Is a tied-agency model good for mutual fund investors?

Recently it was reported in the media that the Securities and Exchange Board of India (SEBI) is contemplating introducing a tied-agency model for mutual funds.

Is this good news for investors?

For that we need to understand the tied-agency concept which is currently at work in the insurance industry. In this model, an agent can sell the products of any one company only. Even if the agent finds that there are products from other companies that are far more suited, he would not recommend them as he is not empanelled with other companies and cannot sell their products. 

As it is evident, this model ensures that the agent is just a salesperson of that one company and always needs to look at all client needs through the limited vision afforded by his company.

This model is a fertile breeding ground for suboptimal advice. The biggest loser in this model is the investor. The asset management company may find this worthwhile. For them, the agency channel is an extended sales force of the company, which is not on the payroll. The company needs to pay a commission only if they sell a product. It’s like having the cake and eating it, too.

In MFs, currently a distributor can empanel with any number of fund houses.  This allows a distributor to pick and choose and create a portfolio of good funds, suitable for his client. Now, if this were to be straitjacketed into the tied-agency model, investors will start experiencing unwanted sales push with a skew to a particular company’s product only.

It is felt that it will help MF industry which is reeling under the impact of various regulations that have come up in the past 2-3 years. MFs may get a temporary reprieve through this. But this is a retrograde step and will result in aggressive selling by distributors of the company products they are aligned with.

This will result in a flood of complaints, sooner than later, from the investors. If investors find that it is not working for them, they will stay away from the MF schemes, further adding to the pressure that the MFs are facing.

If distributors are allowed to empanel only with one fund house, only the top few fund houses will be able to empanel distributors. The smaller and unfancied ones will not be able to attract any distributors. These MFs will have to start wooing the distributors with various attractions like a sign-on bonus, regular salary-like payments, special incentives, trips, etc. It is obvious that the cost of doing business will go up for most AMCs.

National-level distributors and banks would find that they are hugely in demand due to their distribution muscle. They will be able to extract their pound of flesh with the AMC they are aligned with. In this, those fund houses which either have a bank in the group like ICICI Bank and HDFC Bank or have a strong distribution set-up like Motilal Oswal, Birla Sun Life will find that they are able to come out of this relatively unscathed and even increase their stranglehold.

The outcome of all this is that it will increase the concentration of MF assets with a few fund houses only and concentrate power in the hands of a few MFs. The diversity in fund houses and schemes, which are seen now, will be a thing of the past.
The smaller fund houses will have to sell more through the direct and internet platform.

To sell through these channels, marketing efforts would be required. If such efforts are to be fronted by their own staff, it will tremendously add to their fixed cost. Distributor channel is a low-cost channel for MFs, which are only paid for the sales they put through. Hence, their costs will go up if they have to migrate most of their sales to direct or internet platforms. Again, this is not great news for the AMCs, as their revenue stream is limited to the expense they are permitted to charge.

In a nutshell, if tied-agency model were to be introduced it will be a losing proposition for the investor and for most of the AMCs. The distributors will also find it difficult to suggest a bouquet of MF schemes which are suitable to the client and will find resistance from the client, who may want good schemes from across the board. This could mean that at least some of the clients would desert the distributors and go the direct route in search of a diversified portfolio. This will be useful to a few big AMCs and distributors only.

The writer is a certified financial planner who runs Ladder 7 Financial Services and can be reached at ladder7@gmail.com