Mutual Funds –Distribution Cost Cutoff suggestion

A more recent and POSITIVE development that has taken place is in the mutual fund industry. SEBI has offered a suggestion to all the mutual fund houses that they should insist on selling the mutual funds directly to the public, instead of going through distributors or better known as “agents”.

SEBI suggests that Mutual Funds charge the customers with almost 2.25% charges in the name of Distribution Costs. This charge is used to pay to the various distributors and agents who help the mutual fund company to sell mutual fund products to the common public. SEBI suggests that Mutual Funds and asset management companies should insist on selling the units directly to the customer through the online website or advising potential customers to buy it from them by visiting their office. SEBI’s suggestion says that the 2.25% charge should NOT be taken from such customers, who are buying the mutual fund products directly from the company, either online or by visiting their office, as there are no agents or distributors involved. Distribution Charge should be taken only from customers who buy through a distributor or an agent.

Here are some facts about the distributor and agent business in India for selling of such financial products:
• 98% of the money for sale of any Mutual Fund or ULIP scheme is collected through distributors and agents
• That means only 2% of the customers actually buy the product directly from the company
• 2% of the above customers are the ones which are themselves other mutual funds or investment firms who invest into a particular product in big amounts and hence save on charges by directly buying it from the asset management company or fund house

No wonder that the entire mutual fund industry has criticized this suggestion from SEBI in one voice. If they adopt to the suggestion from SEBI, it would mean that the distributors will loose the business within no time. More and more of the customers are now using online transactions for banking and trading. They can as well do the same for buying mutual funds.

The distributors are giving the following reason for not liking the idea from SEBI: “since 98% of the business is routed through distributors and agents, the elimination of distribution cost will mean that mutual funds will not get enough customers. This will hamper the investment business in India”

However, the fact is that the investment business in India will grow better and more number of investors will start considering investing in Mutual Funds, if the administrative charges and commissions are reduced. People like me, who are averse to mutual fund investments because a significant portion of money goes into commissions, as explained in my article: Should you trust your mutual fund manager?, will also start considering investmenting in mutual funds.

The above statement from distributors is nothing but a useless reason because they will be out of business very soon.

On the other hand, the fund managers and mutual fund companies dislike the idea because of the following reason: “We will have to invest heavily on having online system to buy and redeem mutual funds and other products. Moreover, we will have to hire and train our staff who could talk and sell to the customers directly. Having it through the distributors helps manage things better”.

Again, yet another vague reason. Almost all of the mutual fund companies have a toll-free number where one can call and get all the details of the mutual fund or ULIP products. Some of the fund houses even allow you to buy the fund units over the telephone, where your call is recorded and transaction details entered into the system. For e.g., I bought my overseas travel insurance policy over the telephone. If the company can have a few people answer the questions of customers on the phone and some even make them buy the products on the phone, why cant the same team be extended to cut distribution cost and help save the investors money and offer them better returns?
Coming to managing online systems, it is also a fact that all the details of customers and agents are managed using online systems only. There is no paperwork actually involved at the company level. Yet, the companies are quoting this vague reason.

The fact is that the heavy charges being taken in the name of distribution costs are not really used in distribution cost. It’s all disguised and inflated figure. Majority of the commission and cost is pocketed at various levels by people in the supply chain, rest is spent on advertising. If you really look at it, then distribution simply involves filling up a paper form, taking the customer’s signature on it and then sending the policy or fund document by post to the customer. I see no reason why someone investing 100,000 in a mutual fund should end up paying 2.25% or 2250 Rs. in the name of distribution cost. Do you think it takes 2250 Rs to fill up a paper application and send the unit document by post to the customer? OR is it justified for the hopeless level of (misguiding) advices that are given to the customer to buy the fund units?

Not sure how far SEBI can take this suggestion. This is India; there are loads of bureaucratic hurdles in implementing anything that is GOOD for the common men. One can only hope that the suggestion from SEBI finds its way to actually being implemented.

Please read the comments and post your views and queries in the comments section which helps in open discussion and avoids duplicity of questions.

You may be interested in reading my previous articles. Here is the link to Table of Contents in a chronological order.