Regular plans from Quantum funds

Quantum mutual fund company, the AMC that offers Quantum Long Term Equity fund, among others, recently announced that they are going to be offering a regular plan variant for their funds. At FundsIndia, initially we were happy with this announcement. However, when the details emerged about the plan, we were disappointed. The article that they published recently about this move was disconcerting to read, and I decided to write this piece to record my reaction.

If you are not interested in the details and just want to know what would be the impact on you as a FundsIndia customer, here’s the bottom line – there would be no impact. Quantum funds would continue to be available on our platform as they do now. Whether they would be available in the new form (Regular) or the old form (Direct) would be determined more by operational constraints rather than anything else.

If you are interested in the details and want to know why we are disappointed with their plan and why their article was disconcerting, please read on.

Some background

FundsIndia has always carried schemes from the Quantum AMC on our platform since our inception. As a business, our revenue model has been to get trail fees from the mutual fund companies for the advisory and platform services we provide to our (and their) customers. However, Quantum AMC has followed a different model of distribution – a direct to consumer model – and refused to provide any such fees. So, essentially, we have been carrying their funds pro-bono (for free) on our platform. In other words, our offering of Quantum funds has been subsidised by the revenues we got from other mutual fund companies.

So, over the years, we have acquired, supported, and serviced customers of Quantum AMC and investors in their schemes without earning any revenue. Even the charges – such as the bank transaction charges – were borne by us in this regard. We have spoken to the fund house many times in this regard over the years, but they stubbornly refused to even refund such charges citing their “policy and philosophy”. We were not happy, but in the interest of providing a whole universe of funds to our customers, we continue to carry the fund house on our platform.

When SEBI mandated direct plans in 2013, thus voiding Quantum’s USP of being the only direct to customer fund house, they still refused to launch regular plans for one reason or another. And it has been this way since recently.

Today, FundsIndia has about Rs 45 crores in AUM in Quantum funds – making us one of the largest, if not THE largest, distributor of Quantum funds.

And now comes this announcement from Quantum and their article.

Quantum announces Regular plans

About a month back, Quantum announced that starting April 1, they will start carrying regular plans for their funds, and more recently, they published an article in their website explaining the move:

http://www.quantumamc.com/QDDetail.aspx?QDId=595

For an article as short as this, there are a number of problems with it. Let me choose to highlight three issues I have with this essay.

First, their reasoning for why they are launching regular plans. In the article, they say:

From day one, Quantum has maintained transparency in our approach by adopting a team-driven, well-defined research and investment process that generated positive results for our investors over the long term. During Quantum’s lifespan, we have avoided the foggy distribution system that developed at the expense of investors who were kept in the dark, at least as far as the commission they paid was concerned. Hence we firmly stood our ground that till transparency on distributor commissions came into the system, we would pay Rs. ZERO.

There are a large set of distributors who want to work for the benefit of their clients. More than 300 of such distributors are happily working with us at zero fees, reiterating what we have said since inception: we have no issues whatsoever working with distributors who are as passionate about transparency and increasing their investors’ wealth as we are.
In October 2016, things changed. SEBI’s new rule necessitates all mutual fund houses to disclose the exact commission paid to distributors in the half-yearly Consolidated Account Statement (CAS) that is sent to investors. Though our aim was that distributors should disclose commissions directly to investors, it is a start towards giving information that is rightly due investors. And so with SEBI’s relieving news, Quantum is pleased to introduce Quantum Regular Plans for investors, effective April 1, 2017.

So, their reasoning goes like this – We want distributors to be transparent about their commissions, they were not, and so, we were not offering regular plans. Now, SEBI has started disclosing commissions, we are happy, and so we’ll offer regular plans.

This line of logic is so disingenuous, I don’t know where to start.

First, SEBI mandated that distributors disclose their commissions to customers long before the introduction of direct plans. And FundsIndia (and several other distributors) has been disclosing the same in a very detailed manner in our website. The only difference that the recent SEBI move brought about was that these commissions be disclosed not in percentage terms, but in rupee terms. So, to claim that there is a new disclosure being provided to customers causing Quantum to launch regular plans is just a false narrative (and by the way, SEBI made this announcement almost a year ago, so to say that this is some new ‘relieving news’ is laughable).

Second, let’s assume for a second that the disclosure in percentage terms is not good and rupee terms is better and that’s what caused the change of heart. That brings up a question – does Quantum AMC disclose its fund management fee in rupee terms? Do they send account statement stating how much, in rupee terms, was charged to the customer as fund management fees? Do they do it now? Did they do it when they were ‘avoiding the foggy distribution system’? If not, why hold the distributors to a different standard than they were holding themselves to?

Third, let’s assume that not all distributors were providing commission disclosures and only few were. What was stopping Quantum to work with only those distributors that provided the disclosure? It is entirely the prerogative of the AMC to decide who they will empanel and who they will not.

So, the entire claim about them not wanting to participate in the distribution system because it was not transparent, and somehow it is more transparent now is a bogus claim. I mean, if they want to increase their market share and grow AUM, it is their right to do so as an AMC. Just say it for what it is, and please don’t try to maintain a pedestal of being ‘holier than the rest’.

My second issue with the article is about the trail fees that they are planning to provide. You can go to the article to see it for yourself. Suffice to say that it is an extremely low figure that is significantly lower than any other AMC in the industry. Of course, it is their prerogative to set it how they want and the marketplace will react the way it feels best.

The issue I had was this line in the article:

Our sole aim remains that distributors are adequately reimbursed for the valuable advice that they impart to investors.

This is absolutely bogus. Quantum AMC is not in the distribution business (obviously). How do they know that the fees that they are offering would be ‘adequate’? The only way an AMC would know that would be to talk to distributors and find out. I can categorically state that we, likely the largest distributor of Quantum funds in the market, have not been consulted in this regard. The numbers that Quantum has given out are entirely arbitrary, grossly inadequate (let’s forget for the moment the free servicing they enjoyed all through these years), and without any basis on logic.

The third issue that I have with the article is the very next lines after the above line:

We encourage long-term investing; on the same note, distributors who retain investor money with Quantum will receive a higher commission after their clients’ investments with us complete 24 months. Thus the culture of low cost, value-based, long-term investing remains intact for all our investors.

For the record, the commission paid is 0.15% in the first year, 0.2% in second, 0.25% in third, and 0.15% in fourth year and beyond. And this is supposed to encourage long term investing in equity funds?? What a laughable claim! So, according to Quantum AMC, long-term for equity investing is 3 years? And after that, advisors can advice their clients to sell? If the commission structure is purported to ‘encourage long-term investing’, are they saying that the commissions can or should be used to guide an advisor’s investment and guidance philosophies?

Just for the record, we at FundsIndia reject all these premises. We don’t think long-term for equities should be 2-3 years and we don’t provide advice or guidance based on how the commission structures move year after year for a fund. And I think it is irresponsible for an AMC to suggest that we do so.

So, in summary, Quantum AMC is launching a regular plan for their funds based on faulty reasoning, offering inadequate compensation, that is, to put it mildly, poorly structured.

FundsIndia and Quantum AMC: Going forward

As I indicated earlier, our stance regarding funds from Quantum AMC will be unchanged. As is the practice now, our research and advisory teams will not take cognisance of them for analysis or for providing advice to our customers. However, we will continue to carry them on our platform – whether we carry the regular plans or direct plans will be determined by our operations team.