Capital market regulator Sebi has stopped allowing mutual funds (MFs) to charge an entry load, or a commission, from investors starting August 1. Before Sebi came up with the rule, MFs were charging an entry load of 2-2 .5% and paying a commission of around 3% to their distributors. This meant that asset management companies (AMC) had to pay between 50 and 100 basis points (bps) to distributors.
This fixed entry load structure had an embedded conflict of interest for distributors. As distributors made a fixed sum on mutual funds notwithstanding their performance, they had an incentive to push MF schemes, even if the investor did not require it. This led to constant churning across schemes and hindered long-term asset creation. Therefore, it is appropriate that Sebi is putting an end to this practice. In the new scheme of things, the investor will pay a fee to distributors and has the option to negotiate it based on the quality of the service provided.
It is important for investors to know about the distribution part of the business because the ball is now in their court as they have to negotiate with the distributors on commission . What will be the fallout of Sebi’s announcement in short and long term? For starters, distributors will have to play the role of financial advisors to investors and not simply push products. This is the basic philosophy behind the announcement.
The business should be based on investment needs and not the distributor’s ability to merely sell. For investors, their costs will be lower if we simply go by the announcement. But is it so simple? The regulation says that the investors are supposed to negotiate the commission with distributors, giving them more leeway now. They can choose from among several distributors based on their quality of service and price.
But, will retail investors have the bargaining power to argue with distributors? Many experts are of the view that retail investors will not be willing to pay distributors out of their own pocket. In such a situation, AMCs will have to step in to subsidise distributors for the services they provide investors.
While earlier AMCs were paying 50-100 bps, now they may be required to increase it. All in all, it looks like that AMCs’ bottom line will definitely take a hit. Most of them are already in the red and they may have to bear the brunt in the short term. However, the intent of the guideline is to bring about increased inflows in the long term, so the assets under management will increase manifold in future. And then AMCs will turn around.
“In short term, this move can have negative impact on AMCs, but in long term, it will definitely help the industry to expand its reach. More people will invest as the cost of acquisition comes down,” says Kanwar Vivek, CEO, Birla Sun Life Distribution.
Those distributors who are pushing products will find the going tough. Basically, it’s going to be smoother for “advisors” but harder for “sellers” . In fact, industry players feel that even now business is more need-based . Rajiv Deep Bajaj, Vice Chairman & Managing Director Bajaj Capital says that in July, inflows have been higher in debt schemes than equity schemes. The commission on debt funds is just 0.5-0 .7%—much lower than equity schemes.
insurance products, however, continues to be higher
than for MFs. Experts agree that at least in short term
distributors will tend to push unit-
linked insurance plans. Here the investors have to be very cautious as insurance distribution will become more prone to misselling by distributors. Insurance is not a substitute for MFs. While the objective of the former is to protect against foreseeable risk, the objective of the latter is to optimise return on investments. Moreover, ULIP come with much higher upfront charges.
CONCLUSION:
In a nutshell, the new regulation will lead to longterm asset creation. However, there is no clarity on whether investors or AMCs will be paying commission to distributors. A majority of retail investors do not have the tools to find appropriate information about financial products. Therefore, it seems that they are not on an equal footing with distributors. The latest move might complicate matters, as it expects the investor to negotiate with distributors on their own. Investors should be really cautious, especially if the distributor seems overeager to sell ULIP products.
WHO WINS WHO LOSES
Mutual fund distribution set to become more demand based rather than sales push
Time for investors to be more careful, as distributors might push ULIP more, at least in short term
Asset management companies might have to bear the brunt
This fixed entry load structure had an embedded conflict of interest for distributors. As distributors made a fixed sum on mutual funds notwithstanding their performance, they had an incentive to push MF schemes, even if the investor did not require it. This led to constant churning across schemes and hindered long-term asset creation. Therefore, it is appropriate that Sebi is putting an end to this practice. In the new scheme of things, the investor will pay a fee to distributors and has the option to negotiate it based on the quality of the service provided.
It is important for investors to know about the distribution part of the business because the ball is now in their court as they have to negotiate with the distributors on commission . What will be the fallout of Sebi’s announcement in short and long term? For starters, distributors will have to play the role of financial advisors to investors and not simply push products. This is the basic philosophy behind the announcement.
The business should be based on investment needs and not the distributor’s ability to merely sell. For investors, their costs will be lower if we simply go by the announcement. But is it so simple? The regulation says that the investors are supposed to negotiate the commission with distributors, giving them more leeway now. They can choose from among several distributors based on their quality of service and price.
But, will retail investors have the bargaining power to argue with distributors? Many experts are of the view that retail investors will not be willing to pay distributors out of their own pocket. In such a situation, AMCs will have to step in to subsidise distributors for the services they provide investors.
While earlier AMCs were paying 50-100 bps, now they may be required to increase it. All in all, it looks like that AMCs’ bottom line will definitely take a hit. Most of them are already in the red and they may have to bear the brunt in the short term. However, the intent of the guideline is to bring about increased inflows in the long term, so the assets under management will increase manifold in future. And then AMCs will turn around.
“In short term, this move can have negative impact on AMCs, but in long term, it will definitely help the industry to expand its reach. More people will invest as the cost of acquisition comes down,” says Kanwar Vivek, CEO, Birla Sun Life Distribution.
Those distributors who are pushing products will find the going tough. Basically, it’s going to be smoother for “advisors” but harder for “sellers” . In fact, industry players feel that even now business is more need-based . Rajiv Deep Bajaj, Vice Chairman & Managing Director Bajaj Capital says that in July, inflows have been higher in debt schemes than equity schemes. The commission on debt funds is just 0.5-0 .7%—much lower than equity schemes.
insurance products, however, continues to be higher
than for MFs. Experts agree that at least in short term
distributors will tend to push unit-
linked insurance plans. Here the investors have to be very cautious as insurance distribution will become more prone to misselling by distributors. Insurance is not a substitute for MFs. While the objective of the former is to protect against foreseeable risk, the objective of the latter is to optimise return on investments. Moreover, ULIP come with much higher upfront charges.
CONCLUSION:
In a nutshell, the new regulation will lead to longterm asset creation. However, there is no clarity on whether investors or AMCs will be paying commission to distributors. A majority of retail investors do not have the tools to find appropriate information about financial products. Therefore, it seems that they are not on an equal footing with distributors. The latest move might complicate matters, as it expects the investor to negotiate with distributors on their own. Investors should be really cautious, especially if the distributor seems overeager to sell ULIP products.
WHO WINS WHO LOSES
Mutual fund distribution set to become more demand based rather than sales push
Time for investors to be more careful, as distributors might push ULIP more, at least in short term
Asset management companies might have to bear the brunt
Source: http://economictimes.indiatimes.com/Features/Investors-Guide/MFs-No-entry-loads-could-mean-lesser-cost-for-investors/articleshow/4850325.cms?curpg=2
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