The similarity between agriculture and financial services in India is that the middleman makes all the money. The producer, who is the farmer or financial product manufacture and the consumer or investors end up with much less on their hands. The analysis presented by Business Standard (11th April 2012 (http://www.business-standard.com/india/news/top-distributors-make-millions-as-fund-houses-bleed/470840/ ) is revealing. In the financial services industry, the distributors of mutual funds make more money than the fund houses, which are bleeding. Investors are unquestionably a disgruntled lot with returns on investments down due to volatile market conditions since the market crash of 2008.
Why do middlemen dominate financial services in India? Is it due to lack of knowledge by the end user who depends on distributors to invest or is it the inertia or plain fear by asset management companies or for that matter insurance companies to bypass distributors and use more direct marketing methods? Do distributors offer convenience of investing? It is a touchy topic, as many believe that the regulator SEBI is stifling the growth of the mutual fund industry by coming down on fees paid to distributors. There are talks of middlemen losing jobs and many distributors shutting shop. However the fact is that distributors continue to make money at the cost of both the product manufacturer and the consumer and this uneven scale has to be tilted the right way.
So who bells the cat? The regulator should not interfere too much in the market functioning and hence over regulation is not an answer. The job is then left to the product manufacturer and the consumer. The product manufacturer is still cowed down by distributors, as they do not have the bandwidth or the infrastructure for direct selling of their products. It is then left to the investor to by pass unwanted middlemen.
Every single investor has a bank account and almost all banks are on the web platform. Banks in fact sell mutual fund products through the Internet, making it convenient for investors to invest through their banking account. However the convenience of investments come at a cost, which investors do not realize when they invest through their banking channel. There are also third party web based distributors of mutual fund products who investors use to invest. However direct investments through a web based platform provided by a mutual fund is very low (would account to less than 5% of total transactions or even less).
Investors should actually use the web services provided by a mutual fund or insurance company. The cost of buying an insurance product is cheaper by more than 20% and you can save upto 40% if purchased directly from the insurance company. Similarly mutual funds can actually reduce expenses for investors transacting directly with them. Mutual funds and insurance companies should encourage investors to transact directly with them by providing transparency on the products and by giving sops such as lower expense ratios etc.
The number of different schemes floated by the many fund houses or insurance companies pose of challenge to investors The question of where and what to invest in is answered by either making the distributor work for his or her commission by presenting analysis or by subscribing to various research publications available in print or online.
Distributors should earn their keep
Investors should make distributors earn their commissions. Investors should make distributors justify an investment recommendation and present it with a comparison on other investments on expenses. Distributors should disclose the commissions paid by the product manufacturer. Distributors should also encourage web based investments if they are cheaper. Investors can then pay fees to the distributors for value added services.
Distributors play a role in bringing new product manufacturers to investors. The more number of financial service providers the better for investors as high competition keeps performance up and costs down. However, distributors while taking new funds to the investors must be transparent on why they are selling the product. This will go a long way in making the investor believe that the distributor is acting in the client’s interest.
The financial services product manufacturer and the investor making money at the cost of the distributor is the best for all, just as in agriculture when the middleman is eliminated or kept in check.