Remuneration of Mutual Fund managers\u2019 may soon be linked to\nthe performance of the schemes they manage if the market regulator accepts\nsuggestions of the Mutual Fund Advisory Committee. <\/p>\n\n\n\n
But isn\u2019t\nthat supposed to be the case? <\/p>\n\n\n\n
Why haven\u2019t\nmutual fund houses already linked their fund managers\u2019 pay with their\nperformance? <\/p>\n\n\n\n
According to an article published by Moneycontrol recently,\nSEBI\u2019s Mutual Fund Advisory Committee is pondering over appointing a\nsub-committee to frame guidelines. <\/p>\n\n\n\n
Perhaps\nthe regulator wants to introduce stricter norms clearly highlighting do\u2019s and\ndon\u2019ts.<\/p>\n\n\n\n
While some experts believe such rules might instil discipline,\nimprove governance, and help protect investors\u2019 interests; others believe the\ncapital market regulator is now micromanaging the mutual fund industry. <\/p>\n\n\n\n
Is the regulator really trying to micromanage the Mutual Fund industry or is it attempting to make fund managers<\/a> more accountable for the investors\u2019 money?<\/p>\n\n\n\n RBI\u2019s\nregulations on the compensation structures of CEOs of private sector banks\nprobably inspired the suggestions of the Mutual fund advisory committee. As you\nmight be aware, RBI recently decided to link the remuneration of bank CEOs,\ndirectors, and risk management staff to the financial performance of a bank. <\/p>\n\n\n\n At a time when the asset quality of a bank is deteriorating, CEOs and directors getting a substantial rise in their pay isn\u2019t a justified sight. Case in point, following RBI\u2019s norms, Yes Bank<\/a> clawed back the bonus paid to Mr Rana Kapoor in the past, owing to the bank\u2019s poor performance. <\/p>\n\n\n\n The recent episodes of debt fund<\/a> fiascos have exposed the lopsided nature of the mutual fund industry. It\u2019s been found that instead of accepting the responsibility of the fund managers\u2019 actions, mutual fund houses have preferred to riposte with disclaimers and scuttle behind the fine print. If you recall, recently some fund houses have ungraciously advised investors \u201cnot to treat every chest pain as a heart attack\u201d.<\/em> <\/p>\n\n\n\n It seems\nthe mutual fund advisory committee of SEBI wants to get the mutual fund\nindustry out of its comfort zone and, albeit subtly, send out a strong message\nto fund managers. <\/p>\n\n\n\n Has this development gone down well with the industry?<\/strong><\/p>\n\n\n\n A mutual\nfund industry executive expressed his concerns about the idea of linking fund\nmanagers\u2019 pay to their performance. \u201cIf\nSEBI implements such norms, good fund managers may not want to stay in this\nbusiness\u201d, he said <\/em>speaking to Moneycontrol (on the condition of anonymity),\n<\/p>\n\n\n\n SEBI has time and again introduced several regulations to reduce costs involved in mutual fund investing<\/a>. <\/p>\n\n\n\n However,\nit\u2019s still unclear how the capital market regulator will implement the\nsuggestions of the advisory committee if it decides to accept them. The capital\nmarket regulator will also have to clarify if it\u2019s planning to link the fund\nmanagers\u2019 pay to the relative performance (scheme performance vis-\u00e0-vis that of\nits peers) or benchmark-based performance. <\/p>\n\n\n\n Another\nquestion is—will the regulations govern fixed pay or just the variable pay? <\/p>\n\n\n\n And\nperhaps, this is where experts are apprehensive about the advisory committee drawing\nparallels between the banking business and the asset management business. They\nbelieve, banking is a conventional and stable business as compared to the\nbusiness of asset management, which is subject to the high volatility of\nfinancial markets. <\/p>\n\n\n\n The final guidelines,\nin this regard, would be worth tracking, as and when they are formalised. <\/p>\n\n\n\n Will performance-linked remuneration norms affect IFAs and mutual\nfund advisers?<\/strong><\/p>\n\n\n\n Implementation\nof these norms can be a double-edged sword. Fund managers are likely to become\nmore accountable if their pay is linked to the scheme\u2019s performance. But,\nthere\u2019s also a possibility that they might become more concerned with the\nnear-term performance, thereby losing focus on long-term performance. <\/p>\n\n\n\n Just as RBI\ndid in the case of the top bosses of private sector banks, if the capital\nmarket regulator decides to make 50% of the remuneration of fund managers a\nperformance-based variable component and further caps it at 200% of the fixed\npay, the small-sized fund houses stand on shaky ground. <\/p>\n\n\n\n Fund\nmanagers with a proven track record will seek a higher fixed pay if their\nvariable pay is capped. Smaller fund houses may have to compromise on their\nprofit margins if they decide to rope in\/retain talent. <\/p>\n\n\n\n Mutual fund<\/a> investors and advisers will have to keenly watch whether performance-based remuneration norms lead to higher churning or not, because of the possibility that the fund managers might focus more on generating returns. In market downturns, they might refrain from betting on lucrative opportunities, fearing a possible underperformance in the future. <\/p>\n\n\n\n Mutual\nfund advisers will have to get smart and thoroughly understand the investment philosophy,\nprocesses & system followed by the fund house before recommending mutual\nfund schemes. <\/p>\n\n\n\n Similarly,\nif introduced, one has to keep a hawk-eye-view of how the performance-based\nremuneration affects the expense ratio. <\/p>\n\n\n\n Noteworthy,\nprofessionally run fund houses that are concerned with protecting investors\u2019\ninterest could already be following the performance-based remuneration\npractices. For them, SEBI\u2019s awaited guidelines would be nothing more than the\nformalisation of what they have been doing already. <\/p>\n\n\n\n Consistent performers might pay IFAs lower commissions, but these may not put you in an awkward position in front of your clients. Those offering commissions generously could leave you to fend for yourself if something goes wrong. For e.g., look at how the certain fund houses washed their hands off the FMP debacle<\/a>. <\/p>\n\n\n\n IFAs may still\nhave to face the ire of investors no matter what the weather in the markets\n—rain or shine. <\/p>\n\n\n\n SEBI\u2019s\nintent is pro-investor but in the larger interest of the mutual fund industry. Let\u2019s\nsee what new result, the proposed norms, will bring. We will be tracking this\nstory for you.<\/p>\n","protected":false},"excerpt":{"rendered":" Remuneration of Mutual Fund managers\u2019 may soon be linked to the performance of the schemes they manage if the market regulator accepts suggestions of the Mutual Fund Advisory Committee. But isn\u2019t that supposed to be the case? Why haven\u2019t mutual fund houses already linked their fund managers\u2019 pay with their performance? According to an article…<\/p>\n","protected":false},"author":3,"featured_media":411,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"cybocfi_hide_featured_image":""},"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/410"}],"collection":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/comments?post=410"}],"version-history":[{"count":1,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/410\/revisions"}],"predecessor-version":[{"id":412,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/410\/revisions\/412"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media\/411"}],"wp:attachment":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media?parent=410"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/categories?post=410"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/tags?post=410"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}