On October 22, 2018, SEBI banned upfront commission and asked AMCs to follow all-trail model to compensate distributors.
Over the last one year, players with a sizeable book have adjusted to the new economics of lower commission but the move has adversely affected the business model of smaller IFAs. In fact, AMFI’s latest data on status of registration of new ARN shows that while the industry has added 4489 new ARNs under individual category in April-September 2019 as against 10965 IFAs in the corresponding period last year, a massive decline of 60%.
Post October 2018, the new ARN registrations of IFAs has declined steadily.
We spoke to a few industry experts to understand the impact of upfront commission ban so far and the way ahead.
Ashwani Bhatia, Managing Director & CEO, SBI Mutual Fund believes that while the move may create a short-term dip in revenues for both mutual funds and advisors, these measures are a big positive for the industry over the long term. “One cannot deny the fact that number of distributors has been going down steadily post ban in upfront commission. However, the move has helped the industry reduce churning. Going forward, I strongly believe that we would see more people becoming mutual fund distributors due to increasing demand. Since banks deposits have been going down, mutual funds is the clear winner in terms of returns and taxation. Today, many people know mutual funds sahi hai but only advisors can tell them that kaunsa mutual fund sahi hai and aur kyu (which mutual fund is good for investment and why).”
Seconding his views, Kailash Kulkarni, CEO, L&T Mutual Fund said that only a fraction of distributors were affected by the move. He said that most distributors have been following all trail model for years. He said, “It is a big positive move for the industry. In my view, most IFAs have been following even before SEBI implemented it. However, a few category of distributors like banks who relied on upfront model took some time to readjust to the new commission model. Things have settled now and no one is talking about it.”
Swarup Mohanty, CEO, Mirae Asset India has a different opinion. He believes that the decline in income of distributors has more to do with the markets than upfront commission ban. He said, “Trail model is the best for distributors who want to grow their business over the long term. Here, income of distributors is directly proportional to the NAV growth. I think the current decline in distributors’ income is largely due to not so good performance of mid and small cap funds. Last year, many distributors have aggressively sold mid and small cap funds.”
He further pointed out that distributors from B30 location have been affected due to applicability of the additional 30 bps only on retail AUM. Also, distributors relying on NFOs have been affected. “I think distributors who were not so serious have been wiped out. But those who have continued will grow in future considering the low penetration of mutual funds,” said Mohanty.
Uddhav Tulashibagwale, President, Pune Independent Financial Advisors Association (PIFAA) said that while the long term impact of the all trail model will be positive for manufacturers and distributors, there has been short term hiccups due to higher cost of acquisition of new clients. “Distributors focussing on SIP book will have to wait long to create wealth out of distribution business. However, the move has helped distributors build a long-term focus. This is evident from the substantial reduction in churning in the past one year. So while it will affect revenues in the short term, patience will be rewarded.”
Neelesh Shah, President, KAMFA said that the ban has only affected distributors who relied on hybrid model i.e. upfront plus trail commission. However, most of them have understood the power of trial commission and are trying to adapt to these changes. “The only major concern for the industry will be addition of new distributors. In my view, distributors focussing only on MF business will be the thing of the past. Only those who have some other business like insurance and real estate advisory will look at mutual fund distribution to increase their offerings.”