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Guest Column ‘Trail commission ensures that there is no income disruption for distributors’

‘Trail commission ensures that there is no income disruption for distributors’

Committed and dedicated advisers will be able to sustain and grow.
Rajiv Shastri Dec 4, 2018

After SEBI has banned upfront commission of distributors and enforced a compulsory shift towards all trail model, there has been some concern among distributors on its consequences.

Though upfronting of trail is allowed in long term SIPs of up to Rs.5000, it is operationally cumbersome and hence a non-option.

Of the many reasons for angst expressed to me directly and to my team over the last month or so, the most widespread ones are - new distributors may not enter the business and marginal distributors will not be able to sustain. While there is some validity in these concerns, we feel that this phenomenon is more than balanced out by the expected growth in industry AUM and investor participation in the coming few years. The sheer demand for advisers that this is expected to emerge will ensue that committed and dedicate advisers will be able to sustain and grow.

The industry has been averaging a growth rate of close to 25% over the last few years. Even if we expect this to slow down to, say, 20% in the coming few years, the industry will still double in size in the next three and a half years. Since this growth is expected to come on the back of smaller transaction sizes than earlier, it is expected that investor numbers will more than double, possible even triple in the coming three or 4 years. The question that we have to ask ourselves is not whether the industry will flourish, the question really is if we are ready for the sheer scale of what needs to be done.

Coming back to the all trail structure, there are certain spectacular benefits to this that deserve a mention.

Firstly, while volatile in the short term, equity investments are capable of generating significant positive returns over the long term. Since trail commission is paid on the invested amount and not the investment amount, as the investment appreciates, the trail increases as well. And since over long periods of time, equity markets are expected to beat inflation, the growth in trail can also be expected to beat inflation.

Secondly, linking adviser income to the scheme chosen for the investors is a way of getting advisers to participate in the outcome as well. This alignment of interest will naturally yield superior outcomes for investors and advisers alike.

Thirdly, by ensuring that there is no incentive to churn an investor’s holding, a longer term approach to investments will naturally emerge. This is especially important in the current tax environment in which there is a tax impact of transactions, irrespective of the period of investment.

Fourthly, over a few months, the above three combine into a de–facto inflation protected annuity for the advisers, which serves to protect them against the vagaries of life in general and those of the markets in specific.

The last point deserves more detailed explanation. As we can all agree, while equity markets are capable of generating significant wealth over the long term, they can be quite volatile in the short term. It is also well known that investors tend to become quite cautious when markets are volatile, especially when the trend is weak. As such, it is entirely possible that over a short period of time, spanning a few months, attracting fresh investors and encouraging existing investors to undertake fresh investments may be difficult. It is at these times that the annuity from earlier transactions and investments comes in handy to ensure that there is no income disruption. Also, while it is expected that advisers will be committed and dedicated to their role, they do have a right to take a break and go on a vacation. In the absence of an annuity, these breaks and vacations can result in a significant loss of income since fresh transactions aren’t being initiated. Once again, an all trail structure ensures that there is no income disruption.

So while there may be some near term disruption for marginal advisers, we expect this to be overcome by the sheer size of the opportunity that is available. Rather than worry about the short term stumbles that we may encounter on this path, we believe that we need to maintain single minded focus on the opportunity, which is much larger than what we can even begin to imagine. You can count on it!

Rajiv Shastri is the ED and CEO of Essel MF. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.

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Rajivrahalkar · 3 months ago
What about reduction in trail commission rates in near future.HDFMF has already made it's intention clear of reduction in trail commission in the garb of reducing the TER.
Swapnil Mestry · 3 months ago
A good move indeed from a long term perspecive but what about passing on the full TER reduction proposed by SEBI on to the distributor. Why cant the AMC pick a percentageof the burden.... one way street indeed.
vasagan Arasu · 3 months ago
With Fat Pay cheques in hand and sitting in cosy office any body will write only like this.
Deepak Kumar · 3 months ago
There should not
Amffa · 3 months ago
AMC has to understand the cost facter, having to distributor is cost effective than bearing CTC of an employee. AMC should invest on distributors to explore more n more business.
Alagappan · 3 months ago
Sir I think SEBI must intervene and try to reduce the salary of the amc staff since they r all earning salary, bonus esops etc where in if Done the profitability of the Amc increases since every one think that only Ifa make money and mis sell
anurag Dureha · 3 months ago
My belief is that majority of advisors has reconciled with the situation of Up Front being paid as Trail. At least, they get their money, if not in one shot, at least over a period of time. The concern of IFAs is the reduction in Trail rates by AMCs on the pretext of reducing their TER.
All the 5 points, advised by Mr. Shastri, in the above article, are just a repeat and focus on one agenda only - IFAs should increase their AUA. Not a big secret and IFAs don't need an expert of the level of a CEO, to tell this.
I tried the same formula with my maid servant, who asked for a pay hike. I told her to catch hold of more houses instead of asking for a pay hike. I did some arithmetics, the same way as Mr. Shastri has done above, and showed her the potential and earnings growth in future. She murmured something in local language, which, later on, I came to know, was not a decent word. I think she, an illiterate, had understood that I was just fooling her.
Michael · 3 months ago
Totally agree to it..
Murari · 3 months ago
Mr. Shastri , answer my question : Till such time the customer base is doubled up , who is going to take care of the distributors sustenance. His family and children. Please don't rub salt into the wounds. Do you know the concept of ' Opportunity Cost ' . It is better if such articles are not written. The author is telling : Distributors , you may not have bread today but you will have cake after few days. Till such time you live somehow.
Binoy Paul · 3 months ago
HOPE SEBI WILL NOT REDUCE THE TRAIL COMMISSION. While SEBI and AMC leader's incomes are increased time to time, SEBI has history of reducing the poor unorganized distributor's hard earned income.
If Finance ministry will not control these people, new distributors will quit Mutual Fund profession.
murari · 3 months ago
The AMCs will continue to motivate the distributors even if no commission is payable. It is because they do not have the staff to service the clients. Mr Shastri may answer this question : " Can a distributor plan to upscale his business by putting in fresh capital at this juncture when nothing is clear about the future. Now there is another scary news about gradual reduction of trail as per Sen committee report . You know, increasing AUM is not that easy. It requires more staff to service , more capital expenditure , more infrastructure for outreach. No point in increasing AUM when one can't give service " Anyway it has become a fashion with everyone to say " increase the client base" . As if it is the easiest thing to do. Not to forget the advisory from the top to investors to opt for ' Direct" option. One must think that Distributors are all fools and they don't know where they stand. Where is the positive encouraging environment to take any forward looking decision. The least that the AMCs can do is to stop giving advise.
naeem patel · 3 months ago
AMC income rise and distributor income down this is not right. Only small distributor targeted.
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