Variable Load Structure for Mutual Funds

The Securities and Exchange Board of India (SEBI) is mulling introduction of a variable load structure for mutual funds in India. This is a game changing initiative which can have several ramifications for investment management in general and mutual funds in particular.

SEBI has by and large been an excellent regulator. Most regulations, atleast concerning Mutual Funds, have been extremely investor friendly. Against this background, SEBI's move to introduce a variable fee structure for investors and advisors makes for interesting analysis.

Based on the limited coverage in the press, this is what I make of SEBI's proposal:

* a. The load chargeable would have to be agreed to by BOTH, the investor and the advisor, and would have to be mentioned in the application form.
* b. The load mentioned would have to be within the prescribed limit of 6% for a scheme.
* c. Investors can also choose to compensate the advisor with a separate cheque while paying the AMC the amount without any load.
* d. Nowhere in any of the press clippings I have seen, has there been a mention of the default load, i.e., the load levied if there is no mention of it in the application form. Or if any application form does not have this data, would it get rejected as a ‘Not In Good Order' (NIGO) application.

What are the potential ramifications ?

* a. Advisors will have to inform investors of the loads and expenses and the need to sign off together.
* b. ‘Good' advisors can use this opportunity to emphasise their value-add and hence ask for a higher load. This should not be difficult as they charge much higher fees for insurance advice.
* c. ‘Savvy' investors can use this opportunity to demand more from their advisors or even lower the load for investments.
* d. All of this would inevitably lead to a ‘Moment-of-truth' between advisor and investor. This is crunch time and advisors better prepare for the same.
* e. Different FEE and FREE models will develop and in the end an amalgam of thought processes will coalesce to produce a smoothly working model for the advisor and investor.
* f. However, fee discovery can prove to be a prickly affair. Only confident advisors can pull off a fee based model in the face of a downturn.

Moot points :

* 1. How will the large distributors - Banks, Brokerage Houses etc - standardize this amongst their teams.
* 2. Will a Relationship Manager's compensation be linked to the load sign-off. Logically, it has to be. So what is the sales story now?
* 3. Will there be a strata of privileged clients with preferential loads?
* 4. Will commoditised advice be dispensed for the low load clients?
* 5. Will rebating be back? Or can we expect to see these signs in your favourite broker office : ‘Invest in our ELSS before May 31, 2009 and pay no load' or ‘No-load in all new SIPs. Hurry, limited period offer'.
* 6. What will IFAs do? Have a standard plank or charge what the wallet can pay?
* 7. Will Clients use this opportunity to hold the advisor responsible for a sizeable erosion in his equity portfolio.
* 8. Will some IFAs give up on Mutual Funds altogether and go for low hanging fruit - the Jeevan Aasthas and other such insurance schemes.
* 9. What is the guidance that Association of Mutual Funds in India (AMFI) will provide in such policy formulation?

However, this has once again shown that SEBI has cost control and transparency in mind. SEBI is indeed several notches above its Insurance counterpart, when it comes to empowerment of the investor in every stage of investment. Howsoever noble SEBI's intentions may be, this is bound to cause some heartburn amongst the advisory community. Mutual Funds charge a fraction of what Insurance companies charge and hence are much less remunerative. The oft quoted aphorism ‘the Indian investing community is not mature' is soon going to be tested.

SEBI has kept a deadline of March 6, 2009 seeking suggestions on this new initiative.

Do you have any ideas, suggestions and thoughts on this? Please do share it in this blog. This is a topic worth discussing threadbare.