The ban on upfront commission seems to have dampened interests of those wishing to become independent financial advisors (IFAs).
According to data from the Association of Mutual Funds in India (AMFI), new IFA registrations have fallen 42 percent from last November when the mutual fund industry had added 1,047 new AMFI Registration Number (ARN) in the individual category. In comparison, the industry has added a mere 605 new IFAs in November.
From April to November, the industry added 5,709 new individual ARNs as against an addition of 13,272 ARNs in the same period last year.
Industry experts attributed the fall in new IFA registrations to revision in commission structure for mutual funds. The recent changes in total expense ratio (TER) structure by market regulator SEBI may have impacted the feet-on-street fraternity.
In September last year, the Securities and Exchange Board of India (SEBI) banned upfront commissions paid to MF advisers. SEBI directed fund houses to move to an all-trail model. After SEBI’s circular, trail commissions have dropped 20-25 basis points (100 bps=1 percentage point).
SEBI has further trimmed the annual TER that very large size MF schemes would charge to 2.25 percent. Earlier, TER was below 2.5 percent but there was scope for market competition to determine adviser commissions.
With TER now reduced to critically low levels, the adviser community is seeing a decline in new entrants, leaving investors all alone to decide on MF schemes.
“We conduct our business transparently, even then our earnings have reduced because of the SEBI ban on upfront commissions. Who would want to undertake such a business activity if there is no proper remuneration,” said a Mumbai-based IFA.
Overall, there are 2.20 lakh ARN and Employee Unique Identification Number (EUIN) registered with AMFI.
Another Mumbai-based IFA said the MF advisory business may turn unviable because of rising operating cost and dwindling commissions.
Besides helping fund houses grow their assets under management and folios, the IFA community help in increasing awareness about mutual funds as an investment avenue.
Decade old advisers have already generated a high revenue surplus during the erstwhile high commission structure when the spread on a MF investment was shallow. In the new commission regime, it's the new age skill-based IFAs that are facing the heat alone.
Since the entry load ban from April 1, 2009 there has been a far-reaching impact on the business of the IFA community.
A number of regulatory changes also changed the way IFAs conducted their business.