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MF News Countries with commission based model have lower expense ratio: FIFA

Countries with commission based model have lower expense ratio: FIFA

Countries with fee model had average expense ratio of 2.77% whereas countries with commission model had average expense ratio of 2.02%, finds a Foundation of Independent Financial Advisors (FIFA) study.
Ravi Samalad Jan 3, 2017

Representatives from FIFA met SEBI officials recently to present their views on SEBI's consultation paper which has proposed to bar them from offering incidental advice. 

FIFA has shared these recommendations sent to SEBI with Cafemutual.

SEBI chief U K Sinha has been stressing on the need to bring down the TER. To draw SEBI’s attention towards the competitiveness of expenses charged by Indian MF industry, FIFA presented a study on expense ratios across 25 countries. FIFA’s study reveals that the average expense ratio was higher in countries with fee based model than those countries which followed commission model. Countries with fee model had average expense ratio of 2.77% whereas countries with commission model had an average expense ratio of 2.02%.  

The association has presented findings from a study conducted by UK’s market regulator Financial Conduct Authority to SEBI: 

  • Increase in total cost to investor (MF expense + fees paid directly) paid now are higher than in the earlier embedded cost structure. In U.K. the pre-retail distribution review (RDR) cost was 1.75% which has increased to 2.25% post RDR. Click here to read the full report.
  • The minimum investible amount for an investor to be serviced by an adviser has gone up substantially – leaving retail investors unserviced or to fend for themselves.
  • This study confirms the creation of an ‘advice gap’; namely lot of investors being serviced earlier in the commission model are no longer serviced under the fee based model.
  • Steep reduction in the number of advisers.

Highlighting the repercussions of banning commissions, FIFA presented a study titled ‘Indian Mutual Fund Investor’ done by research firm Finalmile which pointed out that doing away with embedded products is not beneficial for investors. “Evidence has begun to emerge, however, that when regulatory agencies seek to increase transparency by outright prohibiting embedded products from the industry-thus forcing current and potential investors to evaluate and negotiate the terms (scope of fees) of their advisory services- many investors either draw from the market or never enter,” states the report.

FIFA has cited some of the key findings of this report which bring out the unintended effects of transparency on investors:

  • Difficulty assessing the real value of advice offered by advisors
  • Unwillingness to pay for transaction and advice separately
  • Investors get susceptible to irrational decision making during market volatility
  • Lack of regulatory protection or recourse from self mis-selling

Stressing on the fact that commissions earned by MF distributors are not high, FIFA has done an analysis of data presented by SEBI to its Mutual Fund Advisory Committee. According to FIFA, the data shows that the percentage of commissions paid on AUM of Rs. 8.04 lakh crore was just 0.59% or Rs. 4,755 crore (before levy of service tax) in FY15-16.

 

11 Comments
Prithwi Nath Keshari · 1 month ago
Thanks FIFA of bringing this unique analysis. SEBI should consider usefulness of commission based model over to fee based.
Actually IFAs are in state of confusion whether to stay in comission based or fee based model. Mine is at age 76 and have been on commission based model since last 16 years but from SEBI enforcement likely in future we IFA are near to be debarred from Adviisory Roles even with our competence to core value cast in perfection of total awareness to financial maths, fund reviews.
MF in fact in its age almost infant is undergoing split of ideology Direct to Regular, IFA to IRA and god knows what more distortion.
Our positioning hve been near to bottom as IFAs . Is this community near to extinction even with certfication of AMFi. Why so many gradations??
Ranjan · 1 month ago
SEBI Chairman Mr.U K Sinha is stubborn in implementing RIA and though he circulated consultation paper but there is no use of it because in spite of negative comments from various stakeholders including IFA association he may not take positive suggestions given from various sources and stick to his RIA model
Brijesh Singh · 1 month ago
You can't change SEBI instance.The are I'll bent to destroy MF with the support of AMC.My advice to IFA is look for some other work. It will be fun. .banks advising custmers.
atul agarwal · 1 month ago
thanks fifa for make as life suuort system for all ifa.
Dweepesh · 1 month ago
Thanks FIFA
Ramesh Bhat · 1 month ago
Thanks all the Gems in FIFA Team and their tireless efforts
P Sateesh · 1 month ago
Good information studied by FIFA
Sebi they dont know ground level problems
And thanks FIFA working hard for mf distributors
Ajay · 1 month ago
Great efforts by FIFA, confirm the fears of Abhimanyu like harakiri by investors. banks & such other institutions will be party to misselling as usual. I am afraid with SEBI's proposed distribution only model, new distributor fraternity will emerge who will sell high commission products as they will not be responsible for advice.
Ajay · 1 month ago
Great efforts by FIFA, confirm the fears of Abhimanyu like harakiri by investors. banks & such other institutions will be party to misselling as usual. I am afraid with SEBI's proposed distribution only model, new distributor fraternity will emerge who will sell high commission products as they will not be responsible for advice.
mohd arif · 1 month ago
Thanks so much ,FIFA for bringing hard fact .
Ratan · 1 month ago
I think unless we come together,and protect ourselves, sebi will enjoy the power

I leatraly have do we have any data if ifa were we can communicate each other their should be some process
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