Independent financial advisors contribute the most to new equity fund inflows especially from beyond 15 cities. Yet the regulator chooses to ignore this ‘small’ distributor community by coming up with regulations that harms their business

Around 77% of the total equity assets under management come from the top 15 cities, according to CAMS MFDEx data (accounts for 91% of industry). In the top 15 cities most of the fund inflows come from independent financial advisors (IFAs), national distributors, and private banks; each of them contributing around 27% to 29% of the total fund inflows from the top 15 cities. From beyond 15 cities, IFAs’ contribute the highest share amounting to 55% of the total fund inflows. Direct investors contribute just 5% to the total assets in both the categories. On consolidating the data, IFAs have contributed the highest to the total equity fund inflows for the period from April 2012 to September 2012. IFAs brought in 33% of the total equity fund inflows followed by private banks and national distributors which brought in 26% and 23% respectively. Other distributor categories brought in less than 6% each. But yet the regulator ignores these facts coming up with regulations that go against the distributor fraternity and impacts the industry as a whole.
 

Here is why we feel the Securities and Exchange Board of India (SEBI) has a history of coming up with half-baked ideas. In August 2009, when SEBI banned entry load, the worst affected were the IFAs. With their commissions taking a hit many IFAs went out of business. Three years later, in order to increase penetration, SEBI allows fund houses to hike TER (total expense ratio). Our analysis has shown that a hike in TER stands to benefit the fund house the most and the earlier entry load worked out to be a better option for long-term investors. (Read: Much-maligned entry load was a cheaper option!) Instead of incentivizing the channel that has the highest penetration in beyond 15 cities, the regulator has done just the opposite by striking a blow at their business and introducing a direct plan.
 

The IFA community has also written a memorandum to be sent to AMFI and SEBI against the introduction of the direct share class. They mention that the abolition of entry load brought a major blow to the IFA community and that their income shrunk by three-fourths of what it used to be. This led to a huge exodus of IFAs from the industry. A number of active ARN holders shrunk drastically post-August 2009 directive. The proposed regulation of introducing direct share class and offering lower TER for direct investors would result in devastating effects for the IFA community. Their existing high net worth clients would shift to the direct route and would result in a loss of revenue for them. “With dwindling revenue, an IFA would find it difficult to remain afloat and soon abandon the business” they mention in the memorandum.
 

Though, at present, direct investors contribute the lowest to new equity inflows, it would be interesting to see whether the SEBI’s new plan would be able to increase the contribution of inflows from the direct route. A lot depends on the magnitude by which the TER of the scheme is reduced. Fund houses knowing that their distributor community contributes the maximum may not reduce the TER to an extent that it would cause investors to switch to the direct plan.
 

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The direct route would be beneficial in the long run for investors but then that too would come at a cost. Direct investors may find it difficult to keep up with the various changes in regulations and documentation process without an advisor. There are various servicing activities like change of address, change of bank mandate, consolidation of folios, transmission of funds, inclusion of nominee, handholding on minor investments, arranging for periodical statement of accounts, correction of mistakes in the account, change in KYC, change in contact information, etc that are carried out by IFAs for their clients. Direct investors would have to do all of it by themselves.