The truth of the matter is, the guideline is there, and it has to be adhered to. What is important is how you adapt to it, which brings me to my objection to the word ‘impacted’. I don’t believe in the word ‘impacted’. A regulatory or any significant external change does not impact a business but forces it to re-look at business models and adapt and innovate.

The questions should be ‘how will revenue models be changed’ rather than ‘how will revenue models be impacted’, ‘how will customers and distributors adapt’ rather than ‘how will they be impacted’.

I believe that in every industry there comes an inflection point every few years, which in the short-term creates some uneasiness in the industry. The Indian mutual fund industry too has had its share of upheavals. And each time, the industry has shown its inherent strength by adapting and adopting those changes to move ahead with a faster than before momentum. In the late 90s, Sec 54EA/ EB of the IT Act was a huge contributor to the growth of assets of the mutual fund industry. Hundreds of crores of long-term money was pouring in, particularly in the Equity fund segment. By a stroke of the pen, the act was abolished in 1999-2000, if my memory serves me right, leaving the industry gasping. The subsequent dot com bust had a pincer like effect on the growth of the industry as equity monies really shrunk. But eventually the industry evolved, got into income funds and MIPs and a whole new world of products and opportunities was opened.

There could be another school of thought that could say that just because the industry is so malleable, should it be subject to regulatory upheavals every few years? The recent SEBI guidelines have prompted this school of thought into action. Only time will tell how the recent SEBI guidelines (find them on www.sebi.gov.in) will pan out. In the interim, this is yet another point of inflection for the mutual fund industry. So how exactly is the industry adapting to this change?

• With the commission structure undergoing a dramatic overhaul, there is very little incentive for a distributor with a conventional business model to sell mutual funds. I have noticed some interesting trends in how distributors are reacting.
  • Some distributors are looking at using mutual funds as a client acquisition exercise. All said and done, mutual fund schemes are one of the most “user friendly” financial avenues around. These new clients will then be sold a heavy dose of high margin products like life insurance and their like.
  • Some distributors have started segregating clients based on the revenue they earn from them. Most low revenue clients are being shifted towards an online investment management experience.
  • Quite a few distributors, however, are using this opportunity to hone and display their asset allocation skills. They are now re-emphasising the virtues of better asset allocation in pursuit of long-term goals. This segment, to my mind, is already charging or is all set to charge clients for their services.
  • In terms of national level distributors and banks, most of them have already designed effective online/ offline retail strategies and are looking forward to consolidate their AUMs in light of the current regulations.
  • SEBI’s decision is an opportunity for distributors to reposition themselves as financial advisors, to build trust among investors and initiate investor education. In the long-term it is going to be good for their business – an investor who trusts a distributor with his mutual fund investment is likely to trust him with other investment products too.
• Quality of service has become a key parameter now. I have always believed that people invest when they are comfortable, not convinced about an investment avenue. Quality of service is going to be a key parameter in determining the comfort level of future investors. Remember, if the investor is comfortable, the distributor could charge a fee for his services as well.
• Fund houses and distributors will have to innovate and rework their business models to make this new equation profitable. We have a lot of commoditized products, and with each new entrant, the proliferation of such products is only going to increase.

My sense is that innovations in product, customer service and technology are going to be the key drivers towards growth. Performance will soon be relegated to a secondary level, particularly in mark to market products. This will also ensure more long-term assets. Effective use of technology would also be able to drive down costs while increasing volumes simultaneously. Definitely an impact on the P&L in the short term, but for fund houses with the vision, strategy and gumption to take this challenge head on, there couldn’t be a better time.

Investors, for whose benefit, the decision has been taken too have some thinking and hard work to do. After all, negotiating a commission for a service requires one to understand and determine the quality of service. So while some sceptics ask whether the mutual fund industry is mature enough to handle this change, I think it is wiser to ask whether Indian investors are mature enough for this change.

Investors are being empowered, but can they handle it, are they awakened? It’s a wait and watch situation. It’s like when a child passes out of school and goes into college, he is suddenly free of many restrictions, no uniforms, no strict school rules etc. There is a new-found independence and freedom, but whether she/he is mature enough to handle this freedom responsibly is something parents have to wait and watch. You don’t stop your child from moving out of school and entering college because you aren’t sure of his/her maturity to handle change. If it is absent, it has to be gradually taught.

It is also a misnomer to think that investors will come flocking to the industry just because entry loads have been abolished. In fact, the role of the distributor becomes even more critical in the current context. With a plethora of investment avenues and terabytes of information available, there is a serious chance of the investor getting overwhelmed and erring in his investment decisions.

How will the entire fraternity shape up? It’s early days yet. The adjustment process is on and I think it will be another three to six months before we actually know whether investors are benefiting in a non-tangible way. My feeling is that by March, we will get a clearer idea of how the distributor-investor equation is working out. A change is usually challenging because it forces you out of a set order. It throws you into uncharted waters. But once the initial resistance falls through, a process of innovation and adaptation begins and things gradually fall into place. I believe that fund houses that will go beyond the traditional distribution models, will be able to substantially expand their investor base. The process is slow, but the one that will create stronger business models.

Changing guidelines and external shocks are not new to the financial product industry, especially mutual fund industry. Adaptability of this sector is phenomenal. There will always be a new product to sell or a better way to service clients. In the Indian mutual fund industry, there has not been a single year that the AUM has fallen dramatically. During the recent financial crisis, when equity collapsed, debt picked up and when debt started flattening, equity picked up.

Call me a hopeless romantic, or a man who’s seen the industry evolve over the years – I believe that these guidelines are building a bulwark for a robust and aggressive growth of the industry. We have already given the world a lot of things to learn in the AMC space – in the next five years, the world would be benchmarking us for all their initiatives.

Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.