“We have not found any logic in the unilateral action taken by your asset management company in passing the large proportion of the reduction (in total expense ratio, or TER) to the distributors. We would appreciate if you could let us know the rationale behind passing on the reduction in TER to the distributors,” FIFA, the body representing independent financial advisors (IFAs), said.
Sources say one of the two fund houses has sought time till June 4 from advisors to respond to their concerns. Till the time of going to press, queries sent to HDFC MF and ICICI MF didn’t elicit any response.
According to industry insiders, larger fund houses can deal with pushbacks from advisors.
“While MFs for the most part are ‘push’ products, larger fund houses have a brand ‘pull’ that could still help them attract flows,” said a senior industry official.
The MF industry has been trying to come to terms with the rationalised expenses structure, with effect from April 1, 2019. When the new structure was announced last year, some of the MF players had said they would have to pass on the bulk of cuts to the distributors.
The TER — which indicates the expenses charged to investors — comprises the management fee (which flows into the revenue stream of a fund house) and the commissions paid to IFAs and other distributors.
The advisors feel that the bulk of the cut in TER is getting transmitted to commissions and the impact on the management fee has been less.
However, MF officials are of a different view. “Part of the cuts is also being borne by the fund house. But we also need to understand that the industry dynamics have changed, and therefore, such cuts cannot be wished away,” said a senior official of a fund house.
According to Pawan Parkash Gupta, president of Delhi-based All Mutual Fund Distributors Welfare Association (AMDwA), different pricing for different distributors is another area of concern. “The smaller advisors are the worst hit as they are already at the lower end of the commission rates set by some of the fund houses,” said Gupta. “We would be writing to more fund houses where we feel cuts have been unfair,” Gupta added.
For now, AMDwA has written to HDFC MF, asking the fund house to take immediate steps to address the concerns caused by the reduction in commissions. According to sources, the advisors could also question why commissions related to older assets are getting cut by some of the players. “For growth, we have been conservative in lowering commissions on newer money,” said an MF official.
“However, we have set a floor of 10 basis points on commissions for all distributors, irrespective of their size, and would absorb cuts to that extent to ensure this minimum threshold,” he added.
The Sebi in its board meeting last year decided to bring down the expenses charged to investors and link the TERs to the asset size of the scheme. According to analysts, this meant the schemes with a larger asset size would see higher TER cuts, so that end-investors get the benefit of scale. Both HDFC MF and ICICI MF manage relatively larger sized schemes in the industry.
However, experts say the economies of scale work differently for distributors, compared to fund houses. “The break-even point for a small or new distributor is much longer, compared to a newer fund house. Also, smaller or new distributors have to bear the cost of acquiring new investors, which is not easily absorbed, as they don’t have the kind of operating leverage that fund houses have,” said an industry insider.