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| Distributors prefer large investors after entry load ban |
| VANDANA & ANJU YADAV / Mumbai Aug 17, 2009, 00:26 IST |
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The Securities and Exchange Board of India’s (Sebi) decision to ban entry load may see distributors move out from servicing smaller investors and concentrate only on large investors.
While fund houses, on their part, have introduced upfront payment and hiked trail fees to compensate the distributors, many feel that it may not be enough.
Sources said that some distributors are already working on business models that will include targeting only large investors. “It is difficult to service smaller customers on the offline platform. So, some distributors may have resorted to following that strategy,” said Vineet Arora, head (products and distribution), ICICI Direct.
It essentially means that many distributors may not be willing to service clients, especially the ones who want to invest smaller amounts through systematic investment plans (SIPs). The reasoning is that efforts required to convince a high networth client and small investor are same whereas the earnings are much more, in case of the former.
“The effort made to service a top-end customer and a retail investor is same. Broadly, some sections of distribution will move away from SIPs. We have not taken a call on this. But it won’t make business sense for large distributors to service clients with lower ticket sizes,” said Akhilesh Singh, head (distribution), Emkay Global Financial Services.
Post the Sebi move, fund houses have been paying between 0.5-0.75 per cent as upfront commissions and annual trail commission of 0.5 per cent-1per cent. And for SIPs, instead of upfront fees, there is a 1 per cent commission with every instalment.
So, if an investor who puts in Rs 3,000 every month through an SIP for say one year, the numbers would look something this — 1 per cent or Rs 30 every month (Rs 360 yearly) and an annual trail commission at the rate of 0.5 per cent Rs 90 (calculated after six months when the corpus is at Rs 18,000). That is, a total of Rs 450 per year.
In comparison, the same SIP would have earned the distributor 2.25 per cent per month — Rs 67.50 (Rs 810 a year) plus a trail commission of 0.5 per cent or Rs 90. The total income: Rs 900. In other words, the income for distributors is down by 50 per cent.
For larger ticket size investments, say a lumpsum of Rs 1 lakh, a distributor would earn Rs 500 as upfront fees and a trail commission of another 1 per cent or Rs 1,000 during the year.
Clearly, the numbers are in the favour of large investments. Experts feared that SIPs in which retail investors had been showing interest could suffer because distributors would not find it profitable to sell them anymore.
Fund houses have started working on this. ICICI Direct, for one, has started an online model with a new fee structure wherein they charge Rs 30 or 1.5 per cent, whichever is lower, for retail customers. “We are looking for volumes from this platform,” added Arora.
And that is good news for retail investors, whom distributors could be unwilling to service anymore.
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