Small town financial advisors not enthused by Sebi's moves

Independent Financial Advisors seek higher trail commissions, mutual fund executives agree

Independent Financial Advisors (IFAs), a strong link between asset management companies (AMCs) and potential investors, especially in the smaller cities of the country, are not excited with the tweaks made by the capital markets regulator, Securities and Exchange Board of India (Sebi) last week to increase penetration of mutual fund products. Rather, they termed the steps as a “drop in the ocean”.

In its quick check with small IFAs spread across the country, Business Standard, found out that majority of financial advisors have lost a significant chunk of their revenues from selling mutual funds. Though frustrated, they said they wanted a clear and concrete road-map for the industry.

Sanjeev Sharma, an Indore-based IFA, says, “Amfi aur Sebi ko cheezein clear rakhni chaahiye. Jab aap kuchh change karo to hamein samay lagta hai adjust karne mein. Ek saal beeta nahi ki fir se parivartan ho jata hai, jo sahi nahi hai (Amfi and Sebi should keep things clear. It takes time to adjust in a new business model, but rules get tweaked in a year which is not good).”

The sentiment is reflected by a Patna-based advisor Manu Mehrotra, who says, "I have upgraded my office and invested in technology to service my clients but people are used to free financial advice which is not helping us. By increasing 30 bps (basis points) in expense ratio, it's not going to increase penetration of mutual fund products." He adds that investors must pay as advisors need to be remunerated for their services.

Last week, Sebi allowed AMCs to charge an extra 30 bps as expense ratio provided the new fund flows from beyond the top 15 cities make up 30 per cent of the overall assets.

Though none of the AMCs have yet called upon IFAs about how they plan to take things further, the latter said they would prefer increment in their trail-commissions rather than a rise in upfront commissions.

Bikaner-based Suresh Modi, who lost more than 80 per cent of his mutual fund business over the last few years, says, "I get 5-10 basis points (bps) as upfront commission. But my trail commission is around 50 basis points. It would be better if AMCs increase the trail to 80 bps." Other advisors echo Modi's opinion. Moreover, they say that if trail goes up they would like to retain clients for a longer period of time, which will be good for all stakeholders.

Currently, on an average, upfront commissions to IFAs range between 10 bps to 50 bps (though in some cases it is as high as 1.5 per cent) while the trail stands in the range of 30 bps to 80 bps.

The demand by IFAs for higher trail has also found takers in the industry. Chief executives say they will be in a better position to take a call on the same once Sebi brings out the fineprint of the measures announced last week.

Sanjay Sachdev, chief executive officer (CEO) of Tata Mutual Fund, says, "I am in favour of higher trail-commission. Though, as of now, I cannot make any commitment till things get clear." Agrees Akshay Gupta, CEO of Peerless MF.

According to Dhirendra Kumar, chief executive of Delhi-based mutual fund tracking firm Value Research, "Higher trail-commission is quite a legitimate demand from IFAs. It will help retain funds for longer period. I believe, distributors should not only get higher trailing commissions on the new flows but also on the existing fund mobilisation."

Indore's Sharma, rightly points out, "We will keep trying to adjust with new norms and service our clients for longer-term if trail goes up."