The impact of Direct Plan

We, the IFA community, feel extremely honored and privileged to be in this noble profession of helping individuals, families, to channelize their savings and route them into Mutual Funds, thereby not only helping them to participate in the great Indian growth story, but also help our nation to harness the power of savings and investments. An IFA comes in all forms and sizes an experienced banker turned IFA, a retired school teacher turned IFA, a successful corporate executive turned IFA, a medical doctor turned IFA, a Chartered accountant turned IFA, a corporate house setting up a distribution unit, the list continues. While there is diversity among different types of IFAs, we all unite together with one single objective to help create awareness among investors and help them protect and enhance their wealth. To this end an IFA embarks on a long, selfless journey, where he spends days in search of acquiring a client, identifying his needs, answering all his queries, educating him on the nuances of investing, setting him up with the basic requirements like applying for a pan card, kyc compliance etc and finally soliciting business. Going by the industry standards, the average conversion rate (i.e) number of prospects met to number of clients converted is 10:1. Which means to acquire one investor in mutual fund, an IFA has to meet and spend time with at least 10 prospects. If one factors in the following costs fuel, office overheads, media cost, technology cost, opportunity cost, servicing cost, the average cost of acquiring one customer works out to Rs 7,000 9,000. At the current rate of compensation in order to recover this cost, through the upfront commission and trial commission paid by the AMCs, an IFA has to wait for a minimum of 3-5 years (i.e) only after servicing an investor for a minimum of 3 years an IFA starts making revenue out of his relationship. Thus an IFA can start making money from his business only after he makes his client create wealth. This is a win-win, long-term relationship. Whatever growth our MF industry has achieved over these years, an IFA has played a significant role in that. Even during the tough times of 2007-2009 there were many IFAs in the arena, engaged in the process of expanding the industry. The abolition of entry load introduced in the year 2009 August brought a major blow to the IFA community. Overnight their income shrunk by 3/4th of what it used to be. All business plans, revenue projections, planned investments, EMI commitments, everything went haywire. This led to a huge exodus of IFAs from the industry. Number of active ARN holders shrunk drastically post August 2009 directive. Even among the existing IFAs remaining in the system only few

have completed their KYD requirement. While those remaining in the system are committed and diehard IFAs, what is required for their survival and sustenance is, recognition and support. The proposed regulation of introducing direct share class and offering lower TER for direct investors would result in driving the last nail in the coffin of the IFA community. Following are our views against introduction of direct share class: 1) Mutual Funds as a concept was introduced to cater to those investors who are not savvy enough to make their own investments in equity markets. While direct equity option is available for savvy investors through a huge network of stock broker and sub-brokers across the country, what is the need for introducing a direct share class in Mutual Fund investment? If an investor is savvy enough, he would anyways prefer a direct equity investment. Is this not defeating the very premise on which mutual fund investments were introduced? 2) Currently there are 44 no of AMCs offering multiple schemes and this number increases with every new launch. How would an investor make the right choice and decide on the right scheme for his investment among the maze of options available to him? Under these circumstances would he not be confused and make a wrong choice? If he loses his money due to his own wrong choice, what are the chances that he would ever come back for a Mutual Fund investment in the future? Are we not running the risk of losing an investor permanently? On one hand an IFA does all the ground work and sources an investor, on the other hand due to lack of guidance, in doing a direct investment, if he loses his hard earned money, he would leave the system. This would result in a leaking bucket situation. How would this help in increasing market penetration? 3) Expansion of any market directly depends on the width of the distribution network. If more number of investors, due to the lure of reduced expense ratio, switch from a distributor to direct investments, it would directly affect the revenue stream of an IFA. With dwindling revenue an IFA would find it difficult to remain afloat and soon abandon the business and start looking for greener pasture. We will again encounter an exodus of IFAs, just like post August 2009. Without width, how will an industry survive and grow? 4) Sourcing apart, there are various servicing activities like change of address, change of bank mandate, consolidation of folios, transmission of funds, inclusion of nominee, handholding on minor investments, arranging for periodical statement of accounts, correction of mistakes in the account, change in KYC, change in contact information, etc etc. The list is endless. With the absence of an IFA, how would the investor carry out such transactions? Does the AMCs have

the bandwidth to handle such transactions? Would this not result in customer grievance? One dissatisfied customer would stop 10 prospects from investing. Is this what we want to achieve? 5) A direct investor would be largely guided by on-line sites promoting mutual fund performance. What is the guarantee of these sites providing unbiased information? Further these sites do not offer periodical reviews or counseling, which is a much needed activity for helping the investor staying on course or making course corrections. Lack of this service would leave an investor stranded. During these uncertain times, where we have many villains in the form of global crises, dwindling volumes, raising inflation, falling rupee, the last thing we need is one more villain. The need of the hour is a Super Hero and we look upon The SEBI as a Super Hero. These are the times where we need support, guidance and motivation. The biggest motivation that you could provide us is to kindly reconsider the proposed norm of introduction of lower TER for direct class and help us focus on what we are best at doing Taking good care of our investors and their wealth. As a token of our representation we have collected a few hundreds of IFAs signatures and appended the same to this request. We sincerely hope your esteemed office would consider our request in the light of points highlighted above. Sincerely yours,

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