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SEBI is likely to focus on distribution payout instead of another sweeping cut in TERs, says a report released by Kotak Institutional Equities. The comment followed SEBI’s Friday’s announcement in which it said that it has initiated its study of fees and expenses charged by the fund houses.
SEBI’s study aims to facilitate financial inclusion, encourage new players and plug loopholes if any. In a press release, SEBI said, “The study shall endeavour to provide to provide data inputs for policy formulations. The policies as always would seek to balance the need for facilitating financial inclusion, encouraging new participants, leveraging economies of scale, encouraging adoption of technology, discouraging cross-subsidization across schemes, closing arbitrage opportunities if any, and curbing malpractices if any.”
The study said that the proportion of distribution commission in the TER has increased. “Distributor payout has been rising in the last few years as seen in the share of distributor commissions rising to 55% of expense ratio compared to 45% three years ago. After the ban on upfront commissions, distributor profitability has recovered well, with revenue growth at 30% CAGR since FY2019 versus 15% for AMCs.
The table shows that the proportion of distribution commission with respect to the overall TER has gone up from 36% in FY 2018 to 40% in 2022.
Further, the report pointed out that new schemes can pay higher commission to distributors. “While there are no rules governing the commission sharing between AMCs and distributors, any form of cross-subsidization impacts existing investors in the older schemes and thus will attract the regulator’s attention” said the report.
However, the report said that commission may not go up from here. “We believe that peak aggression on commission sharing is likely behind us. Three key factors: Commission rates on new fund offers are cooling off from peak levels seen at the time of launch, pressure on commissions due to churn into higher trail-only commission structure (from older lower commission-earning funds) is also likely to subside as we get into a period of slower flow momentum for the industry with greater focus on client retention and most large AMCs have filled their product portfolios in the past 2-3 years and incremental fund launches by smaller players is unlikely to significantly distort commission payouts at the sector level.”
