From reduction in TER to rationalization in commission, the financial distribution industry has witnessed a paradigm shift last year.
Let us quickly recap the key events of 2019.
TER cut
From April 1, 2019, fund houses have rationalised TER based on asset size of the scheme. While the market regulator has capped TER at 2.25% in equity funds and 2% in all other funds, SEBI has followed economies of scale to reduce TER systematically.
The entire exercise has lowered margins of distributors as most fund houses have shared TER cut with their partners. An analysis of the commission structure shows that most fund houses have reduced trail commission by 15-20 bps largely due to reduction in overall TER.
Rationalization in commission
Most research houses such as Citi India and CLSA said that the impact would be more acute on distributors. In fact, they have estimated that the reduction in earnings of distributors is 15 to 20 bps.
However, AMCs reduced trail brokerage on assets of distributors twice due to reduction in TER in lieu of exit load and the TER cut. Since the trail commission on old assets was already close to 50 bps, the impact of these consecutive TER cuts is more acute on such assets.
While IFAs claim that they get close to 80 bps trail commission on assets mobilized after 2015, they get between 15 and 30 bps on assets built before 2015.
Consolidation in distribution business
Post TER cut, the financial distribution has seen consolidation in business to reduce costs and grow business.
The industry saw merger of three IFAs Amit Bivalkar of Sapient Wealth, Pune, Paresh Kariya of Aargus, Mumbai and Pallav Bagaria of Brand New Day, Guwahati to form Sapient Wealth. In another example, 12 IFAs have merged their business with MoneyGain Consultants founded by Chandigarh IFA Shobhit Gupta and Delhi IFA Sachin Jain.
Two FIFA members Dhruv Mehta and Roopa Venkatkrishnan are said to be in the process of merging their business too.
Among some key benefits of such a merger are: reduction of costs by sharing various expenses such as execution platform, software, back-end operations, customer communication, marketing expenses and so on, learning and mentoring from each other and better commission structure compared to individual IFA.
Regular plans became competitive
TER of all regular plans have come down drastically. In fact, in a few instances, the cost of the regular plan of a fund has come down to 0.30% largely because of reduced GST component.
This is largely because of doing away with fungibility i.e.fund houses cannot spill over the cost from their AMC book. Now, fund houses have to disclose break up of their expenses such as management fee and other expenses separately.
Earlier, expenses were fungible i.e. fund houses were allowed to do disclose the base TER without giving segregation of various expenses. Now, with this going away, fund houses can charge GST component in management fees only instead of the entire cost. For instance, if a scheme had an expense ratio of 2.50%, the scheme used to charge GST on 2% (excluding distribution expenses of 0.5%) irrespective of actual management fees. However, now fund houses can charge GST only on fund management fees i.e. if management fees is 1.5% then the GST will be charged on 1.5% instead of 2% earlier.
Creation of escrow account for paying pending commission
In August 2019, SEBI has asked fund houses to put pending commission of distributors in an escrow account. An escrow account is a temporarily pass through account held by a third party during the process of a transaction between two or more parties.
With this, distributors can get their pending commission once they complete all requirement due to which their commission was withheld. AMCs withhold commission including upfront commission for a number of reasons such as failed transactions, incomplete KYD, pending KYC, and so on.
Growing popularity of online distributors
Online distributors like ET Money, Paytm and Zerodha have played a major role in popularizing direct plans by making it more accessible for investors.
Of the total individual investors’ AUM of Rs.14.73 lakh crore, close to Rs.3 lakh crore or 25% was in direct plans as on November 2019. Most of these transaction were executed through online distributors.
E-commerce giants like Amazon and Snapdeal are also in the fray – Amazon already owns a stake in online distribution and robo advisory firm, BankBazaar and Snapdeal has invested in financial services startup Rupeepower, which helps people compare credit cards and loans across banks.
Expanding offerings
Many IFAs have diversified offerings by adding other financial products such as insurance, PMS, AIFs, NCDs, corporate FDs, loans and peer-to-peer lending. Such a diversification has helped IFAs increase their income and get sustainable business growth.
Conclusion
Overall, year 2019 has been a roller coaster ride for advisors with more dips than highs. While the flows in mutual funds have not been impacted largely due to benign market conditions, IFAs need to revisit their business and reduce dependence on equity assets to grow from here.
