“At least one-fourth of the effort of distribution channels that were dedicated to selling MFs earlier have now been diluted and directed towards other products such as insurance,” said Amol Joshi, a distributor.
The Securities and Exchange Board of India, in a circular dated October 22 last year, introduced changes aimed at bringing transparency in expenses, reducing portfolio churning, and mis-selling.
The regulator asked the industry to adopt the full-trail commission and mandated all commission and expenses be paid from the scheme and not from the asset management company or other route.
Upfront commissions are paid once products are sold, enabling banks and national distributors to pay relationship managers an amount in proportion with the revenue they bring in. Trail commissions, on the other hand, are paid annually and tied to the investment tenure.
Effective April 1, the TER for fund houses has been capped. The TER for equity assets greater than Rs 50,000 crore, for instance, is capped at 1.05 per cent, against 1.75 per cent earlier.
The TER for lower assets has also been slashed, slab-wise. That for closed-end equity-oriented schemes is capped at 1.25 per cent.
“Any entity that has a high fixed cost or an incentivisation plan linked to monthly revenues might lessen its focus on MFs. New independent financial advisers or those with a relatively small asset base might turn to other products or give up selling MFs altogether,” said a sector official.
Banks and national distributors focused on individual investors might start pushing unit-linked insurance
plans (Ulips) and endowment policies to buttress upfront revenue. High upfront commissions are prevalent in traditional life insurance
policies and can be as high as 35-40 per cent in the first year. In the case of Ulips, the agent commission is 6-7 per cent in the first year and drops subsequently.
AIFs and portfolio management services
charge a recurring annual fee of, say, 1-2.5 per cent. A portion of this is paid to distributors as commission.
“We believe that lower commissions are impacting distributor behaviour due to the ban on upfront commissions and lower TERs. As life insurance products and other investment alternatives such as portfolio management services
and AIFs continue to offer high upfront commissions, banks and other national distributors are now focusing more on these higher paying products,” observed a research note by HDFC Securities.
New independent financial advisers, too, could get dissuaded from selling MFs, given the prolonged period for breaking even. IFAs with a sizeable corpus, however, might stick to selling these, because most had shifted to trail commissions a few years ago and can generate a steady income stream from the existing client base.
An independent financial adviser operating in a tier-3 or tier-4 city, for instance, typically would want to generate a monthly income of Rs 30,000-40,000, requiring him to create an asset base of Rs 3-5 crore. For an independent financial adviser just starting, building this could take at least a year.