The entry load ban for mutual funds and regulatory changes with regard to Ulip products has hit hard the distribution business of brokerages in the past year and a half.
?Most brokers were caught by surprise by the regulatory changes in the distribution space and were late in reacting to the situation,? said Girish Dev, director, Future Capital Securities. ?Payouts have dropped significantly but costs are rising,? said a CEO of a broking firm.
For instance, he says, payouts on insurance products such as Ulips have become 50% of what they used to be.
Sales for most distributors have been affected. After the ban on entry load from August 2009, many small distributors had stopped selling mutual funds owing to lower compensation.
The new transaction fee structure (of R100) of Mutual funds while expected to improve penetration in smaller towns would also not add much to broker revenues, say market participants. Last financial year, equity MF schemes saw net redemptions to the tune of R13,400 crore while Ulip sales dipped more than 20% since the regulatory changes in September 2010.
?The distribution model of brokers still very much hinges on transaction-driven revenues. If there are no fees and commission how does one push sales?? said Dev.
According to Prasanth Prabhakaran, president?retail broking, IIFL, distributors are now restricting themselves to selling need-based MFs and insurance products.
?It?s more about pull (from clients) rather than push (from distributors),? he said.
He adds that debt products such as non-convertible debentures and FMPs are in demand right now.
Brokers have also been struggling to charge customers for distributing products under the new regime. ?The whole idea of abolishing the entry load was that customers can pay the distributors if they value their services. But the question is why will customers pay the brokers? Which customer would be willing to give his distributor two cheques?? said the CEO quoted earlier. Private banks, on the other hand, have been able to levy charges, he added: ?Banks usually debit the distribution charges every quarter, something a majority of clients may be unaware of.?
The fixed cost for distributing products, especially salary, bonus and training costs remain high.
?If the distribution agent had to do a business of 3x earlier he will now have to do 6x worth of business to justify his salary,? added Dev.
Many brokers have scaled back their distribution platform. For instance, about a year back, IIFL drastically cut down on the number of sub-brokers or IFAs on the distribution side, said market participant.
Bringing down costs is now top priority with distributors, who are now turning to the online model. ?Online medium is cost-effective as it is easier to dispense quality advice,? said Ajay Maheshwari, business head- distribution, Sharekhan, adding that instead of having a huge sales team to handhold clients, it is easier for the distributor to post self-explanatory research reports online.