The Securities and Exchange Board of India (Sebi) has made it cheaper for investors to park their savings in mutual funds; with no entry loads, investors will receive units for the entire amount they plan to invest. Distributors, who so far have received the 2.25 per cent load as a commission from the asset management company, will now have to do without this. For many smaller investors, this is a material amount and Sebi may see reason in leaving them with the discretion to compensate financial agents for any advice or service they may have provided. Fund houses are already thinking of ways to compensate them from the exit load balances that they hold.
However, what is sauce for the goose should be sauce for the gander. If mutual funds are not allowed to charge an entry load which goes towards selling/distribution costs (ie paying agents who canvass money for fund houses), questions need to be asked about the commissions paid to their agents by life insurance companies, and on unit-linked investment plans (Ulips). Agents for life insurance companies can expect to get virtually all the initial premium as their fee; and Ulip commissions can go up to as much as 20 per cent. Since most people with surplus funds look for some basic advice from agents, the issue is how the agent is incentivised. If there are no incentives coming from mutual funds, and plenty coming from other directions, it is easy to see which way these agents will point investors. In other words, Sebi has presented the mutual funds with a real challenge.
The world over, asset managers depend on distribution to sell and, in the competitive Indian market, fund houses have been compelled to cough up hefty commissions to incentivise distributors. With customers not paying anything, funds will need to compensate distributors somehow and that could take a toll on their profits, at least until volumes pick up. What is likely is that the market will get segmented. Wealthy individuals will have no problem paying their investment advisers a certain percentage of their take, or a fixed service fee. Net-savvy investors were in any case investing through the Internet, without an agent as an intermediary. Investors who see value in the services of agents will not hesitate to compensate them; since they are saving themselves 2.25 per cent of their invested funds, they may not mind parting with some of that. For large organised distributors, such as banks, it may not even be difficult to extract fees from customers.
The ones to suffer will be the smaller agents, who will need to work harder to convince clients that they are indeed providing value. Distributors, especially the smaller independent financial agents (IFA), are understandably upset. But it is also true that some of them were only providing courier services and in the past have earned commissions of as much as 4-5 per cent on new fund offerings. Also, they will continue to receive trail commissions of between 0.4 per cent and 0.6 per cent of the average value of the investments. So, while distributors may earn less, they need not go out of business. It is interesting, for instance, that transactions last Monday, the first day of the new regime, were reported to be quite normal, possibly because the stock market too is on a roll.