Mutual Funds
The downfall: Commissions, IFAs, and cheques

The number of cheques released by AMCs to mutual fund distributors is dwindling as well as the number of active IFAs.

The sweeping changes introduced by market regulator Securities and Exchange Board of India (SEBI) in the mutual fund industry are still showing their after-effects. According to sources, two years back, some 39,000-odd monthly cheques were issued by asset management companies (AMCs) to pay upfront commission to distributors. In 2010, this number has plunged to around 9,000-10,000. Upfront commission is released on a monthly basis while trail is paid quarterly. A distributor gets upfront commission when he acquires new business while trail is paid to service the existing client. Currently 0.25% is paid as upfront commission and 0.50%-0.75% is paid as trail depending on the fund house.

“The number of payments received through the electronic clearing service (ECS) as well as cheques has dropped. People either wanted to consolidate or leave the business. People who have decent assets under management (AUM) are undeterred. New people are not joining. The general perception is that this business is not as remunerative as it used to be for a new person to join. This is because of SEBI’s misplaced perception that there is no role of an intermediary,” said a top official from a leading fund house, preferring anonymity.

“The number of cheque issuances among AMCs have dropped,” says a Mumbai-based distributor on the condition of anonymity.

However, registrar and transfer agent (RTA) sources say that the drop in cheques is primarily due to the ECS system. ECS facility was extended to distributors because of the delay and misplacement of cheques.

The following message doing the rounds in the mutual fund industry is a shocking revelation of the number of active IFAs. “What is the similarity between tigers and IFAs? Only 1,411 left. Thanks to SEBI.”

According to an official from a mid-sized AMC in Mumbai, the number of active IFAs bringing in new business has gone down to 1,200 from 5,000 in Mumbai alone. Around 80% of the business comes from metros like Mumbai, New Delhi, Chennai and Bengaluru. In Pune, hardly 40-45 active mutual fund distributors are working. In industry parlance, an active IFA is defined as someone who is still giving door-to-door service and bringing in new clients.

“Last year’s HDFC and Reliance Mutual Fund list showed 1,400 IFAs in Pune but now it has come down. I was submitting 30-40 new applications earlier, now I submit hardly 5-7 applications,” said a Pune-based financial planner.

The drop in the number of monthly cheques indicates that new business is not coming in and distributors are relying on the trail commission and past Systematic Investment Plans (SIPs). The industry added just 2,355 folios while equity funds lost 1.47 lakh folios in the month of July. A part of the money moved into debt funds.

Some distributors are now shifting their focus to allied financial services like general insurance and company fixed deposits, which offer decent commissions while others are completely changing their business model.

After the crackdown on upfront commissions, distributors are struggling to acquire new business. The commission does not even cover the cost of acquiring a client. Now, even the trail commission is not paid to a new distributor in the event of a broker change.

“I have been in this business since 19 years and have a decent AUM. Around 650 families are investing through me since 1994. I have incurred an operating loss of Rs1.75 lakh in the last one year because of ‘no load structure’. Investors are not ready to pay the advisory charges because a number of bank channels are offering free services. We are not able to cover the operating cost of our organisation. It is very difficult to survive. After a lot of convincing we get around Rs40,000 to Rs50,000 worth of investments,” said Yogesh Kulkarni, proprietor, Royal Investments.

Sources also indicate that some mutual fund distributors have completely stopped sending self-declaration forms to AMCs due to the paltry commissions involved. SEBI rules mandate that all intermediaries send a self-declaration form to fund houses annually, failing which the fund house can stop the commission paid to distributors. The self-declaration form contains an acknowledgement that a distributor has disclosed the commission received by him to the investor.

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COMMENTS

R Varadarajan

7 years ago

When SEBI brought in restrictions on ULIPs ( rightly so ), the entire insurance industry and the IRDA cried foul and they got everything diluted to loot the investors jointly. When it comes to MF Entry Loads the MF Industry silent - obviously resigned to the fate.

Sanjeev Deshmukh

7 years ago

Now is the time for the finanace ministry to take review of the no entry loads decision . while implementing this decision SEBI promised that MF business will grow in multyfolds . . But time has prooved the necessity of IFAs .
SEBI has biased view against IFAs.Over regulations has ruined the MF industry.

Prashant Parab

7 years ago

Wake up "SID" ( Sebi's Intellegent Deparment). How much time will you take to wake up. It is a year after now when you decide to kill the mf industry. please wake before you dont have any thing left to regulate

Prashant Parab

7 years ago

Mr. Bhave has proved that in India people are offered the job just relying on their academic career and not by the capability of doing job well. Mr. Bhave has just removed the entry load but who will take initiative of educating the indian investor about investing who still is cofused to buy jeevan saral or Moneyback policy . Sebi is like the all other POLITICIAN who know only take to decision but do not know how to implement the same.

babu jose madathil

7 years ago

in this changed scenario o no load structure, AMCs/fund managers should find ways of increasing the returns equal to at least an avg of 15 - 20% CAGR. all funds performance statements should be made simple to the common invester understand what are the facts abt the fund and also what he/she can expect. then he/she will be better able to select a fund.

jignesh n vyas

7 years ago

amc not interst in retail business. some amc sell pms . Amc not intrest in small ticket like 5000or 10000 and smell sip.Amc protect IFa.Mr bhave jeo or jen do.

PPM

7 years ago

Why not AMCs not comeout to support the IFAs?

End of the day, its AMCs interest to get more retail investors to invest in their offerings.

AMCs are scared of SEBI...may be tomorrow SEBI may comeout with a regulation that AMCs can not charge the investor anymore ...AMCs need to run the operations as a service to the society.

satya

7 years ago

SEBI MOVE IS GOOD FOR TRANSPERANCY OF CHARGES, BUT STILL LONG WAY TO PROTECT CUSTOMER INVESTING IN EQUITIES AND LOOSING THEIR CAPITAL. THIS HAPPENS BECAUSE OF HEAVY CHURNING IN BULL RUN AND MONEY EVOPORATES. SEBIT DID NOT DO ANYTHING UNTIL TODAY FOR INVESTING RS.10000 AND COMMISSION PAID IN BULL RUN YEAR MORE THAN 50% ????

GOD ONLY TO EDUCATE THE INVESTOR

SEBI HAS TO INSTRUCT EQUITY BROKERS TO PUT LIMIT IN COMMISSION CHARGED FOR INVESTMENT LIKE 10% IS MAXIMUM IN A YEAR TO CHARGE ON THE AMOUNT INVESTED INTIALLY. BUT WILL THAT WORK ??

asim kumar das

7 years ago

Mr Bhave will be ever remembered by thousands of IFAs as you did a revolution in the mutual fund industry at the cost of bred & butter of the IFAs. You are really a benevolent well-wisher of the MF Investors. Long live Mr Bhave. Thank you.
Mr Asim Kr Das. Mutual Fand Advisor (working in rural-belt as Advisor)

Roopsingh

7 years ago

Mr Vardarajan and Asim Das,
whatever SEBI the GOD is doing is pampering Demons like stock brokers and depositeries due to vested interest-it burned its hands bcos GOI (the most looting govt in the world) wants to loot common men by all hooks and crooks-like service tax to every penny earned-and ULIPS which are day light cheaters-the real agenda of our cheater govt is ''trapping''common man in NPS-
GOI did all this bcos MF gained unseen popularity in short span of time and this made govt sponsored SSS unpopular-
now govt does not want to have burden of interest payment on PPF and NSC-so it wants to grab peoples money through NPS and stop old guaranteed Small saving schemes-

R Varadarajan

7 years ago

Yes. There has been a significant drop in the clientele and in fact no new clients are coming . Added to this a large number of investors have moved to ULIPs , thanks to the misleading sales personale. SEBI has already decided to close down the MF Industry - after the disastersous failure to rein in the Insurance Companies in respect of ULIPs. The MF Industry will not survive beyond 2015, thanks Govt of India's partisan attidude to ULIPs in preference to MF

asim kumar das

7 years ago

Man obey God as He protects, loves, punishes and forgives. Without the existence of men, God's glory as well as existence is insignificant. Who will care SEBI after someday, when IFAs are dying "Fund-Houses" are drying?
Asim kr Das. mutual fund advisor.

Kapil Patel

7 years ago

The steps taken by SEBI in favor of investor are very good & it should be appriciated. But as every one know that no one is complete in world, and this law is also applicable to sebi.SEBI can also make mistake. They should rethink about their policy. There are some error in policy and it must be rewrite by the policy maker.
One of them is,
Sebi has mentioned to all distributor to mention what they are getting from AMC as a commission? Do any body know a product in which buyer know the profit margin of distributor? But MR. Bhave told to distributor to mention details of all the payment they received from the company as a commision, which is agaist any business model. So distributor have to give up this model. Sebi must check that how national distributor like banks have taken action upon this applicable rules. How they are mentioning the details of payment which they will received from the AMC to investor.

One good idea for SEBI is, SEBI should told all AMC, to charge a flat fee on their business other then they are not allowed to deduct any charges from investor's money. Also sebi should allow to AMC to do whatever they feel with the fee which they will receive.
These fees are flat for all companies and also AMC must inform to Investor that how much they are charging to investor for investing in mutual fund. This might be a best solution for all participant of MF industries.

jignesh n vyas

7 years ago

sabi ne jai ho . Bhave ne jai ho.

Devendra Mhatre

7 years ago

It is easy to put all the blame for current low volume of business on SEBI.. But we are in the mess today is because of mis-selling by National Distributors/Banks who were getting hefty commissions (5-7%) compared to meager paid to IFAs.
AMCs are also partly to blame as they are in the rat race of AUM's without focusing on the retail long term investors. The high commissions paid to Banks was an incentive for them to churn the existing AUMs and advisory role took the back seat. The lessons have not been learnt, even today the Banks are getting higher upfront than IFAs, plus they charge seperately by debiting the investors bank account without his knowledge.. The solution is National Distributors/ Banks should be paid only trail and no upfront and if investor redeems before 1 year, the trail commission paid till date should be credited back to the Scheme (not the AMC) so that the existing long term investors benefit.

Moneylife Foundation discusses legal provisions for NGOs with Noshir Dadrawala

Moneylife Foundation on 16 July 2010 held a workshop-cum-discussion on legal compliance and good governance for Non-Governmental Organisations (NGOs). Speaking on the occasion, the chief executive of The Centre for Advancement of Philanthropy, Mr Noshir Dadrawala, said that the importance of the voluntary sector is that it is able to fill in the gaps which the government and private sector fail to do. He also added that organisations that provide social and welfare help must strive to understand legal nuances even more to operate in a better fashion.

He further stressed that good governance is fundamental for a voluntary organisation. A board must be able to provide a vision, take up responsibility and be capable of self-regulation. He also added that there must be a proper system of working within voluntary organisations and everyone from board members, chief executives and staff members must all work in tandem. "Good governance means watertight directions for the systematic flow of working with various departments," Mr Dadrawala added.

He also touched upon the various ways in which voluntary organisations can register themselves either as a trust, society or a company. Mr Dadrawala also spoke on how voluntary organisations can generate income - either from interest, sale of products, leasing halls or property coupled with membership fees and subscription. He also gave inputs on income-tax related problems and possible solutions for organisations.

Mr Dadrawala elaborated on the implications on voluntary organisations of the Centre's proposed norms under the new Direct Tax Code. "Up to 15% of the surplus or 10% of gross receipts, whichever is higher, will be allowed to be carried forward to be used within three years from the end of the relevant financial year - indefinite accumulation of up to 15% of gross receipts as is prevalent will not be allowed," he said. Also, carrying forward of unspent balance to the next financial year will not be allowed and not-for-profit organisations will no longer be allowed to accumulate funds up to 5 years.

The Centre for Advancement of Philanthropy is a company specialising in areas of charity law, finance, management, taxation, resource mobilisation and human resources development. Mr Dadrawala is also director of 'Resource Alliance' and a member of the Coordinating Committee of the Worldwide Initiatives for Grantmaker Support (WINGS), a global network of more than 140 membership associations and support organisations serving grantmakers. He has written several resource books including The Art of Successful Fund-Raising, Management of Philanthropic Organizations and Merchants of Philanthropy - Profiles in Corporate Citizenship.

The conference was attended by various voluntary organisations.

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Monsanto India swings back to profit in Q1

Mumbai-based agrochemicals company Monsanto India Ltd registered a first quarter net profit of Rs58.7 crore against the loss of Rs8.5 crore for the quarter ending on 31 March 2010. During the quarter its total revenues increased to Rs201.8 crore from Rs28.31 crore in the March quarter.

On Wednesday, Monsanto India shares ended 4.1% higher at Rs1,734 on the Bombay Stock Exchange, while the Sensex closed 0.6% up at 17,977 points.

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COMMENTS

Hemant Bhatia

7 years ago

To compare q on q result is a mistake,because its a cyclical ind so your title is wrong.Further if you compare june 09 with june 10 its a flat result.

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