Trail fees from MF sales prove a lifeline for brokers

MUMBAI: The current slowdown has forced several broking outfits to resort to cost-cutting measures, including a cut in salaries and laying off employees. The silver lining, though, has been the trail fee for the distributors of mutual funds.

The trail fee is paid by asset management companies (AMCs) to distributors for the amount they manage to mobilise. This fee is paid on the basis of average assets held every month. Typically, the fee paid amounts to 0.5% for equity assets.

At end-November, the total equity assets under management (AUM) of mutual funds stood at Rs 1,10,000 crore. Therefore, on an annual basis, the trail income earned by distributors could be close to Rs 550 crore from equity AUMs alone. This fee is paid on a monthly or a quarterly basis.

From the beginning of the equity boom in 2003, foreign and private sector banks have been aggressively distributing mutual funds.

Industry watchers say bank distributors like Citibank, Standard Chartered, HSBC and HDFC Bank between themselves, account for an AUM of Rs 20,000 crore since they distribute mutual funds to high net worth clients. Apart from them, there are other big distributors, such as Bajaj Capital, NJ India Invest and Bluechip Investments, that have a large network.

If the average equity AUM of a bank is Rs 2,000 crore, it will earn Rs 10 crore as trail income for the year.
���This amount helps in meeting the fixed costs of the department,��� Anand Rathi Securities director (wealth management) AV Srikanth said. The banking channel today accounts for 20-25% of the total value of funds distributed, with independent financial advisors accounting for another 40%.

Compared with this, a stock broker has no recourse to such trail fee. His revenues are restricted to brokerage earned on a transaction. While a downturn results in broking outfits resorting to cost-cutting measures, mutual fund distributors, or wealth management teams, remain relatively insulated on account of the trail fee.

Building a corpus takes anywhere between three and four years. It is precisely for this reason that a lot of stock brokers during the downturn have diversified into selling fee-based products, such as mutual funds and insurance. The trail income is an added incentive.

���Broking outfits have realised the importance of recurring or annuity income in tough times and, hence, many are looking at it aggressively,��� said Churiwala Securities MD Alok Churiwala. Products, such SIPs, where one can start investing with as little as Rs 1,000 a month, are finding favour in uncertain times with investors and, therefore, distributors are selling them aggressively.

Outfits such as India Infoline, Emkay Shares, HDFC Securities, ICICI direct and Sharekhan actively distribute mutual fund products to their clients. In many cases, they have formed separate sales teams although mutual fund distribution income is less than 5% of the overall income for most of them.