Floundering mutual funds wooing distributors with expensive junkets

Fund companies are in competition to organise lavish junkets for its distributors, hoping to influence them to sell their schemes to the unsuspecting public

Disenchanted investors are pulling money out of mutual funds, there is chaos over regulation of collective investment schemes and serious worry whether the mutual funds business is headed for stagnancy. What is the fund industry’s response? Do much more of the same. Unable to pay entry loads to distributors, asset management companies (AMCs) are blowing up money on flying distributors to expensive junkets.

According to industry sources, HDFC Mutual Fund is planning to take some 50-odd distributors to Italy on 17 March 2010 for four days. These are among the top distributors who have raked in maximum moolah for HDFC Mutual Fund. Recently, Reliance Mutual Fund took some of its distributors to Kashmir while HSBC took them to Kerala for a long weekend. According to distributors, Templeton has a scheme wherein any distributor who achieves his target is entitled to a foreign trip.

Funnily, the number of junkets have increased so much that they are becoming counter-productive. Some large distributors are sick and tired of such frequent fly-offs. According to sources, one of the frustrated distributors returned to Mumbai mid-way from his Kashmir junket.

The junkets have reached such unseemly proportions that KN Vaidyanathan, executive director of market regulator Securities and Exchange Board of India, has recently said that the regulator won’t tolerate such incentives.

The question is: Who pays for these fancy trips? So far, it was deducted from  investors’ money, but the regulator has now come down heavily on AMCs and is preventing the fund industry from making investors pay for such extravaganzas. So AMCs are supposed to be bearing the expenses on their own. “Earlier, AMCs were debiting the expenses of junkets to the schemes but now they have to pay out of their pockets,” says an industry source.

Lavishing money on distributors is not new, but assumes importance now in the light of the fact that money is moving out of funds after SEBI abolished entry loads. Some years back, it was quite the norm to incentivise distributors with expensive gifts and foreign trips, until SEBI cracked down heavily on these practices. This was akin to bribing the channel partners. Indeed, AMCs rarely sell their funds on the basis of performance; they depend on either lavish advertisements or on bribing distributors to push their products.

After the ban on entry load that came into play from 1 August 2009, outflow of money from fund schemes accelerated since most financial advisors had no incentive to sell and service funds. Between August 2009 and December 2009, when the Sensex gained 15%, the mutual fund industry saw a massive outflow of Rs7,315 crore. “So, now, AMCs are trying some other methods to hard-sell their schemes,” says an IFA.

This explains why AMCs have started resorting to expensive junkets again as a means to garner assets. “After coming back from these trips, distributors generally try to push that particular AMC’s product. Many a times, a product is sold to someone whose risk profile does not match the scheme at all,” says a certified financial planner.

Indeed, foreign junkets of AMCs and other incentives of fund companies, such as Templeton’s promised trip to Malaysia, are compromising the interests of retail investors. “Usually, the first 50 distributors who bring maximum AUM are taken to foreign locations like Italy, Hong Kong and Istanbul, and the next 50 are taken to Dubai. So, distributors are trying to get into the first 50 slot so that they can go to Italy,” said an IFA who did not wish to be named.

There is also a cynical interpretation of these junkets. According to the CEO of an AMC, it is fund executives who seem to be more keen on junketing. “They are having fun ever so often, in the name of wooing distributors. The serious distributors are not in this.” 

In remains to be seen whether irrespective of cumbersome rules and regulations and poor performance, the distributors, bribed by lavish junkets, would be able to push fund products down the throats of the investing public.

Interestingly, companies selling fixed deposits are also in the same game. “Most of the brokers are selling Mahindra Finance products today. If a broker gets Rs1 crore fixed deposit business, he or she gets a free trip to Malaysia. Everyone is getting tempted to go on a foreign trip,” said a distributor.
 

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COMMENTS

AJIT

7 years ago

Can someone ever approach any Insurance company's office and get a ULIP directly,without any Charges or load...Answer is...No.
But a MF product can be taken without Entry Load,without any intermediary.
But the products have striking simillarities.... how long will this partisan treatment continue...Make ULIPS eligible for Direct subscription,if someone is really a watchdog for small investors

sumitra swain

7 years ago

If sebi really interested for investors benifit,first separate bankpng chanels
from their roof.Because if u will check , 60% profit comming to banks by selling m.f./ L.I. commission instead of core business.So their distribution chanel should be in separate house.They are using beautiful girls to sell the product.They have no accountibility. finally bank b.m./a,b.m. taking advantages for foreign tour.sebi is simplly is a barking dog , not watch dog.

R Sneha

7 years ago

Dear Sir:

I am shocked at the pace the 4th estate, SEBI {and the mute spectator the Finance Ministry official and the ineffective and defunct AMFI} are racing with each other to kill the budding Mutual Fund industry in India. Please stop publishing such articles which are nothing but meant to garner more cheap publicity for your portal. Please tell me one industry or business where the Principle is not rewarding his Agents? If you have one answer, then let Government of India shut down the Mutual Fund business in India. Even Government sell its own products like Postal savings, PPF etc. through agents and pay them brokerage. However, the enemy of Mutual Fund industry and small investors SEBI passed an order that AMCs should not pay brokerage to their agents and they expect agents to spend money from their pocket and do the charity of making visits to their clients place, educate them and make them invest in MF schemes - but will not take any brokerage, incentive or promotion stuff from their Principles. A strong Mutual Fund base and Insurance and Pension Fund base can be an effective counter balance to FIIs who create havoc in our markets, which kills millions of small investors. However, since the regulator SEBI and AMFI {worth winding up this non-functional and ineffective organisation} are stooges of the FIIs and enemies of India are all ganging up to kill and bury the MF industry in India. Portals and inexeperienced financial journalists see only the MF industry and its agents and after having pushed the industry into 'coma', are not sparing any efforts to kill the industry sooner than later and bury it deep - so that no one in India talk {sorry even think} about Mutual Fund. Long live SEBI.

kumaar

7 years ago

Hi,

The writer should first understand the difference between Reward and Bribe. There is a lot of difference.Advisors are also agents of the Mutual funds (Principals) and there is nothing wrong in Principal rewarding their agents.

And I don't understand even if it means pushing the products, advisors are only pushing the products of the reputed AMCs which were vetted by the regulatory authority.

Thanks and Regards



L Kumaar

dillip swain

7 years ago

ENTRY LOAD 2.25%, IT WAS A GAME INTHE NAME OF DISTRIBUTORS. ACTUALLY AMC WAS PAYING BROKERAGE LESS THAN 2%. BUT AMC PRESENT TO SEBI ENTRY LOAD IN THE NAME OF DISTRIBUTORS. NOW F-TRIP IN THE NAME OF DISTRIBUTORS.DO U KNOW NO. OF F-TRIP FOR THEIR EMPLOYEESIN A YEAR? SEBI NEVER QUERY ABOUT THE EXPENSESFOR AMC EMPLOYEES. IS SEBI KNOWS SALARY OF AMC EMPLOYEES IN TIER-III & IV CITIES. NOW INVESTORS ARE AWARE ABOUT STOCK MARKET.THEY HAVE MORE PARTICIPATION IN DIRECT MARKET THAN MUTUAL FUNDS.BUT THERE IS NO SEBI,BSE OR NSE OFFICE/EXECUTIVES.SO FOR WELLBEING OF INVESTORS SEBI SHOULD NOT ALLOW TO OPEN MORE OFFICES IN DIFFERENT DISTRICTS.BECAUSE R.M./B.M'S ARE MISS-SELLING TO PROTECT THEIR JOBS. B.M/R.M ARE MORE DANGEROUS THAN DISTRIBUTORS TO INVESTORS.PLEASE PROTECT INVESTORS OR REVOLUTION IS AHEAD.

V SUDHAKARAN

7 years ago

As business incentives marketing persons can go for any incentives includiong foreign trips but not for DOCTORS which is currently offering by all pharma companies
AMC offering different rates of brokerages which is not agreeable

SURI SEETA RAM

7 years ago

Ravi Samalad hardly knows the Drivers for Marketing. His only strength is that Money Life would publish whatever crap he writes.

Try advising or promoting an MF Product in the market and you will know.

Everyone becomes a critic and public prosecutor stating that the people are being taken for a ride. The Mutual Fund Distributors as a matter of fact have to run longer and steeper miles when it comes to moving a product in the market.

SEBI has already done the damage to the extent they can't go any better. Let them try stopping the incentives offerred to distributors and they will know.

Every Tom under the guise of protecting people and taking shelter under the regulator's view tries to pour more and more venom in the Market. The more they do, the merry for hardcore professionals. The toughest will any way survive and only they will reach the moon.

Pity columnists who don't go into the depth of the subject before venturing to mud slinging on Distributor Community.

SURI

ang

7 years ago

The editor has no idea what he is allowing to be published. It is sad that the journalist's capabilities are low and cant even understand facts, the idea seems is more to create a cathy headlines rather than giving information as it really means. It will be nice if they can show any industry or career where there is no reward for performance and people work without expectations of any recognition for their efforts including the same media industry

Prabha Krishnan

7 years ago

Good analysis. Please suggest solid investment opportunities for various risk profiles.

roopsingh

7 years ago

dear IFA freinds-it is very clear that no one from SEBI, AMFI or finance ministry is serious for all matters raised in MONEYLIFE-they have no answers to all points raised by editors and various readers comments-BUT i am optimistic that who ever tries not to face the realities will be out -bcos truth always comes on surface whatever pressure exerted to bury it deep-bcos it is afterall a question of NOT only IFA"S but of AMC"S and its future and whole of MF industry

MK

7 years ago

EVERY INDUSTRY REWARDS ITS BEST ACHIEVERS. WHAT IS WRONG IN THAT? SUCH INCENTIVES ARE GIVEN ONLY AFTER A DUE ANALYSIS OF THE PERFORMANCE OF ITS DISTRIBUTORS.
EVEN IN THE MEDIA INDUSTRY SUCH PRACTICE ARE VERY COMMON. DONT THEY RUN INCENTIVE SCHEMES FOR THOSE WHO SHOW REMARKABLE SALES?

Santhana

7 years ago

Please forward your magazine to SEBI and Mr.Swarup. Atleast now let them wake up from their slumber and come face to face with reality. Who will control these MFs and their junkets. SEBI and Mr. (Sic) Swarup are against only the IFA small fry earning a honest commission for their hard work. Not against Big syndicated MF distributors and Foreign and Private banks earning the spoils..

R Balakrishnan

7 years ago

Every industry has this practice. SEBI seems to be leaving no stone unturned, to ensure that distributors have absolutely no interest in ever selling a mutual fund. Insurance companies also do this. Will IRDA go after them? After all, when one sells a financial product, it is a dream that is being sold. Last 5 years returns are shown. Then a fine print that 'past is no indication about future'. Leave a reason for a distributor to sell the product. Take away his reward and he will kill the product and the industry.

Narendra Doshi

7 years ago

AMCs should try to give a reasonable benefit to MOST of the IFAs rather than concentrating ONLY on TOP 50 / 100, IN THEIR OWN LONG TERM BUSINESS INTEREST rather than short term interests.
Good timely investigations by MONEYLIFE team.

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