ALERT ALTERNATIVE INVESTMENT FUND CAT 3

Well, who brings the change in AIF rules and regulations is very clearly hinted at, mentioned, and accentuated in this article. The Indian GDP will grow to 5 lakh cr in the next 5 years but the selling of financial products based on past performance will never end.  If you sell (Alternative Investment Fund) AIF and PMS based on past performance you will qualify for Amsterdam, Span, Hongkong Australia, and Singapore trips offered by B2B platforms.  Don’t be surprised. These are the new tools of miss-selling promoted by many B2B companies.  AIFs are being sold as replicas of Mutual Fund products. Don’t be shocked. The truth is that soon this industry of AIF will meet the fate of mutual funds in terms of the expense ratio and earnings.  We all know how long it took for the MF industry to a reduction in expense ratio and earnings and the path from upfront commission to trail commission model. But in the case of AIF, we may not find or get such a time frame. The changes might come fast and they will shake the industry. Don't forget we have Zerodha who changed the dynamics of the broking industry.

May the ticket size might be hiked from 1cr to 2cr. Manufacturers are not only going to suffer but the creditability and beauty of AIF and PMS will be lost for a long time.  A big question has been chasing in the mind of the distributors soon AIF ticket size might become from the current 1 cr to 2cr or 5 cr and the upfront commission might be brought down to trial mode only.

Very soon the Alternative Industry will meet the destiny of PMS where brokerage will no longer be paid upfront and all will be in the trail. Well, thanks to all those companies who are operating through the B2B model in PMS and AIF industry. We know how financial advisors or so-called mutual fund agents who have grown their AUM with the blessings of the market are selling AIF-like Mutual funds.  They also sold PMS in the same way when it was Rs 5lakhs or 25lakhs ticket size.

As AIF has a significantly high commission and the ticket size is 1cr the earning is hopingly around 5% to 7% in many cases. Further, it has the option of charging a setup fee that is over and above the 5% or 7% commissions. Hence the earnings are enough mouth-watering.  Well, most of the wealthy outfits are running and expanding in crazy fashion in this business vertical.  The hiring of the team has gone crazy and also the industry pay package has gone up to an 80% hike now.  Well, a 50% hike in demand is now the most common.

But they are well-trained financial professionals and know the risk and explain the same to the client who also understands the same. But the irony or the slow death of the industry is being introduced aggressively by those distribution companies who are into B2B business models running Schemes of foreign travel.

We all know how the mutual fund industry expense ratio and control in pricing and also change in the pricing mode was introduced by SEBI in the last 15 to 18 years.  Miss selling by banks and by mutual fund agents now called advisors has led to the current status of the Rs 40lakhs cr industry size.

 Yes, these B2B people are selling the AIF and PMS products based on past performance and most surprisingly they are being offered contests like Spain Tour, Amsterdam, and Australia.  These provocative incentive schemes being run in distribution companies create immense miss selling opportunities, which is the birth of major issues.  Most of these PMS and AIF products are being sold based on past performance and the client is not aware of the risk levels of these products. Now when there is a loss in AIF during the initial year the client comes chasing the back of these brokers who propose an exit from these AIF in mid of the period of the fund tenure. The irony is that the client has to pay the exit load whereas the broker faces zero claw-back. In this case, the broker and the distribution company is the clear winner.

In many cases, most of the investors of these AIF and PMS products are being sold in complete darkness where a case of negative returns in initial times raises questions from the investors that even FD products give an 8% return.  When such points of comparison come from the investor it shows how these AIF and PMS products have been sold.   In many cases, it has been found that even AIF is being compared with Mutual Funds and are being sold in the market as a duplicate of MF. In one of our close interactions, it has been found that comparisons are being drawn between a small cap MF which has given a 30% return, and a small cap AIF that closed just 6 months has given a negative 20% return.

In many places, fancy names of AIF products have led to more confusion and the creation of more problems for investors. This has also been a boon for miss-selling by the brokers and so-called partners of the B2B platforms.  The depth of miss-selling has been so deep now that once the capital market tanks by 30% from the current levels all these past performance-based selling and lucrative incentive structures will come chasing as a nightmare to all manufacturers of these products.  Very soon we will find radical changes in AIF fee, expense, and earning structure change which will be just like Mutual Fund or PMS structure.