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 55 percent in this financial year (FY20) compared to FY19.
In April-December of FY19, the mutual fund industry added 14,311 new AMFI Registration Number (ARN) in the individual category. In comparison, the industry has added a mere 6,431 new IFAs in April-Dec (FY20).
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 markets regulator SEBI may have affected the feet-on-street fraternity.
In September last year, 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.
Overall, the MF industry added over 32,000 ARNs across all distribution categories.
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.