Do you have any unique insights from one to the other in terms of getting your name out
04:19 there?
04:20 Does the distribution community help or is it word on the street?
04:24 Is it how does it work?
04:26 So I'll tell you like, you know, when an organization is new, clearly talking about yourself to
04:31 the trade and making them know is the first port of call.
04:35 But I think thanks to you guys and thanks to the whole digital medium, discovery happens
04:40 pretty fast.
04:42 And organically.
04:43 And organically.
04:44 And because two things have happened.
04:45 One is over the number of years, because of regulation, because of you guys, because of
04:49 social media, because of awareness with investors, over the number of years, industries become
04:53 more and more meritocratic.
04:55 And also because of digital platforms, it's become more and more democratic.
05:00 So first port of call always it's the trade or the distributors, which, you know, get
05:05 a brand out there.
05:06 But then otherwise organically also nowadays the timelines have got crunched in terms of
05:11 how fast discovery plays out.
05:14 Okay.
05:15 Coming back to the conversation on trail commission.
05:16 So you've understood as things stand that there is a difference between direct and regular.
05:21 The difference in the total expense ratio is effectively what the distribution fee is
05:25 and what the distributor gets as a commission on a monthly basis.
05:29 Now, there was something Kirtan called an upfront commission that doesn't exist anymore.
05:35 What exists is a trail commission.
05:37 How does that work?
05:38 So Alex, what happens is in a trail commission, ideally what you're doing is as long as that
05:43 asset stays with you, you are pro rata basis paid on whatever was supposed to be paid out
05:50 to you for the whole year.
05:51 Let's take an example.
05:52 What that means is, let's say if you have a hundred rupee of AUM and probably a 1% was
05:57 supposed to be paid out to you, you are ideally supposed to get one rupee for the asset staying
06:02 with you for the entire year.
06:04 Sure.
06:05 But let's say if the asset stays only for 25% of the year, you get paid only 0.25 paisa
06:11 depending on how long the asset has stayed with you.
06:13 So that's how the industry has actually moved from the upfront entry load/payouts that were
06:19 made earlier to a trail model wherein the incentives were aligned for the investor to
06:25 stay invested and that's how the entire ecosystem benefits from the AMC to the investor and
06:31 the distributor.
06:32 So in your example, one rupee calculated for the full year, assuming that the investor
06:36 stayed for the full year, gets split over 12 months and each month it's calculated based
06:41 on the AUM.
06:42 Now what is this new norm that we're talking about?
06:45 Because we're talking about, say, okay, let's take an example, right?
06:49 Kirtan is a distributor.
06:51 I'm a distributor.
06:52 I was selling a product.
06:53 I sold a mutual fund scheme and I was earning the trail commissions.
07:00 Now he's convinced the investor that he's better than I am and therefore the investor
07:04 shifted.
07:05 The investor was not getting the trail commissions in that situation, right?
07:09 Yes.
07:10 That was the old rule.
07:11 What was happening to the amount that was set aside for the distribution?
07:15 So whatever the amount is would remain, because these things work on provisions because there
07:19 are no accurate numbers.
07:20 Sure.
07:21 So I'm making an estimate that on these much of assets, I have this much of part of the
07:25 assets raised from a regular plan and some part of the assets raised in a direct plan.
07:31 And as you'll appreciate, all of this is in percentage points.
07:34 So let us say starting of the month, the assets are 100 crores.
07:37 End of the month, the assets are 110 crores.
07:39 Then through the average of that, there is an average trail commission across all distributors.
07:43 So there is a, you know, you're making a provision in the scheme saying that by end of month,
07:47 I need to debit this much, but the actual calculation will happen later.
07:50 Correct?
07:51 So obviously, there are large pools and to a small extent where, you know, there is change
07:57 of code and for that particular asset, which may be a minuscule proportion, you're not
08:02 going to pay.
08:03 Despite having made a provision, you're not going to pay.
08:06 So there will be some excess provision that will get rolled over.
08:08 It will be set off against some future commissions, etc.
08:11 Got it.
08:12 So actually, it's not a very big part of the overall assets or the overall commission paid
08:17 out.
08:18 But what is interesting to keep in mind is that till now, the rule was that even if the
08:23 customer decides that I want to move from Alex to Kirtan, right, the policy was that,
08:29 you know, sometimes you might, he might be doing something to, you know, lure the customer
08:35 under some false promises.
08:37 He might indulge in mis-selling.
08:38 He might say that, okay, Alex has given you this scheme, but you know, there's something
08:41 wrong with it and he's not updating you.
08:43 I'll update you.
08:44 If you invest with me, you will get better returns, you know, or in the olden days when
08:48 the rules were not strict, you know, you say that, okay, I'll give you, I'll pass back
08:51 some of the incentive back to you.
08:52 Right.
08:53 There were very many malpractices for which the door would be left open if we allowed
08:57 this kind of switching and commissions to move.
08:59 So what is happening now though?
09:00 Yeah.
09:01 So at one point in time, the Association of Mutual Funds decided that, you know, to end
09:04 all malpractices, let's do one thing.
09:06 If a customer says, change my distributor, we will not pay any commission to the new
09:12 distributor so that there is no change happening because of malpractices or incentives.
09:18 It happens purely based on probably giving better service.
09:21 And then over a period of time, that new distributor would get more wallet share from the customer
09:25 or otherwise would grow the business.
09:28 And if this fund doesn't perform at some point in time in future, it may get switched and
09:31 then they, right.
09:33 Now what we are, now what the Association of Mutual Funds has said is that to not pay
09:37 commission forever and ever probably doesn't make sense.
09:41 So let's do one thing.
09:42 When there is a change of broker code, don't pay for the first six months.
09:46 Cooling period.
09:47 So don't pay for the first six months.
09:50 After six months, if you find that after changing the broker code, the customer has remained
09:53 with the new distributor, it means that maybe he's happy with that decision and there was
09:58 no malpractice and, you know, it's been done for the right reasons.
10:01 So after six months, you start paying the commission.
10:04 So I think it's only fair and square because what will happen is that no malpractice at
10:07 the same time, no reason to keep churning the assets.
10:09 Yes.
10:10 We've tried to give you an understanding of how trail commissions work and how the norms
10:14 have changed.
10:15 Now we're talking about who benefits.
10:18 Kirtan, of course, you've been distributing for some time.
10:21 What according to you is, if at all, a section of the mutual fund distributor community that
10:26 will benefit, will competition be ramped up in a big way?
10:29 Alex, I think there are three different ways to look at this.
10:33 I think there are three people who will really benefit.
10:35 First is the good guys will benefit because the industry so far was in a way where you
10:41 had these assets, even if you didn't do anything on the assets, which is value addition, you
10:46 were still getting paid the trail commission and getting paid a higher commission every
10:51 time the AUM went up without you really doing anything.
10:54 And hence, everybody will have to pull up their socks to now make sure that you are
10:58 adding value for the money that you are making.
11:01 And if you don't do that, you will get switched to a good distributor or an MFD who's going
11:07 to bring that value on board.
11:09 So I definitely believe the good guys will benefit.
11:12 Second, I think there are a lot of private bankers or wealth managers who've been a
11:18 part of the system for a long time, but they've not been able to move out and start on their
11:22 own because it was not easy to move assets.
11:25 And now those guys will benefit.
11:26 And the investor community will definitely benefit because so far what was happening
11:30 is even if you know that the person that you were working with was not adding value, but
11:35 for you to switch to somebody else was always a task because for the newer distributor to
11:41 really make money or get incentivized, you would have had to sell your schemes and buy
11:44 new schemes and pay capital gains tax.
11:47 Now what can happen is if you've identified whom you're working with and you're not comfortable
11:52 and you want to move to somebody else, you can change the broker.
11:54 The newer broker will also be incentivized and you will save on capital gains tax.
11:58 So I think all these three sections, in my opinion, should benefit, Alex.
12:03 Do you think there's another category that will benefit?
12:06 Do you think there's another implication that we are not talking about yet?
12:10 No, not really.
12:11 I think Kirthana has covered it comprehensively.
12:13 I think it's a good move because if you say that, okay, you're not happy with a particular
12:17 distributor, you want to move to a new distributor, the new distributor is not going to get any
12:21 trail, then he or she is also not sufficiently incentivized to provide better service to
12:27 a newly acquired customer.
12:28 So I think it's a win-win in that sense.
12:30 And it's good that, you know, for at least for clients, it's going to be a positive.
12:34 It should be.
12:36 So don't be surprised if you get a few calls.
12:39 I don't know if it's going to be as aggressive as that.
12:41 Maybe you guys should tell me on the comment section over the course of the coming weeks
12:45 whether or not you get approached by your neighbor's distributor or something like that.
12:50 But it's interesting because incidentally, I was having a conversation with a friend
12:55 about their investment portfolio and they were saying that, and I think, Ashish, this
13:01 is maybe something that you can tell me about as well because I know that you do a lot of
13:05 conversations that give you insight of how investors behave.
13:09 And what she was saying is that she has had a distributor for the last three years.
13:13 She's had a decent 18-odd percent CAGR on an equity portfolio.
13:18 She's found out that her aunts have been getting a 20-plus percent CAGR and she wants to shift
13:24 to that distributor.
13:26 So this is the context that she gave me and she showed me the schemes that were being
13:29 offered by the second distributor.
13:31 And right enough, there were three small cap schemes out of six that were being offered.
13:36 So I was taken aback because I was wondering, hey, what is the benefit of having three small
13:40 cap schemes?
13:42 What I'm trying to understand is, are these still being aggressively sold?
13:46 And I'm asking in the context of the Amfi numbers that came out for the month of February.
13:50 Seemingly there's a deceleration in mid-cap and small cap, but is that happening on the
13:54 ground?
13:55 No, not really.
13:56 I think asset managers have been getting more and more cautious and conscious and you saw
14:00 that regulatory nudge also about planning liquidity and stuff.
14:04 So this time around, what I've seen, asset managers have been a bit more conservative
14:08 and a bit more cautious.
14:09 But if you see the flows, not a big discernible slowdown.
14:13 In fact, for the month of February, the gross inflow into equity mutual fund schemes, if
14:18 I just take pure equity and you take this balanced hybrid equity oriented funds, that
14:23 gross inflow was well north of some 73, 74 thousand crores.
14:26 And I'm not even counting ETFs and index funds and the EPFOs money and stuff.
14:30 Which is a record.
14:31 74, yeah, 74 is probably the largest, right?
14:35 And so you can see that there's no let up really speaking.
14:40 It always happens.
14:41 You know, I always tell on a lighter note that some people do a lot of analysis and
14:44 buy what's working well in the last one year.
14:46 And some people don't do any analysis and still buy what is working well in the last
14:49 one year.
14:50 So the former are just trying to justify why they're buying last one year and the other
14:54 ones are directly buying last one year.
14:56 So there's a huge penchant for people to buy what worked well in the last one or two years.
15:01 But markets are mean reverting and they are cyclical.
15:04 So in fact, if you have anything to see in the last one year, you should make sure you
15:07 don't buy what worked very well in the last one year.
15:10 Fair point.
15:11 Are you changing?
15:12 I know for a fact that you have over the last few weeks and months, I think, changed the
15:16 kind of messaging you're giving your clients.
15:19 What does it stand at right now?
15:21 I think Alex, look, if you're a long term investor, you largely want to stick to your
15:25 asset allocation, which fits your risk profile.
15:28 But of course, this may not work for every client.
15:31 But there are definitely some clients for whom you have a small tactical allocation,
15:35 given the nature of the work that you really want to do, and you have an understanding
15:39 with the client.
15:40 So on the technical side of the bet, I think we've had this conversation multiple times
15:45 that for 24, we've had large cap allocation and we've reduced small cap.
15:49 But I think this is, look, getting this to be done on the ground is as difficult, as
15:55 easy as it looks while we talk, right?
15:57 Is because now when you look back four months, you would say that this call went right, but
16:01 it's not always that your calls will go wrong and you will have to be more prudent, understanding
16:05 whether or not you're okay taking a bet at this kind of valuation in the small caps,
16:10 whereas the large caps have not done well.
16:12 I mean, we were talking last one year, large caps have done what 17, 18%?
16:16 Sure.
16:17 Mid was 40, small was 45, right?
16:20 And like Ashish said, there's always mean reversion, right?
16:23 It's only prudent for you to allocate some more money to large cap because that's where
16:27 probably value is.
16:28 So, so the context, of course, is for the last part of this conversation, which is that
16:34 the market regulators come in and said, look, hey, you need to disclose more on the liquidity
16:40 side and certain other risk management aspects, which I guess mutual funds are doing anyway,
16:46 but on the 15th of the month, there will have to be a report on certain aspects.
16:49 What does that change for you?
16:50 No, so basically, on a, it says that we have to report, I mean, whatever work we may be
16:55 doing, like we have a chief risk officer, which is a, by the way, a regulated position
16:59 reporting to trustees and the securities and exchange board.
17:02 So we do all of that work, you know, that what is the top distributor concentration,
17:06 top five distributors deploying money with us, top investors deploying money with us.
17:11 What is the concentration?
17:13 You know, what is the biggest redemption we've received in the past?
17:16 If we receive such a redemption, how much?
17:18 So all kinds of liquidity analysis, what is the liquidity of each and every stock?
17:22 How many days it will tell us to completely take us to completely exit?
17:24 All of that we do, right?
17:26 Now what we have to just do is that we have to publicly disclose what was internal.
17:31 So you know, we supply fact sheets to investors.
17:33 So they see our portfolios, they see sectoral allocations, they see who's the portfolio
17:37 manager, what type of team, what performance.
17:39 They see all of these things and buy our fund.
17:41 Now the regulator is probably nudging that look for one more thing, you know, performance
17:45 and all is well and good, but is this performance generated by having a lot of money just going
17:51 pyramiding?
17:52 So, you know, if you have illiquid stocks in your portfolio and you get huge inflow,
17:55 you keep buying your own stocks.
17:57 So then, you know, that just keeps flying.
17:59 So sometimes the impact cost, sometimes a lot of flow into a few number of schemes,
18:04 hence putting money into a few number of stocks.
18:07 So the regulator is just telling investors that amongst the many things you look at,
18:10 make sure that you look at this also.
18:12 That's the intent of making public disclosure.
18:14 I think the owners will then fall under the distributor community and the advisory community
18:18 to utilize that information, of course, to the investors as well, because this information
18:24 is going to be publicly available.
18:25 We will try and break that down for you as soon as we get a report like that to tell
18:30 you how best you can utilize the information.
18:33 But that brings us to the end of this particular edition of the Mutual Fund Show.
18:36 Ashish, as well as Kirtan, thank you so much for joining us in the studio and for breaking
18:40 down the latest changes in the mutual fund space.
18:43 If you've got questions for us, you can write to us on the WhatsApp number that flashes
18:47 occasionally at the bottom of your screen.
18:49 There it is right now.
18:50 Or in fact, on the social media platforms that you follow us on.
18:54 Do stay tuned.
18:55 We've got more coming up over the course of the day.
18:56 And this is NDTV Profit.
18:58 Thanks for watching.
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