MF distributors unfazed by direct plans eating into commissions

Himadri Buchmoneycontrol.com 

In a move to popularise mutual funds, the capital market regulator Securities and Exchange Board of India has been pushing hard for reforms. In December 2015, SEBI chairman UK Sinha proposed to allow online marketplaces like Flipkart and Snapdeal to sell MF units. But these measures could potentially deal a blow to distributors, especially online players, whose source of revenue is from the transaction fees and commission they charge investors. iFast Financial India, Fundsindia, MyUniverse and Scripbox are some of the pure-play online MF sellers. But are their livelihoods in jeopardy?Not ReallyNo doubt, revenues of mutual fund distributors will be impacted if an investor opts for a direct plan of a mutual fund on an e-commerce platform. A distributor's commission ranges from 0.5 percent to 1.25 percent depending on the scheme.

On top of it, there is also a transaction fee depending on the transaction fee model. Some platforms go for a flat fee every month irrespective of the number of transactions, and some charge a fee based on the asset-based pricing fee model.

But most distributors are of the view that a large set of investors will seek an advisor’s word before buying a scheme. Only a small section of distributors believes that their commission will be at risk if investors migrate to an e-tailer. 

“I believe a lot of investors would want to take advice before buying a scheme even if they are opting for a direct plan,” said Rajesh Krishnamoorthy, Managing Director of iFAST Financial India.

Besides regular plans, mutual funds are also being currently sold directly, which bypasses the distributor. 

“Direct plans are merely 14 percent of total industry assets under management. We have not been impacted with direct plans coming in and with e-commerce platforms selling MF schemes we don’t think it will have any impact on our business,” said Srikanth Meenakshi, Founder and Director at FundsIndia.com.

The biggest enemy for the distributor is of course the fund houses selling their plans directly – a trend which is seen to have incrementally gone up.

SEBI is against distributors offering financial advice.  So, keep it direct (KID). The key aspects of buying a mutual fund scheme through an e-commerce are convenience and cost. Therefore, investors are likely to choose the direct plans even if they start with regular plans.  

Distributors and financial advisors have been lobbying hard against mandatory disclosure of commissions by fund houses, but SEBI had other plans.

The market regulator has made it mandatory for mutual fund houses to disclose actual commission paid to the distributors from October.

The investors will have to be notified of the commission paid in absolute terms in the common account statement. The amount of commission paid will have to be disclosed during the half-year period against the investor’s total investments in each mutual fund scheme. 

However, the mutual fund sales on e-commerce platforms are not likely to be free of cost like the direct plans. These platforms would entail certain operational costs. First time customers to e-commerce platforms are expected to go through a product and risk suitability test based on income and certain demographic details.     

Thus, with limited one-time costs, these platforms would be cheaper for the customer compared to an independent financial advisor's (or IFAs) charges. The e-commerce platform is expected to catapult mutual fund distribution on to the digital platform. It remains to be seen if this can bridge the digital divide by reaching out to customers hitherto uninitiated to financial services.