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.