Dear Group Members,
As part of my best effort to provide useful and valuable information to my readers and educate them on financial matters, I am forwarding an interesting article which I noticed recently. All the readers who entrusted their money with banks and other financial institutions with the believe that, these institutions are their right financial advisor/guardian of wealth and they will act only for the best interest and financial wellbeing of its customer must read this article to find out what your relationship managers are doing with your hard-earned money. This is the time for the self-evaluation to assess how much money your Relationship Managers earned for you during this period and also the advices provided or products selected by them were at the best interest of you or the institution he works for or increase his incentives and bonuses. You might have already given POA (Power of Attorney) to your bank to take decisions and execute financial transactions on your behalf. As long as the POA is valid you can't challenge your bank legally. It's all depends on the nature of the POA you submitted with your bank and authorized them to deal in financial matters. As I always advice (not only Prakash Nair .. but people like me with same thinking and attitude) people to take care their investment decision themselves and in case you are not knowledgeable enough you can take the help of a reliable and experienced Financial Planner (normally financial planners charges fees based on the asset managed by them) (please note that, I am not a product selling agent or paid Financial Advisor). Please avoid selecting a product selling agent as your financial advisor, even though he is an expert in finance and investments, his primary motive will be to earn the upfront commission and other incentives and the financial wellbeing of the client will be secondary. It is very difficult to change his/her mind settings. To ask is to empower yourself to understand how the product will perform. This will ensure that you don't end up buying a wrong product.
The role of a financial advisor has to evolve from merely being product centric to a 'lifecycle advisor' who caters to the banking and financial needs of their clients, across investment loans and protection needs. Both financial advisors and clients have started acknowledging the need for effective engagement for their investment needs.
I sincerely believe that Indian banks (especially Private Sector and new generation banks) can play a significant role in facilitating and servicing the client needs of this segment through their product suites, multi-channel approach, efficient service delivery network, and regulatory and compliance framework. For that, they definitely need to change their mind settings from profitmaking motive at the expenses of poor customers to a true and sincere financial advisor.
Finally you are the best judge to assess whether your bank and relationship managers are doing justice to your investments. In case their performance is not up to the mark, search for an alternative.
I really don't know how many of you are reading my postings. In case you like my postings please let me know. I need your valuable suggestions and guidance for further improvement. In case my postings are worthless, there is no need to wasting your valuable time.
Best Regards
Prakash Nair
Are banks churning investor's money?
Despite a steep rise in commissions earned, some large bank distributors saw net outflows from equity funds. Your MF has not got long-term assets but distributors have earned money
Two weeks ago, when the Rs 6.92 trillion Indian mutual funds (MF) industry disclosed the commissions it gave to its distributors in the last financial year (FY12), we saw that distributors overall earned about 4% more commissions than what they had earned a year before last. Some distributors such as Citibank N.A., ICICI Bank Ltd, Hongkong and Shanghai Banking Corp. Ltd (HSBC) and a few more distributors saw their commission income go up by about 20% to up to 55% last year. So logically, these distributors should have got more equity funds into the MF industry, considering that equity funds pay the highest commission.
An analysis of inflows and outflows of equity funds of the top 20 distributors (by average assets) of fund houses serviced by Computer Age Management Services (Cams) showed that some of these large bank distributors saw net outflows (more money went out than came in) in equity funds despite a steep rise in their commissions. We also looked at what distribution segments as a whole bought and sold; private sector banks (including foreign banks) saw a net outflow of equity funds to the tune of Rs.174.60 crore, while government-run banks saw a net inflow of Rs188.21 crore. National distributors and independent financial advisers (IFA) saw a net inflow (more money came in than went out) of Rs1,232.7 crore and Rs1,631.69 crore, respectively. We got the first set of numbers from our sources; Cams provided us with the second set of numbers.
But the question we are asking is this: are banks churning?
The trend
Eleven of these top 20 distributors saw more money going out from equity funds than coming in. Citibank and Standard Chartered Bank saw some of the highest outflows worth Rs267 crore and Rs292 crore in equity funds (serviced only by Cams), respectively. Their commissions earned from MFs went up 47% and 10%, respectively.
Most of these distributors, notably HSBC, Kotak Mahindra Bank Ltd and ICICI Bank, that saw a rise in their MF commission income saw money going out from equity funds and money coming into non-equity funds (all funds apart from equity funds) on a net flow basis. For instance, as per our figures, ICICI Bank got net inflows in non-equity funds to the tune of Rs1,546.7 crore. Kotak Mahindra Bank saw a net inflow of Rs2,118.7 crore in non-equity funds.
Some distributors, including HDFC Bank Ltd and NJ India Invest Pvt. Ltd, saw a rise in their commissions on account of a good show, both in equity as well as non-equity funds. HDFC Bank's and NJ India Invest's commission grew 13% and 4%, respectively.
On the whole, however, banks are not known to have higher levels of net inflows, especially in equity funds. But not all banks behave in a similar fashion.
Also See | The churn game
Different distributors, different strokes
As mentioned earlier, according to figures provided to us by Cams, private sector banks (including foreign banks) saw a net outflow of about Rs174 crore, but government-run banks saw a net inflow of Rs188 crore. However, private sector banks have also shown far higher inflows in equity funds to the tune of Rs11,555 crore as compared with just Rs1,220 crore by government-run banks.
Do banks churn investors' money?
Many MF industry officials in the industry believe that banks work on a different pricing model than IFAs and national distributors. Distributors earn fees in two ways. One is upfront fees and the other is trail fees.
While fund houses pay upfront fees from their own pockets (in other words, asset management fees that they collect from you, the investor, every year as part of the total expense ratio of a maximum of 2.5%), trail fees comes from the total expense ratio. Upfront fees is paid at the time of investment and trail fees is paid to distributors for as long as the investor stays invested and goes to the distributor in a staggered way, say at the end of every quarter.
"This is not a new trend; we have been witnessing this for a long time," says Vijai Mantri, chief executive officer, Pramerica Asset Managers Ltd. Mantri explains that typically relationship managers in these banks get incentives out of upfront commission and not from trail commission. In other words, they aim to earn upfront commission. Trail commission, many fund officials tell us, is not what the relationship manager is interested in.
The "culture" of some banks is also often the reason behind their business models, says Anil Chopra, group chief executive officer of Bajaj Capital Ltd, one of India's largest national distributors. "Big banks see a churn in its staff; it's not uncommon for an investor (their customer) to be dealing with new relationship managers almost every year. So what does the new relationship manager do in that case? He churns," says Chopra.
Ask foreign banks and they strongly deny this. "Our approach to the distribution of investment products is based on the fundamental tenets of financial needs analysis and customer profiling. We believe these are essential in order to ensure that the products offered are in line with the risk appetite and long-term investment objectives of our clients. We have robust measures in place for surveillance, monitoring and controls, extensive certification and training programs, and follow the core tenets of responsible finance," says Arjun Chowdhry, business head, Citibanking and Wealth Management Products, Citibank India. HSBC, Standard Chartered and Kotak Mahindra Bank officials were unavailable for comment.
"Another reason why clients of private and foreign banks have moved more money out of equity funds than invested in them could also be because investors are shifting their money from banks to IFAs," claims Akshay Gupta, chief executive officer, Peerless Funds Management Co. Ltd.
"Investors have become more conscious. Many such investors realized that their relationship advisers haven't done too well with their money. In the past two or three years, IFAs have also become more sophisticated. Some IFAs have even joined platforms like iFast and NJ India Invest to offer value-added services to their clients," says Gupta, adding that such IFAs today offer "good competition" to banks in terms of the services they offer.
Look at assets also
Banks claims that on account of volatile markets last year and high interest rates prevailing in debt markets, many of them focused on selling debt and hybrid schemes such as short-term income funds and capital-protection oriented funds. Though debt funds yield negligible commission, capital-protection oriented funds earn as high as 3% (on the investment amount) upfront commission; no trail fee gets paid. Since these are closed-end funds, the entire commission is typically paid upfront to the distributor. Of the total sales of MF units worth Rs25,737 crore that HSBC made last year, it sold only Rs2,573 crore worth of equity funds. Citibank and Kotak Mahindra Bank had similar numbers, as per our figures.
"Due to prevailing market conditions, customer preferences have shifted towards fixed income products. Hence, in FY12, our share of products such as ultra short-term, short-term, income funds, fixed maturity plans, liquid and liquid plus funds had increased. This has led to an increase in our commissions," said an ICICI Bank's spokesperson. Chowdhry of Citibank says that his bank's offerings include equity and debt funds, asset allocation products, structured notes and also specialized investment options.
Chopra of Bajaj Capital says it's hard to pinpoint a reason or two on why a distributor's income has gone up or down.
For instance, ICICI Bank's commission went up 55% last year as compared with 29% of HSBC. But the actual figures for HSBC are much higher than those of ICICI Bank because of higher actual (gross) sales. Distributors who focus excessively on fixed-income schemes, including JM Financial Services Ltd, Mata Securities India Ltd and Tata Securities Ltd, have seen a drop in their annual commissions as debt schemes, especially liquid schemes, fetch low commissions.
Others like NJ India Invest, one of India's largest MF distributors, work on a sub-broker model where several small distributors are latched on to its platform. Apart from being spread out in Mumbai and Pune, it is also a dominant distributor in Gujarat, where the cult of equity investing is high. Market sources say that's why NJ India Invest has a lot of its clients' money invested in equity funds through systematic investment plans.
Direct investors bring sticky money
Those who invest in MFs directly and without any distributor's help have typically stayed invested in equities throughout the past year. As per figures provided by fundsindia.com, a website that allows investment in fund houses directly without getting any advice, an average of 68% of money that came in was retained between July 2011 and June 2012.
What should you do?
We are not suggesting that investing in MFs directly is necessarily the best way for you. But if you are stuck with a bank where you meet a new relationship manager every year or two, it's better you take your investments elsewhere or do it yourself.
Source: livemint.com
Graphics by Ahmed Raza Khan/Mint
kayezad.a@livemint.com
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