Lower commissions may force small mutual fund advisors to shut shops

Ban on upfront commissions last year and a lower trail commissions from April this year are likely to force many smaller mutual fund advisors to leave the industry, fear mutual fund advisors. Some smaller mutual fund advisors have already shut shop after Sebi banned upfront commission in September last year has made the business model unviable, adds mutual fund advisors.

“ARN holders who were holding small AUM or doing it as their part time job are finding it hard to sustain due to the reduction in commissions by Sebi last year. No upfront commissions and lower trail commissions from April onwards is compelling them to leave,” says MS Shabbir, founder and managing director of SenSage Financial Services.

Sebi banned upfront commissions paid to mutual fund advisors in September last year. Sebi asked mutual fund houses to move to an all trail model. Sebi also reduced the total expense ratio (TER) in mutual funds. For more details, read: Sebi changes total expense ratio (TER) of mutual funds


The new commissions rates are not out yet, but mutual fund advisors believe the trail commissions would drop by 20 to 25 basis points.

Mutual fund advisors believe that exodus of smaller mutual fund advisors might have a negative impact on already impaired inflows to the mutual fund industry. Inflows into domestic equity mutual funds declined for the third straight month to Rs 6,158 crore in January compared with Rs 6,606 crore in December and Rs 8,414 crore in November.

“Almost around 75-80 per cent of the total AUM of top 10 AMCs come from the distributors. The inflows which already look hurt in the last three months can feel more pain in the near future if distributors leave,” says Prashant Maurya, partner, Citrine Financial Advisors.

Mutual fund advisors say the mutual fund distribution business is likely to become unviable because of rising operating cost and falling commission.

“Operational costs are rising. Apart from the daily expenses, technological advancement also adds on to our expenses. For an instance, we have to buy a portfolio management software to be able to analyse and keep a check on every investor portfolio. Also, we buy portfolio view software to provide a detailed view of the investments to our client investors,” says Maurya.

However, some mutual fund advisors believe that it might turnout to be good for booth the industry and mutual fund industry because only serious mutual fund advisors would remain in the industry.

“Transition will always be there. It could be good for investors as only serious people would stay in the business. Part-timers might not be able to do justice to investors’ requirements,” says Shweta Jain, founder, Investography.