The business of mutual fund distribution could see a phase of consolidation in 2011 after being in a state of change for more than a year
Mumbai: The year 2010 saw the business of mutual fund distribution in a state of change. The year 2011 could be the turning point for the distribution business which since August 2009 had to endure loss of a major chunk of the revenue.
SEBI’s decision to abolish entry load was dubbed unfavourable for the industry but it has possibly sowed the seeds of the emergence of a more professional distribution in future. The New Year could be the defining moment.
Small distributors, particularly in smaller towns, have felt the blow of zero entry loads to be too severe. However, the regulatory action is gradually giving rise to a set of independent financial advisors (IFAs) who are building their business based on trail commission.
CAMS data belies doomsday prophesies
The data on new SIP accounts is a pointer to the fact that fund distributors continue to serve retail investors. A total of 2,31,296 new SIP accounts were opened in August 2010, up 45 per cent from 1,59,369 in July 2009, according to Computer Age Management Services (CAMS), a registrar and transfer agent.
This suggests that the more established distributors have faced the headwinds with grit. The trail commissions received on investments made in mutual funds under their advice has provided them the required comfort.
“We have not changed our business model and we are not charging a fee from our clients. Our business model remains the same as it was three years ago, said Hemant Rustagi, CEO of Wiseinvest Advisors.
CAMS data on distributors also shows that the number of people who have registered themselves with AMFI for selling mutual funds has increased since the abolition of entry load in August 2009. The number of distributors holding AMFI registration numbers (ARNs) had increased to 81,219 in August 2010 from 75,414 in July 2009.
There is expectation that the distribution business will now evolve into a practice that is based more on financial advisory. Commission structure was a key driver for pushing sales of mutual fund schemes before the end of entry load regime.
“More IFAs will take to investment and client advisory services, as the potential unfolds. If the markets also do well, there will be an added impetus,” says T P Raman, Managing Director, Sundaram Mutual Fund.
Dent in profitability
It is true that more people have registered themselves as mutual fund distributors. But this fact cannot be used to say that the situation on the ground is very rosy. The entry load ban has cut revenue flow while increasing the cost of conducting the business. A top Mumbai-distributor told Cafemutual, “Our upfront brokerage too has reduced to just 0.40 per cent from 2.25 per cent. To maintain profitability our turnover should have increased five times. It has not happened.”
India is not the only one to bring in changes in advisor fees. In the UK, the Financial Services Authority (FSA) has barred payment of all commissions by investment managers to advisors from the end of 2012. Financial advisors will have to charge a fee to their investor clients to earn their living. Investors in the UK who cannot pay an upfront fee for seeking advice will have the option to bundle the cost with that of the scheme they were buying.
More trouble
At the height of anxiety over the future of their business, two cases of fraud by distributors rattled the regulators. This led AMFI, on directions from SEBI, to introduce mandatory KYD compliance. Distributors detested this move, particularly the requirement of having to undergo biometric identification.
Client poaching trouble
There was no end to the woes of IFAs. Distributors were faced with poaching of their clients by national distributors. AMFI had found that large number of AUM transfers had happened to national distributors. This game was put to an end by a blanket ban on trail commissions in the event of an investor shifting to another distributor.
Aversion to debt schemes
Retail investments in debt schemes are negligible. The share of retail investors in debt is just 5.40 per cent, or Rs 17,594 crore, of Rs 3.25 lakh crore of debt AUM at the end of September 2010. In equity, the share of retail is 60 per cent of total equity AUM.
The primary reason for low penetration of debt funds among retail investors is that they are not easy to understand. The retail investor better understands fixed deposits with banks. Lower returns as compared to equity and lower commissions acted as disincentives for distributors to sell debt schemes.
“Debt markets are complicated. The returns depend on the interest rate scenario. Debt funds have to be realigned periodically. They are more difficult to manage than equity schemes. FMPs are ideal only if the interest rates are peaking. Moreover the returns could also be worse. So equity schemes are better for investors,” says Rustagi of Wiseinvest.
Some distributors have begun to advice their clients to invest in FMPs or other debt schemes. This is reflected in the increase in number of retail portfolios in debt schemes. The number of folios of retail investors in debt schemes was up 31 per cent to 37.6 lakh in September 2010 from 28.7 lakh a year ago.
