While the investment markets go through ups and downs, many mutual fund distributors are increasingly concerned about the new commission rules that the Securities and Exchange Board of India (SEBI) may be in the process of introducing.
Since I last wrote about this a few weeks ago, I have come across a number of distributors who feel that the new rules will completely disrupt this business. Mutual fund distributors have thus far been paid a commission by the fund company, deducted from the investment an investor has made, with the commission decided between the distributor and the company.
The proposed rules envisage a system under which the distributor and the investor will negotiate a commission, which would be paid either directly by the investor to the distributor or through the fund company. Regardless of the route, if the proposals become rules, there will be free, negotiated pricing. And that is scary for distributors.
Are these fears justified? I'm not sure, but the situation does remind me of an article I read on cnn.com a couple of days back. In a town in Ohio, USA, a caf and #233;, of all businesses, has switched to an open pricing policy and is apparently thriving. Sam Lippert, the caf and #233;'s owner, has removed all prices from his menu.
When patrons finish their meal, they tell him what they thought the food was worth - and pay it. He accepts whatever they offer without complaint or comment.
Sales are up due to the novelty factor, and Lippert finds that his price realisation is also higher: some pay less than what he would have charged, but others pay more. Lippert got the idea from his Bulgarian girlfriend, who told him that in parts of Europe, some cafes allowed customers to decide on a meal's worth.
Will free pricing work in the distribution of retail financial products? I believe it will. Also, I believe that smaller distributors may be at an advantage if this happens. A recently-sacked sales guy from a top-flight 'wealth management' outfit told me in a confessional conversation that the big outfits consciously churned investor holdings because that was the only way they could make any profit. If an investment is uselessly churned four times a year, the company makes eight per cent instead of two. This would be harder to do under the kind of transparency new rules will bring in.
A differentiated market where different suppliers offer different prices depending on the depth of services will eventually be better for all concerned. From what I hear, there are plenty of lobbies at work to maintain the status quo.
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