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In a nutshell
That's quite a dramatic title, lifted straight from Bollywood. A colourful way of saying "Time to get the true picture".
Its time we get a true picture on how investors need to be protected. Not from the regulator. But, directly from the investor.
For years, numerous regulations have been imposed on fund houses and distributors - all in the name of investor protection. And some more are on their way, on more commission disclosures. But, we never really went out and asked the investor his point of view, did we?
Its time for the industry to lead an effort to hear the investor's voice on investor protection. Time for AMFI to undertake a comprehensive survey focused on investor protection. And, time for the investor's voice to help shape regulations, rather than the notions of a few influencers.
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All in the name of investor protection
Since 2009, there have been a number of regulations introduced in the mutual funds business, all in the name of investor protection. Some of these regulations seem to make good sense to all stakeholders, while others continue to be hotly debated and unwillingly implemented. Some are not well implemented, which then gets the regulator to tighten the screws to ensure effective implementation.
On many of these regulations, distributors believe that the regulator is indulging in "ivory tower thinking" - coming up with rules and regulations that don't recognize ground realities. These typically are the ones that impact them the most - commission disclosure, direct plans etc. On others, fund houses feel the same way, but are less vocal. These are the ones that impact them the most - scheme rationalization, advertising disclosures, net worth norms etc.
But, we never really asked the investor, did we?
Interestingly, all of this is done in the name of investor protection. And interestingly, we haven't really come across any material which tells us what the investor really wants in terms of investor protection. Strange, isn't it?
In all the representations that AMCs and distributors make to the regulator on regulations, it basically comes down to one point of view against another. All in the name of investor protection. But we don't really go out and ask the investor his point of view.
For years, I have seen representations being made to the regulator on various issues. More often than not, decisions are not reversed despite valiant attempts at representing the flaws of a regulation sought to be introduced. Shouldn't we try something different? Isn't it time we involve the investor in this decision making process on what's in his best interest?
Time to get a true picture
I believe its time for AMFI to commission a comprehensive investor survey from a reputed market research organisation which will reach out to a statistically large enough sample of investors - across cities and towns, across SEC segments - basically a sample that will stand up to scrutiny as truly representative. This may mean reaching out to say 100,000 investors across 100 towns - it will be well worth the effort, in my view. It is important that this initiative be "blessed" by SEBI - ie, AMFI should ensure it keeps SEBI in the loop on this initiative - as the results of this survey will be very useful to everybody in the industry, and of course the regulator.
There are a number of questions that we must ask investors about their attitude towards and apprehensions about mutual funds and their preferences on how information should be presented to them, in order for them to make informed investment decisions. A competent research agency will surely create a well-rounded questionnaire, with inputs from all stakeholders. Here are a few questions that can help provide a very useful investor context on some ongoing industry debates:
Do you see value in the current format of fund advertising, with all the disclosures on performance of all schemes that the fund manager manages, with all the fine print that takes up more space than the actual message of the advertisement? Have you had bad experiences with celebrity endorsements in insurance and banking products that mislead you to make bad financial decisions? Do you support the ban on celebrities endorsing mutual funds or are you indifferent about it? For those who chose direct plans, what influenced you the most? Was it media reports highlighting the cost savings or was it your own confidence in managing your investments? What matters more for you in terms of cost disclosures: total cost that you arepaying in a mutual fund or a break up of that in terms of what goes to your distributor, how much goes to the R&T agent, how much goes to the AMC and so on? Do you see value in receiving guidance from an intermediary - by whatever name called (advisor/distributor)? Where does such an intermediary add value: in creating a plan / in fund selection / in ensuring adherence to the plan through ups and downs of the market? Do you believe that a 2-2.5% annual cost is too high a price to pay for investing in an equity fund? What in your view is a reasonable cost for all the services that come bundled within this cost: fund management, advice and client servicing? How would you ideally like to pay for the services you avail in mutual fund investing:
Option A: The fund house charges a consolidated amount of say 2.5% p.a. on an equity fund, from which it pays the fund management team, your advisor and the R&T agent. Option B: The fund house charges you 1.5% p.a. for its fund management and R&T services, and leaves you to negotiate and pay separately to your advisor his compensation by way of an annual cheque or more frequent instalments, as mutually agreed. Option C: The fund house charges you 1.5% p.a. for its fund management and R&T services, and asks you to indicate a percentage (in the application form) that you want to pay your distributor/advisor, which will be deducted alongside the 1.5% p.a. How willing will you be to pay your advisor/distributor his annual fee in a year in which the market went down and your portfolio thus gave an unsatisfactory performance?
Let the investor's voice shape investor protection regulations
Responses to these and other questions that a well-designed questionnaire will ask, should give all of us in the industry as well as the regulator a good peek into the mind of the investor, on how he really wants to be protected. On what matters to him and what perhaps doesn't. Let this be the framework that guides regulatory development. Let this be the framework that guides fund houses, distributors, advisors - all stakeholders whose job it is to serve the investor. Let's stop arguing about who knows best what is in the best interests of investors. After all, shouldn't the investor have the final word on investor protection?
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