36 CHAPTER II MUTUAL FUND / INSURANCE DISTRIBUTION INTERMEDIARIES & RETAIL INVESTORS This focus of this chapter is to study distribution channels prevailing in India as well as throughout the world. While doing so, researcher has maintained the focus on insurance and mutual fund distribution channels. After finalizing working classification of distribution channels, researcher defined retail investors and also discussed distribution intermediaries’ role towards retail investors. Towards the end of this chapter researcher reviewed retail investor specific studies and discussed various emerging forms of MF / ULIP distribution channels globally.
21
Embed
CHAPTER II MUTUAL FUND / INSURANCE DISTRIBUTION ...shodhganga.inflibnet.ac.in/bitstream/10603/85004/14/14_chapter2.pdfMUTUAL FUND / INSURANCE DISTRIBUTION INTERMEDIARIES & RETAIL INVESTORS
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
36
CHAPTER II
MUTUAL FUND / INSURANCE
DISTRIBUTION INTERMEDIARIES
& RETAIL INVESTORS
This focus of this chapter is to study distribution
channels prevailing in India as well as throughout
the world. While doing so, researcher has
maintained the focus on insurance and mutual fund
distribution channels. After finalizing working
classification of distribution channels, researcher
defined retail investors and also discussed
distribution intermediaries’ role towards retail
investors. Towards the end of this chapter
researcher reviewed retail investor specific studies
and discussed various emerging forms of MF / ULIP
distribution channels globally.
37
2.1 Importance of distribution channels for Financial Services
The financial services refer to services provided by the financial industry.
Thus the financial industry comprises of a broad range of organizations that
deal with the management of money. Among these organizations are banks,
insurance companies, consumer finance companies, investment funds and
stock broking companies.
Lovelock (1983)1 classified services based on various criterions like nature of
service acts, who receives the service, nature of service delivery, type of
relationship, need for customization, need for judgment by customer contact
staff, demand – supply fluctuations, availability of service outlet, customer –
service provider interaction. Researcher applied these bases to financial
services and the scenario emerged is as follows: -
- Financial services are intangible and they are directed towards
things.
- Continuous nature of service delivery.
- Formal relationship between service provider and customer
- High level of customization is needed.
- High level of judgment is needed from customer contact staff
- Low demand fluctuations. Demand is met without major delay.
- Service availability at multiple outlets
- Mainly organization comes to customer but increasingly even
customer goes to organization. Due to technology both i.e. buyer
and seller transact at arm‟s length.
These all characteristics of financial services make distribution channels very
significant. Mutual funds and insurance are those modern financial services
which are needed by corporate as well as retail customers. This entire chapter
will portray various retail distribution channels prevailing in both insurance
and mutual fund industry.
2.2 Mutual Fund / Insurance Distribution Channels worldwide
There are wide differences across the countries in terms of how mutual funds
are distributed. Let us start with mutual fund distribution channels prevalent in
USA.
38
Mutual Fund distribution structure prevailing in USA is well described in
various literatures. An official source for classifying Mutual Fund distribution
intermediaries in USA is reports and various publications of Investment
Company Institute (ICI). ICI classifies MF distribution channels into three
types as shown in Table 2.1 below: -
Table 2.1 – Mutual Fund distribution channels in USA
Type of
Channel
Employer or
Retirement
Channel
Sales force
Channel
Direct Channel
Channel
Members
Employees are
investing in
defined
Contribution plans
through employers
Full service Broker Direct Mutual
Fund company
Independent
Financial Planner
Discount Broker
or NTF (Non
Transaction Fee)
supermarket Banks
Insurance Agent
Share of
channel as
on 2001
48 percent 37 percent 15 percent
Compiled from: www.ici.org
U.S. mutual fund distribution has been concentrated on full-service broker-
dealers which maintain large retail sales force capable of penetrating the
household or retail sector and which are compensated mainly on the basis of
commissions. In recent years, discount brokers have made substantial presence
in mutual fund distribution, compensating for reduced sales effort and limited
investment advice by lower fees and expenses. Insurance agents account for
another 15 percent of U.S. mutual fund distribution which focus on mutual
funds with an insurance wrapper like fixed and variable annuities and
guaranteed investment contracts. Bank branches have played a limited role in
the U.S. Bank channel accounting for the relatively small 13 percent share in
United States Mutual fund market.
Apart from USA, Europe is dominant region for Mutual Fund Industry. The
European countries like Luxemburg, France, UK, Ireland and Italy are
amongst top 10 countries in terms of Mutual Fund industry asset size. These
five countries together manage 27.4 percent of total mutual fund assets of the
entire world. This makes European Mutual Fund distribution channels
important to our study.
39
As shown in the table below, mutual fund distribution through bank branches
dominates in countries such as Germany (80 percent), France (70 percent), and
Spain (61 percent), while U.K. distribution concentrated among independent
advisers (See Table 2.2). But Italian distribution roughly split between bank
branches and independent sales forces. Overall, contrary to US, European
mutual distribution is dominated by bank channel.
Table 2.2 – Share of various Mutual Fund /Insurance distribution
channels in European Union
USA Germany United
Kingdom France Italy Spain
Bank 8 80 10 70 43 71
Full service brokers 31.2
Dedicated Sales Force 25
Independent Sales force 20.3 14 50 44.1
Discount Brokers 8.6 6
Direct Channels 31.9 15 1.1
Others 30 11.8 29
Compiled from: Ingo Walter (1999)2 “The Asset Management Industry in
Europe: Competitive Structure and Performance Under EMU”
A closer look at United Kingdom shows that Investment Management
Association (IMA) disaggregates Mutual Fund (referred as Unit Trusts) flow
data by investor type and distribution channel into the seven Categories. From
retail investor‟s perspective, IMA classifies distribution channels into four
types.
1) Direct investment from Mutual Fund Company
2) Independent Financial Advisor;
3) Tied sales force;
4) Private clients - refers to portfolio management services offered by
banks, stockbrokers and law firms
The table 2.3 below describes each channel in detail.
40
Table 2.3 – Mutual Fund distribution prevalent in United Kingdom
Channel Description
Direct
investment
All sales and repurchases where the unit holder places the
deal directly with the Mutual fund company. This type of
business is likely to arise as a result of "off the page"
advertising, direct mail-shots or spontaneous customer
response to newspaper editorial coverage or fund
performance rankings.
Independent
Financial
Advisor /
intermediary
All sales and repurchases of unit trusts where the order is
placed through an Independent Financial Adviser /
Intermediary. Such advisers will normally be members of
a recognized professional body
Tied sales
force
All sales and repurchases of units in question where the
order is placed through a company's Direct Sales Force or
tied agents. It is important to remember that tied agents
could, for instance, include a bank or building society
branch selling units on behalf of a unit trust management
company from a different parent group.
Private
clients
All sales and repurchases of units arising as a result of
orders from an in-house private client discretionary
portfolio management service. . These could be execution-
only or advisory services, or they could even take the form
of discretionary services whereby the provider may trade
on behalf of the individual investor.
Aslam, John (2010)3 has classified Mutual fund distribution channel as a direct
& indirect distribution channel. Lakshmikutty Sreedevi and Baskar Sridharan
(2003)4 also observed distinction of channels in the developed markets as
personal distribution systems and direct response systems. Personal
distribution systems include all channels like agencies of different models
and brokerages, bancassurance, and work site marketing. Direct response
distribution systems are the method whereby the client purchases the
insurance directly. This segment, which utilizes various media such as the
Internet, telemarketing, direct mail, call centers, etc., is just beginning to grow.
In a nutshell, when it comes to insurance distribution channels one-size does
not fit all Dumm & Hoyt (2002)
5. Multiple distribution channels are the key
feature of insurance as well as mutual fund distribution.
2.3 Mutual Fund / Insurance Distribution Channels in India
Categorizing distributions channels in India is a difficult task, in particular
given the relatively poor disclosure by AMFI & SEBI of distribution activity
in the mutual fund as well as life insurance industry (as compared with
41
disclosure of performance data). Daniel Bergstresser, et al (2004)6 has also
encountered with this problem while conducting study on Mutual Fund
industry in USA.
As per IRDA, Insurance (ULIPs) products are sold in India through various
channels like agents, corporate agents (including banks), brokers, referral &
direct channels. As per AMFI, mutual fund distribution channels are classified
as corporate agents (including banks) and individual agents. As far as direct
channels are concerned, mutual fund companies are exploring various ways to
reach directly. Direct channels like mutual fund company‟s offices, websites,
telephone, mobile, ATM kiosks are evolved in the recent past. All these
channels and channel intermediaries are common for both insurance (ULIPs)
and mutual funds. Again distribution structure is changing and embracing
newer and newer ideas increasingly. Both the industries are observing
emergence of innovative distribution channels. A prominent channel has
emerged in the form of banks. Both AMFI and IRDA do not report data
separately for the bank. They have included banks as a corporate channel.
As researcher has already discussed how bank as a distribution channel is
evolving worldwide. This phenomenon is gaining its importance in India also.
Karunagaran (2006)7 concludes that going by the present pace, bancassurance
would turn out to be a norm rather than an exception in future in India and it
would be a „win-win situation‟ for all the parties involved - the customer, the
insurance companies and the banks. Syed Shahabuddin (2008)8 bank channel
has slowly realized its own potential and is now emerging as a big player for
mutual fund industry. Considering this, one should accord bank as a separate
distribution channel.
In a nutshell, need for multiple distribution channels is obvious for both
Mutual funds and ULIPs as low level of penetration of both the products,
diverse needs of customers, low level of awareness amongst the customers,
increasing number customers emphasizing service.
But the way Distribution intermediaries as classified by the regulators are
increasingly becoming obsolete as newer and newer distribution channels are
emerging.
In this dynamic set up, researcher would classify Mutual Fund
distribution intermediaries for the purpose of study as below: -
42
1) Individual Mutual Fund agents / Individual financial advisor /
Brokers.
2) Institutional or Corporate Agents (Group of people working
together as a company or partnership firm, Mutual fund branch
offices, National or regional level organizations operating through
branches, Distribution houses, etc)
3) Banks.
4) Emerging distribution intermediaries (all those channels which are
not covered by Sr. No. 1, 2, 3)
After classifying Mutual Fund / Insurance distribution intermediaries in India,
researcher will now define the term “Retail investors” in next section.
2.4 Definition of Retail Investors
Retail investors are referred in various ways like non institutional investors,
small investors, individual investors, non professional investors, household
investors.
Stefan Bender (2006)9 a retail investor is an individual who buys and sells
securities for their own behalf not for an organization. Retail investors (non-
professional investors) typically trade in much smaller quantities than
institutional investors. Retail customers define the end of the distribution
chain.
AMFI reports mutual fund folio data periodically in which data is shown for
three types of investors i.e. corporate or institutional investors, HNI (High Net
worth Individuals), Individual (small / retail) investors. AMFI terms those
individuals whose mutual fund portfolio is more than Rs. 5 Lakhs as HNI
(High Net worth Individuals). From this, researcher can make out that retail
mutual fund investors those investors who invest less than Rs. 5 Lakhs in
mutual funds & other similar products.
In a nutshell, retail investors are those investors who exhibits following
characteristics; -
1) Their investments are in small amounts (in terms of volumes and
value) on behalf of themselves.
2) Total investments made in Mutual funds are less than Rs. 5 Lakhs.
3) Objectives behind investing are personal or family.
43
2.5 Role of Mutual Fund distribution intermediaries in relation to retail
investors
Taking a leaf from previous subsection one can easily classify these
distribution channels into direct and indirect channels. Indirect channels
include independent financial planners, Individual financial agents (IFAs),
banks, tied agents, brokers. Direct channels will be Mutual Fund Company
itself, NTF supermarkets, etc.
In India, indirect channels (comprising individual agents, corporate agents
including banks) are the dominant channels but a lot of direct channels are
emerging. Mutual fund investors prefer indirect channel as against the direct
ones. Globally, in most of the countries investors initially use indirect
channels and then slowly shifted towards the direct channels. Even today, in
the sophisticated markets like USA investors prefer indirect as against direct
channels.
John Aslam (2008)10
further studied possible reasons behind Mutual Fund
investor‟s propensity to engage financial advisors and found that behavioral
influences as well as knowledge plays vital role. These influences are
tabulated (Table 2.4) as follows: -
Table 2.4 – Influences for engaging advisor while purchasing Mutual
Funds
Behavioral Influences Knowledge Influences
1) Investor desire for convenience
rather than low cost in fund investing;
2) Influence of fund and distributor
advertising and marketing on the
investor;
3) Investor feelings of inertia rather
than action;
4) Investor feels the need to combine
financial services “under one roof”
5) Investor has feelings of insecurity
rather than confidence;
6) Investor feels the need to validate
fund decisions before transacting;
7) Investor feels the need for a referee
in spousal disagreements over investing
and money;
8) Investor tries to time the market,
especially short term;
1) Investor is a novice rather than
experienced fund investor;
2) Investor has proven inability to
select high-performing funds;
3) Investor has a lack of knowledge
of and/or appropriate education in
fund investing;
4) Investor has inadequate time to
do the necessary “homework” prior
to transacting; and
5) Investor has certain knowledge
of advisor who is a successful
investor to manage his/her fund
investments.
Compiled from – John Aslam (2008)9
44
In short, investors engage advisor for variety of reason like convenience,
inertia, non confidence, indecisiveness, inability, lack of knowledge, advisors‟
advertising and marketing, advisors past performance, lack of time, etc. Many
of these reasons are relatable with Indian retail investors. Victoria Leonard
and Michael Bogdan (2007)11
also found two prominent reasons behind using
advisors one is investment and planning services offered by them and other is
advisor‟s expertise.
To explain the role of Mutual Fund distribution intermediaries in India,
researcher has to go through the fine print of the guidelines given by insurance
as well as mutual fund regulators. Association of Mutual funds in India
(AMFI) made a comprehensive guidelines and the code of conduct (titled
AGNI i.e. AMFI guidelines and norms for intermediaries – refer Appendix D)
so that all those engaged in the business of selling and marketing of mutual
fund schemes follow professional, healthy and best practices for the sustained
benefit of all concerned – investors, intermediaries and the Mutual Fund
Industry as a whole.
AGNI endorses that investors are diverse in terms of their needs; they can
broadly be classified in three categories:-
(i) Those who want product information, advice on financial planning
and investment strategies.
(ii) Those who require only a basic level of service and execution
support i.e. delivering and collecting application forms and cheques,
and other basic paperwork and post sale activities.
(iii) Those prefer to do it all themselves, including choice of
investments as well as the process/paperwork related to investments.
To cater these investors AGNI has listed two types of services an
intermediary should offer to their investors (See Table 2.5).
The cardinal principle of AGNI is “ensuring that the clients’ interest is
protected”.
As per our definition mutual funds includes Unit Linked insurance products, it
will be essential to study the regulation in relation to it. IRDA has stated these
guidelines under two acts i.e. Insurance Regulatory and Development
Authority (Licensing of Insurance Agents) Regulations, 2000), IRDA