Greetings from the new Tavaga office!
Before we get down to brass tacks, we are excited to report the launch of a Jewellery goal on the Tavaga app last week. The money chasing a Jewellery goal tracks the price of jewellery almost perfectly, as it all goes into the Gold ETF in our portfolio. The competition selling mutual funds can’t ever create a Jewellery goal unless they decide to get into ETFs.
The launch of the Jewellery goal helped us balance out the gender ratio of our audience. Close to 50% of potential customers we engage with now are women. While the conversion cycle with women tends to be slightly longer, owing mostly to the absolute neglect of the segment by incumbents, their interest levels are high. We believe that we have a real opportunity to become the preferred advisor for this segment if we focus on goals like Jewellery, and develop more focused features and campaigns for this segment.
Moving on to the main focus of the update this month: the rapid regulatory transformation in our industry.
SEBI flexes regulatory muscles
SEBI, through its latest consultation paper on Investment Advisor regulations has now made it amply clear on how it wants the industry to evolve. It makes it very clear that advice and distribution are separate activities and should not be conducted by the same entity. Read the whole paper here.
Several thought pieces and op-eds have been published on the issue in the pink papers recently. You can find them through Google News – we do not want to sway opinion by linking to specific articles.
What does this really mean?
The consultation paper recommends that anyone selling regular Mutual Funds (MF) under the guise of advice, and pocketing 1-1.5% in commissions, can only do so for a maximum of 3 years from now – and even then with adequate disclosures. This will have greater impact on online MF distributors. Over 90% of start-ups claim that they have the ‘best algorithm’ to pick the ‘best mutual fund’ all for ‘free.’ SEBI has indicated that it is in favour of disabling businesses that survive on AMC-paid commissions. These start-ups can take one of the following paths:
– Becoming pure distributors (Funds India when it started), where there is no element of financial planning or advice. This will enable them to continue to sell regular mutual funds and make commissions; OR
– Charging their clients for the advice they provide and stop being distributors only. SEBI has also proposed explicitly banning anyone not under the IA regulations from calling themselves independent financial advisors or wealth advisors.
In other words, if a Mutual Fund pays you, you cannot help your customer choose funds. If you help them choose funds, you can make money ONLY DIRECTLY from your customer.
How does this effect Tavaga?
As an ETF only platform, Tavaga does not make any money from the Mutual Funds. Therefore, we do not anticipate these recommendations to impact our revenue model. In fact, we at Tavaga are fully committed to the stricter stance taken by the regulators, and have also made a representation to the SEBI on this consultation paper, arguing for a shorter transformation period and stricter fiduciary norms.
SEBI clearly has an eye on, and is inspired by, international developments in this space, such as the US Department of Labor’s April 2016 ruling which redefines fiduciary investment advice, among other things. Please note that we do not claim to know the best funds or where the market is headed. Our algorithms only ensure optimal diversification, given the constraints of the Indian markets and the ETFs available. There is very little subjectivity involved. Besides, our diversification algorithms are based on realised correlations and co-integrations, and are backed by some of the most well-regarded academic research in the field. These quantitative factors typically move very slowly and hence, there is no reason for us to recommend rebalances unless there are large fundamental changes or changes to the microstructure of the markets.
How does this effect competition?
Most of our competitors are selling regular mutual funds bundled with advice. SEBI has also proposed some additional compliance measures for ‘robo-advisors’. The recommendations seek to audit and check the algorithms that promise to pick the ‘best mutual fund’. The proposed amendments will add significant regulatory burden on anyone claiming their algorithms predict the future, while being paid by the AMCs.
Though direct mutual fund sellers that claim to find the best mutual funds for their clients seem to face no direct revenue model impact, they will also need to comply with the proposed robo-advisory amendments. However, most start-ups (80%?) in the investment space currently sell regular mutual funds and might pivot to the direct model (remaining 15-20%?), increasing competition in that sub-sector.
In addition to these, SEBI has also proposed a ban on stock tips and competitions based on the markets (the likes of SAMCO’s Indian Trading League). Although there are not many significant players in this space, it is clear that SEBI does not want finance based gamification to be monetizable.
Why do we believe these changes will be implemented?
This time around, SEBI is very intent on containing the gross mis-selling of mutual funds being carried out by distributors. The regulations requiring disclosure of commissions paid by AMCs to distributors has been implemented. September is the first time that MF investors received a consolidated statement that clearly states the amount that distributors made from the MFs. SEBI didn’t budge and insisted that the disclosure be in rupee value and not in percentages as was being lobbied for by the distributors.
Over the next 6-12 months, most investors will notice these exorbitant fees. We at Tavaga will do our bit to ensure that MF investors understand the magnitude of commissions being earned by distributors who claim to be ‘free’ platforms.
What do you need to care about?
The biggest question in the robo-advisory space now is – With kickbacks from AMCs set to dry-up in 3 years, what is the revenue model of the mutual fund distribution start-ups?
Their claims of MF distributors being robo-advisors were always exaggerated. Actively managed MFs are not Robo products and the most basic, standard value adds of any global robo-advisor like tax-loss harvesting, glide path investing etc. can’t be implemented using MFs.
With the cushy 1-1.5% commissions drying up, time to pivot to ETFs?
Anil Rajan
Hardly anyone notice this 1-1.5% commission charged by bank because they never talk about it. No individual who sells MF even says anything about expense ratio.
It so funny customer buy this without any idea. Infact there are two way to buy MF. One is regular (where bank will get commission just to fill your forms) and the other is direct(you buy from MF house like blackrock, Fidility). These option are available in India from year 2013 itself.
Most of the online buying options of MF charge commission without client’s knowledge or its mentioned in the long terms and condition.
Even though laws are in place, bank are reluctant to help build the Advisory world, since if adviser business grows, noone is going to open CASA and FDs in bank ,which happens to be the easiest mode of making money for Banks (in some Private banks case the minimum balance is as high as Rs 10,000).