Firms want to avoid handling the low-value cheques they would
have to collect if they charge small investors
Some mutual fund distribution companies, which predominantly cater to low-value retail investors, have decided not to charge for their services from customers beginning August. Even larger distributors, which handle a broader variety of clients including high net-worth investors and companies, have decided to keep a no-commission model open for smaller investors.
A July rule from capital markets regulator Securities and Exchange Board of India, or Sebi, does away with entry loads of up to 2.25% for investors and caps at 1% the portion of exit loads used for marketing expenses.However, the new regulation, effective 1 August, has created a logistical logjam for distributors.
Earlier, the invested amount would go directly to the asset management company, which would deduct the commission and pass it on to the agent. Under the new regulation, if a person invests Rs1,000, distributors will need to collect a cheque of Rs25 as commission separately.
Rather than increase overhead costs by investing in technology, staff and other back-end services, and hoping for the customer to pay for it, some companies have decided to entirely do away with commissions for small, retail investors.
J. Rajagopalan, managing director, Bluechip Corporate Investment Centre Ltd, 90% of whose clientele is retail investors, says, “For a multi-location distribution house like us with 240 locations, managing back-office operations becomes a huge issue. We do not have the infrastructure to manage the flood of low-value cheques that will hit us if we implement the twin-cheque system. Internally, we have decided we will not charge investors from 1 August.”
Also, charging investors under the new environment is not going to be an easy task, said K. Venkitesh, national head (distribution), Geojit BNP Paribas Financial Services Ltd.
“Imagine buying a shirt for Rs600 and giving two cheques, one for the manufacturer for Rs450 and one for the shopkeeper for the remaining amount. This is the same thing. It is not going to be easy to convince the consumer what he is paying for,” he said.
New Delhi-based Bajaj Capital Ltd had also decided to forego a commission for low-value customers. “We don’t like charging the customer. If a person really wants only the transaction services and does not want any advisory or support services, we will not charge,” said joint managing director Sanjiv Bajaj.
However, he added that if a customer wanted services such as consolidated statements, portfolio advice, etc., he would have to pay for it.
Rajagopalan of Bluechip said the trail commission, which agents get from fund houses at the end of the year based on the assets they helped bring in, would help them cover costs of providing services to retail investors.
New distribution companies, however, have already started offering the no-commission model, saying that the new model will, in the long term, work to everyone’s benefit.
Chennai-based Wealth India Financial Services, has launched a free website where investors can buy and sell funds without paying any upfront charges.
“We decided to start a company that would be positioned to take advantage of this development,” said Srikanth Meenakshi, director, Wealth India Financial Services. “We launched FundsIndia.com, where retail investors could come (and) register, become investors and buy or sell mutual funds with no loads, no transaction fees for any amount.”
FundIndia has empanelled with 16 mutual funds and is in talks with more. It plans to have a country-wide online-only network without any regional sales points, a low-cost, scalable model that can be sustained with just the trail commission.
S. Raghunathan, head of Computer Age Management Services Pvt. Ltd, an industry veteran who has been associated with the mutual fund industry for at least three decades, said the new regulation would work out to be a “win-win” situation. “As we reduce distribution costs, more and more people will start gaining confidence and volumes will grow. As volumes grow, everybody can make enough money through the trail commissions.” He cites the example of the demat revolution that changed the face of the brokerage industry 15 years ago.
“When demat was first introduced, people had similar apprehensions. They thought life would become difficult for the brokers. But look at what has happened. Volumes have grown exponentially. I expect a similar result here also,” he said.
However, the no-commission model will not be the only model in operation. Distribution comes at a cost and someone will have to bear the cost if not the consumer, say some distributors.
While there is some expectation that fund houses will fray some of the costs, say experts, there is also the hope that this will lead to innovation in distribution models such as deep discount brokers, discount brokers, premium brokers and full advisories.
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