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| Equity funds find no takers |
| Chandan Kishore Kant / Mumbai Sep 15, 2009, 00:22 IST |
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Ban on entry load leads advisors to focus more on Ulips, insurance and NSC.
Pramod Chowdhary, a small independent financial advisor (IFA) and distributor of mutual fund schemes in Gwalior, is an unhappy man. The reason: His monthly commission has dipped over 60 per cent from Rs 10,000 to Rs 3,000 last month, thanks to the Securities and Exchange Board of India (Sebi)’s ban on entry load for equity funds effective from August 1.
As a result, other financial products, including unit linked insurance policies (Ulips), general insurance, National Savings Certificate (NSC), corporate deposits and even recurring deposits at post offices are increasingly being preferred by small town IFAs across the country as these products offer higher commissions.
Faced with investors’ non-willingness to pay the consultancy fees and the inability to charge, Pramod says, “Business is adversely affected. Enthusiasm and interest to run after clients is no more alive.”
Chowdhary is not alone as a majority of over 90,000 IFAs across the country are finding it hard to continue with their expenses. The sudden change in payment model is something advisors are not able to come in terms with.
Vineet Sharma, a Jaipur-based IFA, is grappling with a 50 per cent fall in his turnover last month. “Whatever commission we are getting is only through trail commission. In a small town like Jaipur, it’s hard to make our clients pay our fees separately,” he says. They say that change in the mindsets of investors will take one to two years. “We have to convince the investors about better returns in mutual fund schemes,” says Devanand Amin, an Anand-based advisor. “But,” adds Sudhir Baghel from Jabalpur, “We cannot service clients without reasonable commission. I would prefer to push Ulips and other insurance products more than mutual fund schemes.”
Asset Management Companies (AMCs) have already admitted that the channel of IFAs will be severely impacted given their inability to charge the customers at a time when clients are aware of the fact that no entry fee can be charged.
To tackle the crisis, fund houses are paying 50 to 100 basis points or even higher to their distributors as an upfront commission to continue pushing their products in the market.
However, IFAs say they are getting only 30-60 basis points as upfront fees. They point out that national distributors are being paid an upfront fees of as high as 125-150 basis points.
Saroj Singh, who travels 40 kilometers to Dhanbad in Jharkhand to sell mutual fund schemes, says, “I was earning an overall commission of Rs 20,000 a month which plunged over 70 per cent to Rs 5,000-6,000 in August,” he says. “This is not helping me meet my expenses.”
Fund houses, according to IFAs, have started sending their own marketing staffs to clients. “They don’t charge any fees, then why should an investor come to us. It is affecting our business. I get an upfront commission of 40 basis points only. It is hard to stay like this as I am left with nothing once income and service tax are deducted,” adds Saroj.
However, advisors based in cities like Ahmedabad, Anand and Jabalpur said that though AMCs were using their marketing executives, “IFAs outnumber the AMC executives. They cannot reach out to the penetration level in the rural regions the way we are present and have access to,” says Nilesh Shah, an Ahmedabad-based financial advisor.
Out of the total inflow of retail investments to the mutual fund industry, around 15 per cent comes from the rural regions of the country which mainly comes through the IFA channel. The intial responses from the financial advisors’ fraternity is likely to apply brakes on the pace with which mutual fund industry has been penetrating the rural markets in Tier- II & III cities. This could prove a major jolt to the concerns of Reserve Bank of India in its annual report last month in which the central bank had suggested the fund management industry to shed over-dependence on corporate money and penetrate more in rural areas and reach out to households.
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