Not convinced about mutual funds? Here’s a solution for you.

19 Nov 2013

In the inaugural article of this new column called Straight Talk, Brijesh Dalmia – one of Eastern India’s most successful advisors and a trainer and coach to thousands of advisors across the country – had discussed what it really takes to build a successful retail distribution model (Click Here).

In this article, he takes a step back and squarely addresses an issue that has been playing on the minds of several thousand IFAs (or, should we now say IFDs, as Mr. Ramesh Bhat suggests) who were once active in MF distribution, but are no longer that convinced about the business. The issue is simple : are mutual funds worth distributing? The straight talking Brijesh shares his views on why he believes many IFAs have lost their confidence in this business and what they really need to do to move forward from where they find themselves.

I have met close to 15000 advisors in the last 4 years across the length and breadth of the country. I have met some of the most successful advisors in the industry having hundreds of crores of AUM. I have also met several advisors who are not so big but have understood the power of mutual funds and are focussing big time on it. Unfortunately, I am also meeting a large number of advisors who are still not confident about mutual funds as the main product in their profession and are still relying upon traditional products for their bread and butter.

Incidentally, I also find that most of the noise around commissions, performance and industry is being made by in-active and lesser active advisors in mutual funds. The serious ones are simply busy in increasing their AUM’s and taking responsibility for their actions.

5 reasons why many advisors have given up on mutual funds

As regards the lesser active advisors, I attribute the following reasons for their inability to accept mutual funds as a good tool for clients and their own future security.

  • Past – Most advisors still have a baggage of high commissions they used to get earlier. Advisors are simply not able to accept the fact that reduced commissions make it worth selling mutual funds. Any which way – B15 cities commissions are already high now. Still, there is high resistance. I doubt the high commissions paid during NFO’s will be restored, if they are looking at that.
  • Performance – Last 5 years have been bad for the industry in terms of performance. Most advisors are simply blaming the AMC’s and markets for this. They are not taking the onus on themselves that they went overboard in selling equity and sector funds.
  • Insecurity about trail – They are doubting that trail can go away. Rather than making the most while the sun is shining, they are concerned about something which may never happen. I don’t claim that trail will always remain but I have my doubts as to which financial products will have commissions left if commissions from mutual funds are withdrawn completely.
  • Investors acceptability – There is definitely a drop in investors’ confidence in mutual funds due to performance in the recent years. But there is no dearth of investors in India. The penetration is too low in India with respect to Mutual funds. Moreover, its the advisors responsibility to educate investors. Every industry has its good and bad days.
  • Ego – Lastly, ego is a big reason of many advisors shunning mutual funds. They have taken it personally, and are mentally now against SEBI, against AMC’s. It will not help.

Such advisors are losing out themselves. Yes, the industry is also not growing due to lower no. of distributors left in the country. But essentially, these advisors are not realising the power mutual funds can have in their income and future security. Trail is powerful. More powerful than one can imagine. Product wise, mutual funds beat most other instruments. It’s only a matter of time when mutual funds will make a comeback. Those who are active today will benefit out of it ( not those who are not focussing on mutual funds right now ).

A 10 crore AUM gives a trail income of around 5 lacs a year ( taking average of 0.50% pa. ). For earning 5 lacs, one needs to have a renewal premium base of 1 crore in life insurance, or sell 5 crore fresh fixed deposits or post office schemes annually. Not an easy job at all.

3 things you must do now

Those who are not confident about mutual funds I ask them simply to do the following :-

  1. Meet 2-3 serious mutual fund advisors in their city and understand why they are focussed on mutual funds.
  2. Ask themselves – Is doing fresh business of 5-10 crores in alternative product easy year after year. Anyways, no one stops them to sell alternative products along with mutual funds. There is scope for all the products.
  3. Do you have AUM of 5 crore today – If yes, I am sure you are motivated enough to focus on mutual funds. If not – on what basis you have decided that Mutual funds are not good? Meet 2 advisors having 5-10 crores of AuM and your perception will change. My advice- First achieve an AUM of 5 crores and decide for yourself whether Mutual funds work good for you or not. No point complaining without doing anything.

I will be straight in saying that the current revenue in mutual fund is very attractive and pays well for the efforts we do. Mutual fund is today a lifeline for 100’s of advisors in the country. I wish, it becomes the lifeline of 1000’s of advisors.

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