Saturday, May 25, 2019

Mutual Fund Distributors on the Verge of Death Series 2

How many times one IFA have to face rough words of his client? It was not a mistake being IFA, it sold the product and then the client suffered loss.  When IFA started the business he was told look into the Offer document to check the objective of investments. Now does IFA need to become a portfolio analyst before recommending any product? An IFA cannot get back to school to study now. Falling revenues and loosing clients have now become now inevitable.

The revenues have fallen and IFA’s are already in problem with the current mess created by the AMC. To whom I shall write or address to get a solution to my matter. The client wanted returns and we gave them products. But managing the products and generating a return from them is the work of the AMC and their professionals. Then why I should lose the client. What explanation should I give being an IFA for the fiasco in debt products? The current scenario will push these clients towards Bank FD  and will never attract Mutual Funds to them. 

If an IFA  go to AMFI then indirectly he will file the complaint to those who about AMC and the irony is that he will submit the complaint to the AMC Heads about themselves only. AMFI is run by the AMC people and by the IFA community.  Why does the AMFI need AMC people to represent to the government why can’t the AMFI be headed by the IFA community?

The financial market is under a critical phase.  Mutual funds are no longer Sahi hai. Last 1 year we all faced the burn of IL&FS, ZEE and then few NBFC stock problems. Long back we faced Amtek Auto problem and few more which I don’t remember.

The performance of FMP has also been impacted.  Credit Risk-based papers are best suited for well-defined products under the category. The strangest part is that Liquid Funds which should have a maturity of 90 days to 180 days in terms of papers being invested how they get into negative return phase. This is because those risk-based papers were held in those Liquid Fund product portfolios. The most surprising part is that same risk-based paper has been included in every category of Debt Mutual fund.  How can this be allowed? Why did not SEBI interfere into the portfolio being managed by the Debt Mutual fund category?

The debt fund is collapsing due to the inbuilt structure of products where the papers itself are no longer plain vanilla products.  When the unlisted firms in the Zee group which borrowed money, pledged the shares in listed group companies as collateral. When these companies defaulted happened, and some creditors sold the pledged shares, the share price crashed. So creditors could not recover the full value of their outstanding loans.

We all know that DSP, ICICI, Reliance and few more AMC brings a huge number of FMPs. Now in order to generate a return from these FMP ones needs debt papers and lack of papers brings the Fund management team to look for poorly rated papers under the Name of Risk-Based Debt paper.

The ZEE group story will occur with many more companies as on when their times come.  Debt Mutual Funds are on the tip of Iceberg. The Fund managers and AMC greed of beating the players within the circle and generating superior returns have created this mess.  

The biggest problem as on date is that the NBFC sector is reeling and hence many ancillary industries will suffer. This will impact the debt instruments floated by them as they have commitments to payback and this is where Debt Mutual Funds faces problems.

Well, we currently don’t know how much-leveraged debt holdings are there in the debt mutual fund space. But if any IFA loses any clients who will take the blame and who will compensate?

Coming back to the question where an IFA will complain.

INDIAN NBFC Non Core Sale & New Draft rules are Difficult

Non-Core Assets & Liquidity is going to keep the Indian economy under problem.  The new regulations for NBFC are going to be a tough job. They will not find the high liquid assets (HQLA) component to maintaining the Liquidity Coverage Ratio (LCR). Most of the AMC have complicated assets involved within their system. These assets are long term nature and less of short term nature. 

They have to cut down on bad assets and in many cases might have to take hit on the books. Remember where Banks faced problem-related to lending that is the place where NBFC penetrated and hence the quality of checks were ignored in most cases and linnet policies and measures were followed.  These investments will pose the biggest risk. For example, one Housing Finance company gives loans to Mumbai real estate segment where OC is not available.  In other words where banks reject to give loan them.

Most of the NBFC has ventured into non-core business as a part of diversification and this is the place where exiting those businesses will be challenging.  Around Rs.15000 cr to Rs.20000cr non-core asset is being held by these NBFCs. Promoters of most of the NBFC have pledged deals which take this number too high. Most of the NBFC shifted from the core business to enhance returns from investments. These investments length and non-disclosure in proper terms are the real problems behind the industry. RBI is very clear that it wants these NBFC to get back on the track by selling noncore assets and this is the reason why RBI does not want to inject liquidity.

Starting April 2020, NBFCs will have to maintain a minimum of 60% of LCR as highly liquid assets which will be increased in a calibrated manner to 100% by April 2024. Well 1-year time frame for 60 % itself is going to be a problem since most of the NBFC books size is so big that to have liquid assets component to maintain the Liquidity Coverage Ratio (LCR) is going to be a nightmare.

But I find that this step will be another failure since the existing the asset-liability management (ALM) have not been followed and only when the crisis of the IL&FS came to limelight the trigger of ALM checking came into the picture.

All the NBFC have intricate intra-group fund transfers and have been involved in the diversification of funding. The AAA ratings are just junk of paper rating and have now worth when the collapse of the Financial Company happens. The ratings have no value during the PRE 2008 the financial crisis and even after 11 years they still in the same place. For a common investor, the risk of investments is calculated based on the rating of the paper. If the same rating is just junk then where does the investor stand at that time? This is the most common situation for an investor.

The biggest challenge and where the government will have negligible scope to play is injecting liquidity. NBFC plays a pivotal role in terms of the consumption economy within India. The rural market consumption will slow down which will impact the manufacturing industry and also long term investments. Trade and business are already facing the heat of Trade war which is impacting the exports.   

Low banking penetration in the last couple of years have given immense growth to NBFC and the same NBFC don’t have liquidity then that will impact growth.  Consumer durable and non-durable both will be impacted. Auto industry and all those industries which are linked to borrowed consumption will face major setbacks.

NBFC needs funding or rather make Banks free up its arms to lend and increase the retail lending arm so that the economy keeps going. The only aggressive approach by the Banks till full confidence is built on the NBFC side will help Indian GDP to grow.

Who will buy the Noncore assets of NBFC? Selling them will not be easy.

Tuesday, May 14, 2019

Crude price to Remain Low & Trump will win 2020

Why the Sanctions on IRAN is so important and why the US wants to have a monopoly in crude supply and kill the shareholding of the OPEC is a trillion dollar question?  At the same time being an economist I find that till 2020 and may be beyond the same crude will remain low despite any war etc. I have also tried to figure out that Mr Donald will win the 2nd term also in 2020. 

Now let’s get back to the 1st part of the thesis so as to prove the final one.  OPEC will have negligible scope to control or inflate the prices. Crude prices will remain low despite any political unrest or oil supply problems. Well, it has less to do with Donald Trump and more with the political owners who own the crude market. Climate change is bound to get hammered when political involvement is on the Oil companies’ stock prices escalation.

Mr. Trump has also millions of dollars directly invested in the fossil fuel industry. The FOSSIL FUEL based company’s stock price escalation in the last couple of years reveals how much net worth has grown for the political members associated with the same. Net income for the 43 U.S. oil producers summed up to a total $28 billion in 2018, which is a five-year high. Based on net income, 2018 became one of the most profitable years since 2013.

The return on equity by the companies in the US has been quite phenomenal.

The crude money plays a pivotal role in the upcoming US election in 2020. Below is the list of the contribution made by the US oil Giants in the Presidential election where both the segments Democrats and Republican both have held over the contribution made by this industry. 

Well, the same contribution with renewed new figures will come up soon in 2020. This is the prime reason why the US will play a monopolistic game towards controlling the price of crude and not letting OPEC have its share increase. The various countries which were crude suppliers are now in deep trouble giving immense space to the US to play its cards.

A a quick look at the contribution made by the OIL Giants towards US Politics:
·        Amount the fossil fuel industry spent during the 113th Congress (2013 & 2014) on contributions to Congress’ campaigns: $42,373,561
·        Oil, Gas, and Coal lobbying total 2013:  $156,776,386
·        Oil, Gas, and Coal lobbying total 2014 : $151,437,335
·        TOTAL amount spent by Big Oil, Gas, and Coal in 113th Congress: $350,587,282 ($350 million and change)

These numbers speak and support why crude prices will be lower and why OPEC and other countries will keep losing their shares and US will keep gaining its muscles. US banking industry is longer in those Golden days as compared to Pre 2008 era. Hence the flow of capital is now coming from Oil Giants.

Now a big question in everyone’s mind is that will Donald get a 2nd term. Well, he is bound to get it. He has been able to keep crude prices low and hence Americans have been pretty okay to pay bills. The industrialist lobby is happy with the scrapping of climate change and giving more subsidies to these oil companies.  Yes subsidy the indirect tax payer’s money going to the pockets of the oil Giants.

The basis of the argument that Mr Donald will win the 2020 elections also is based on much the favourable decision was given in favour of the oil giants. He is going to be funded by them only.

  1.          Withdrawal of the United States from the landmark Paris Agreement,
  2.          Repealed President Barack Obama's carbon-cutting Clean Power Plan
  3.          Rolled back mining restrictions
  4.         Reduction in Outer Continental Shelf royalties
  5.         Rollbacks of Obama era fracking and methane emissions rules.
  6.         Ignored government climate reports
  7.      Repeal of the Obama administration's ban on offshore oil and gas drilling in U.S. coastal waters.

      The above few changes by Mr Trump gives a clear indication that he is going to be backed by the Oil Giants in 2020 to print money for the next term for these people. Well for crude importing countries its joyful time or rather era as crude prices remain much below the level of $100/barrel.

Well What was lost in the 2008 crisis by the BIG Giants of the American economy I find  10 times have been earned by them in the last decade.

Sunday, May 12, 2019

Mutual Fund Distributor Many Suggestion ...But None Works Easier

This month the brokerage came much less as compared to my previous months. Around 20% to 25% decline, I witnessed in my trail income.  Well I am speaking about the trail AUM income on historical AUM. AMC is not bothered about us. They have reduced the brokerage more compared to the reduction in TER. The sharing ratio from the AMC has come down significantly for distributors. The biggest problem is for those clients where I have to pay a certain part of the trail for the high ticket size business which I pool. If I don’t pay clients then they will drive their AUM towards Direct Schemes. The competition in buying a business is too high and too challenging. 

The challenge is significantly high for a newcomer to this industry. In the last 5 years, many people from AMC left the job and started their own shop. Well, the lucrative nature of the industry made them earn more compared to their jobs and also as the trail show was good building the AUM an enjoying the fruits for the long term.   The current falling brokerage on Historical AUM turns out to be a nightmare for IFA.

Falling earning raises the biggest question about my Fixed Cost burden which is to be managed every month despite any size of AUM I have. Someone is required to service the clients and other miscellaneous cost related to the office.  

Someone suggested that to have new products in my kitty like Insurance and Fixed Deposit. Well, I have set up this business and we all know that after months of effort the 1st deal gets to happen.  Getting into new products and selling them takes time. Further, all IFA will be joining the same segment of selling insurance and the challenge will be the same in buying a business. Every client knows about the earning of an Insurance selling agent and hence buying business comes into play.  All clients are mainly covered by dozens of life insurance products by LIC hence where do I stand.

 Retaining the existing clients and earning out of them is tough with falling margins. This is the place of stagnation of my business. Understanding equity and selling the same through Mutual Fund was easier and well-educated work.   Clients will invest but servicing the same through online alone is not sufficient. Many or rather most of the clients want me to visit them. How do I manage that cost? Now please don’t tell me to do skype calling and video calling. Indian mindset of investor is that and IFAN might have many names but at the end, he is an Agent.

On the other day someone senior from the Financial Distribution industry advised focussing on HNI client segment. But HNI clients are not so easily available and even if they are few HNI clients the biggest challenge with them is to “Retain” them under the threat of Direct Schemes availability.   

Someone further told be set up an office in B-30 zone and focus on client acquisition. Well, suddenly how I can shift and procure clients in B-30. Getting a channel to penetrate for a Midsize IFA or a small size IFA is a herculean task. Having a local presence is one of the important requirements of growing business in any area. B-30 and T-30 are just definitions by the regulator but the reality is that one needs to have a huge backup of the network to build this business. For a large size IFA the challenge will be fixed cost burden to set and then generate revenue from those location.

HNI client’s community moves together. When one HNI adopts new things the same is being spread as wildfire across other HNI. Hence that segment of the business is a challenge.

Insurance is a new subject domain and hence adopting the same and understanding the products, claims related issues and how to convince clients to buy becomes a major challenge. Insurance is a commitment for the long term.

Investor procurement support from the AMC has dried down. Getting new clients is a difficult task. Well for me one client is new but for the Regulator, he is an old client.  The new of set rules have created new problem for making clients.

 Earlier their used to be marketing support form AMC but now suddenly these things have changed where no support is being given. The whole cost of marketing has now come upon the shoulders of the IFA.

This month trail brokerage reflected that I need to cut down the cost but my biggest worry is that how do I survive in the long term?

Monday, May 6, 2019


In one side the TER is coming down and simultaneously the brokerage is also coming down. How will I run my family?  In continuation to my previous article on Mutual Fund Distributors are on the Verge of Death it is being found that the Push of change of industry towards advisory does not have much to pay or earn for the distribution fraternity. The industry wants to move towards financial advisory and charge fee from the client. But when multiple free advice is available why the client will pay fee to me.

Now  did any one bothers to ask the client that does he really want a fee-paying financial advisor? It’s not about the quality of advice being given by the advisor but the willingness of the client to pay the fee.  This is the mother of the issue of the new changing industry.

The Mutual Fund Advisory business is a big hurdle in India. The mindset of the investor is the big hurdle. Financial advice or rather a tip is required by every client but when it comes to paying for the same the number of count of people seeking the same come down. Many financial advisors will take great effort to  get proper financial planning designed for their clients but when it comes to paying the fee the client may pay you for the 1st year some charges but may not turn up in the 2nd year.

The freebased advice is the biggest hurdle and lack of proper minimum guarantee of the advisory fee is the biggest factor where the financial advisory is not being taken up seriously by the client. The Indian client mindset is that a Broker remains a broker and why I should pay him a fee when he earns a commission.

Direct schemes have changed the landscape of investors investing. But the advice of the financial advisor in developing a proper asset allocation and financial planning are few of the key things required for wealth creation.

There is no proper online or any other way where the client can be charged after the 1st year. Leaving execution, giving only advice and getting documented the same down not give proper shape to the financial advisory.

The financial distribution industry is facing a bigger threat from the AMC segment which is clearly indicating that it is not bothered from where the money comes to them-Direct or through a distributor. The recent case of “NIL EXIT LOAD” by an AMC for shifting of Investments from Regular to Direct schemes provokes investors that you don’t need any financial advisor.  The best scheme names are available in the public domain and hence long term wealth can be created by investing within those freely available scheme names.

 If the equity market gets double from today then, obviously the best performing funds as on date will perform in the long term as well. Well, there are a number of schemes which have given stupendous return over the past 15 to 20 years.  

The 2nd most important question is what does a retail client will pay the advisory fee or HNI. Why a retail client who has a portfolio of Rs 10 lacs pay a fee to you. Well there are many clients who have an investment portfolio of less than Rs10 lacs. What a financial advisor will charge these clients.

Online direct scheme facility is already there and hence why I need an advisor. Well, the truth is that everyone is not my client. Now those who used to be my client under the retail ticket size, are no longer clients under the financial advisory model.

How I will run my family?

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