In its latest move, SEBI has banned upfront commission paid to mutual fund distributors and asked fund houses to move to all trail model. In addition, the market regulator has introduced newer slabs of TER in which it has reduced expense ratio with the increase in size of the fund.
We spoke a few industry experts to understand impact of these decisions.
Blow to earnings of MF distributors
With rationalization in TER, earnings of mutual fund distributors is likely to come down. A Mumbai-based financial advisor requesting anonymity expects that earnings of distributors to reduce by 15 to 20 bps. “SEBI has made changes to TER based on the size of scheme. Of the total 400 odd open ended equity funds, only 20 schemes have AUM of over Rs.10,000, which is just 5% of the total open end schemes. New slabs suggest that there will be a decline of 17 to 30 bps in such schemes. However, the reduction would be 10-15 bps in most open end schemes.”
Talking about the impact on various distributors type, a senior official of a large fund house believes that ban on upfront commission will largely affect banks. “There will be a big blow to banks as most of them incentivize their relationship managers with upfront commission. These banks will have to revisit their strategies.”
Prathit Bhobe, CEO, Tata Mutual Fund, however, believes that there will be short term pain for long term gain. “Most banks are cash rich and can pay incentives to their employees from their own books. I don’t think that banks will take time to adjust to these changes.”
Discourage budding IFAs
Sunil Subramaniam, MD and CEO, Sundaram Mutual Fund believes that customer acquisition will not be viable any more for distributors. “Ban on upfront commission will discourage IFAs to bring new clients since cost of acquisition has become unviable. Assuming that if an IFA brings in new customer investing Rs.1 lakh in an equity fund paying 1% upfront commission to him, he would get Rs.1,000 as upfront commission, which is just Rs.80 a month. However, to acquire this client, he would have spent over Rs.800 on taxi and coffee. Hence, most distributors would be better off servicing existing clients to grow business.”
Seconding his views, Mumbai advisor Ritesh Sheth of Tejas Consultancy believes that industry would find it more difficult to attract new distributors. “Budding IFAs will have to wait for at least 3 years to make some earnings through mutual fund distribution. It is like working for years without salary. Also, IFAs bringing in small ticket investors will find it unviable to service them.”
Shift to other financial products
Subramaniam believes that most banks would aggressively sell insurance policies, alternative investments and PMS, as they are more rewarding for them.
Bhobe too feels that distributors will shift their focus to AIFs and PMS. “Most banks will aggressively distribute alternative products and PMS after ban on upfront commission. These products offer higher incentives and at times, deliver better risk adjusted returns.”
However, there will be no major impact on IFAs. Swarup Mohanty, CEO, Mirae Asset said, “Most IFAs work on all-trail model and hence, they would not go anywhere. In my view, flow will continue in mutual funds despite rationalization of TER and upfront commission ban.”
Difference between direct plans vs regular plans to reduce
Mohanty believes that the difference between the expense ratio of direct plans and regular plans will decrease. “Though I cannot say if mutual fund distributors will benefit (due to narrowing of the difference between direct and regular plan expenses) by this move, it is certain that the difference will be reduced.”
Another senior official believes that price sensitive and tech savvy investors will continue to invest in direct plans. He said, “Currently, average difference between direct plan and regular plan is somewhere close to 0.70% in most schemes. This will come down to 0.50% after introduction of all trail model. However, price sensitive and savvy investors will continue to invest in mutual funds through direct plans.”
SIP story to continue
Bhobe said that since SEBI has allowed fund houses to do upfronting in SIPs, the industry would continue to receive strong inflows in mutual funds through SIPs.
Mohanty said that IFAs would get more focussed on SIPs. “This is a welcome move. The industry will continue to have inflows through SIPs. Also, these inflows will be long term in nature and would benefit all stakeholders be it investors, advisors and AMCs.”
Some shift to small size funds
A senior official of a large fund house feels that banks and IFAs will shift to small size funds expecting to get attractive trail commission.
However, Bhobe feels that there will be no major impact of this reduction in small sized funds. “There will be hardly any difference in trail commission in absolute terms. Since trail is given on NAV, good performing funds will continue to get inflows irrespective of its size.”
Subramaniam too believes that IFAs will distribute schemes based on performance, track record of schemes across cycles and brand value of the scheme.
End of close end saga
Close end funds have now become unattractive for AMCs and distributors. Subramaniam said that SEBI had signalled earlier that the market regulator would not give approval if they do not find offering unique. With further decrease in TER to 1.25% in equity funds, it is not a viable business for anyone, he added.
