Ever since the MF industry has moved to an all trail model and rationalized commission structure due to TER reduction, many distributors claim their income has declined by as much as 30%-50%. While MFDs claim that they get close to 70-90 bps trail commission on assets mobilized after 2015, earning on assets acquired prior to 2015 is less than even one-third of the above in most cases.
Experts believe that one of the ways to deal with reduced income is to diversify offerings by adding other financial products such as AIFs, NCDs, corporate FDs, Structured Products and other lending products.
Such diversification will help you increase your income and get sustainable business growth. It will also help your clients diversify investments across products.
Let us look at commission structure of these financial products:
Perpetual bonds: In last 12-18 months, when equity markets have been choppy and debt funds have seen negative headlines, retail participation in the secondary bond market have increased considerably. Among other fixed income products, you can look at perpetual bonds.
A perpetual bond is a bond without a maturity date. However, many perpetual bonds also have a call option, which allows the issuing company to redeem them after a few years. Note that the option to redeem lies with the issuing company and not the investor. Both government and private entities issue these bonds to fund their long-term capital requirements.
You can suggest perpetual bonds to those clients who need a predictable, steady stream of income and earn transaction-linked brokerage of up to 0.2%.
Tax-free bonds: These bonds are tax efficient and low-risk investment avenues as government enterprises issue them. These are suitable for HNIs and Ultra HNIs who fall under the higher tax slab or senior citizens who want regular income with minimum risk.
One limitation of tax-free bond is its illiquid nature. These bonds have 10-20 years lock-in period and clients cannot withdraw their money before the maturity date. MFDs can earn around 0.1% commission from these bonds.
AIFs: If you have HNI and ultra HNI clients who understand the complex products and can bear the associated risks, you can look at recommending AIFs. Typically, commission structure in AIFs is different across scheme categories. However, many AIF players offer considerable upfront commission in close-ended structures.
Nevertheless, you must understand underlying investment strategies before recommending AIFs and ensure that their clients have the risk taking ability. Experts believe that HNIs and ultra HNIs should allocate 20%-25% of their corpus in these products, taking into consideration all the aspects of the chosen investment option.
Corporate FDs and NCDs: In case of corporate FDs, commissions increase with duration of the product.
Depending on the company and investment tenure, you can earn 0.2-1% commission in corporate FDs and NCDs.
Other products: Apart from these products, there are products like Loan against shares, loan against mutual funds and loan against bonds that can help you increase offerings in fixed income space. These products can offer upfront commission of up to 1%.
