Mutual fund industry hit as new 'financial advisor' additions plunge

The Rs 22-trillion mutual fund (MF) industry is facing growth hurdles not only from heightened market volatility but also from slowdown in the registration of new individual distributors or independent financial advisors (IFAs) entering the space.

Data shows, the number of new Amfi-registered number (ARN) for IFAs fell by 51 per cent year-on-year to 8,594 in 2019-20. Overall, the industry added 41,501 new distributors, down 26 per cent over 2018-19.

ARN is a unique code allotted to intermediaries by the Association of Mutual Funds in India (Amfi).

Earlier, the MF industry had set Rs 100 trillion as a potential target by 2030, which included adding 400,000 new distributors.

However, the run-rate trend underscores the challenges that lie ahead in achieving this mark. “We have seen a host of regulatory changes, such as scrapping of upfront commission, and rationalisation of total expense ratios, which also had some impact on trail commissions. Also, there has been a regulatory nudge towards the fee-based advisory model,” said Sunil Subramanian, managing director of Sundaram MF.

Compared to the 11-month average additions of 725, the additions in March were down 14.7 per cent at 618.

Further, asset erosion in the recent market sell-off has hit revenues of distributors. Equity assets have shrunk to Rs 5.78 trillion in March, following the erosion of Rs 1.79 trillion from the February levels. “Distributors have seen their asset base shrink significantly due to the fall in equity prices. This will hurt trailing commissions,” said Srikanth Matrubai, chief executive officer of Sri Kavi Wealth.

Multiple domestic and global headwinds have kept markets weak. "Since the last three-four years, the economy has faced several headwinds from government-initiated structural reforms, and the US-China trade war, along with various crisis-like situations pertaining to NBFCs, YES Bank and Karvy. Debt schemes have also witnessed markdowns due to rating downgrades. While SIP returns have remained weak, reduced commission payouts have left little incentive for new players to come in," said George Heber Joseph, chief executive officer and chief investment officer at ITI MF.

“Not many people are showing interest in coming into the business, as they don’t see the business offering adequate incentives. Also, several distributors are shifting to the insurance business,” said Ritesh Sheth, co-founder of Tejas Consultancy.

Lack of upfront commission has also dissuaded individuals from the business. Upfront commissions helped in covering initial client acquisition costs. “In absence of an initial income, it is difficult for players to absorb these costs,” said an executive of a fund house. Apart from individual distributors, there was a 13 per cent decline in corporate employees; new ARN stood at 32,022 in FY20, down from 37,048 in FY19.