The push by asset management companies (AMCs) to get business from beyond the top 15 cities, or B-15 towns, is likely to give a leg-up to the community of 75,000-plus independent financial advisors (IFAs), as AMCs will mostly depend on these advisors to get the business in these regions. As part of this push into B-15 towns, a majority of the AMCs have already increased the commission paid to IFAs by anywhere between 75 basis points (bps) and 100 bps, according to industry observers.
“The market regulator’s decision to allow AMCs to charge an extra 30 bps as expense ratio means that AMCs can effectively choose to pay a higher upfront commission of up to 200 bps to distributors for selling equity schemes,” said the sales head of a large AMC, on condition of anonymity.
“Unless the IFA is adequately incentivised, he will not be interested in getting business from these regions because of the high cost involved in acquiring clients,” said Ramesh Bhat, president, IFA Galaxy, a body of IFAs. A large portion of this cost would involve travel expenses and the money spent in educating investors, he added. As of December, 31, 2012, the top 15 cities contributed more than 87% to the MF business. Experts believe that the reliance on IFAs in B-15 towns is likely to be higher as IFAs have historically been known to bring in more sticky assets than banks or national distributors.
As per Sebi guidelines, AMCs will have to claw back additional TER in the case of inflows from cities beyond top 15 cities to the extent the investments are redeemed within a period of one year. A new cadre of IFAs is also expected to emerge from the B-15 towns.
“We expect several retired people from these regions to sign up as distributors,” said V Ramesh, deputy CEO, Amfi. According to Bhat, a lot of retired persons from the banking industry have shown interest in selling mutual fund schemes.
In August, market regulator Sebi, in its guidelines, had allowed postal agents, retired officials from government, banks and retired teachers to distribute simple products in a bid to energise the distribution system and increase the ‘feet-on-street’ in distribution.