Financial advisors still feel the heat of Sebi's entry load ban
facebooktwitter
Loading...

Entry load ban still hurts advisors

Before August 2009, mutual fund houses used to charge up to 2.5 per cent of entry load on investors while investing in fund schemes for meeting distribution and commission expenses.

  • Mumbai,  December 14, 2011  
  • |  
  • UPDATED   15:18 IST

Two years after entry loads were banned in the mutual fund industry, about 72 per cent of the independent financial advisors (IFAs) are still feeling the heat, according to a survey.

"While 28 per cent (of IFAs) have felt no adverse impact, 72 per cent have found the going tough. They have also been hit by the unfavourable conditions in the market over the last two years," said Prem Khatri, founder and chief executive officer (CEO) of Cafemutual.com, while announcing the results of the survey.

Of the 28 per cent of IFAs who felt no adverse impact, 15 per cent saw their incomes go up, while the remaining 13 per cent saw their income levels remaining the same compared to two years back.

The survey conducted by Cafemutual in August-September, covered 1,505 IFAs across 30 cities.

When asked further about the extent of increase or decrease in income, the IFAs threw up some interesting findings.

"Those who reported an increase typically cited a large increase in income. Similarly, those who reported a decrease tended to cite a huge decrease in income," Khatri added.

Before August 2009, mutual fund houses used to charge up to 2.5 per cent of entry load on investors while investing in fund schemes for meeting distribution and commission expenses. Thus, the risk for the fund house was nil, while the entire burden of the fund launch was shifted to the investor, while the investor was not properly educated about the same.

To usher in transparency, the Securities and Exchange Board of India (Sebi), under the stewardship of C.B. Bhave, had done away with the entry loads.


ONE-TRACK MOVEMENT
  • Most IFAs focus on selling equity funds & not fixed income products
  • This has helped MF industry in mopping up funds
  • IFAs helped industry in keeping inflows from drying up during downturns
  • IFAs don't undertake biz development activities
KEEPING IT SIMPLE
  • Before August 2009, MF houses charged 2.5% of entry load on investors for distribution & commission expenses.
  • So, the risk for the fund houses was nil, while the burden of the fund launch was shifted to the investor
  • To usher in transparency Sebi had done away with the entry loads


Incidentally, the IFA business is still attracting newcomers and five per cent of the IFAs surveyed have joined the business in the last two years. Most IFAs focus on selling equity funds only.

Despite their earnings looking down, IFAs are yet to take fixed income products seriously. Fixed maturity plans (FMPS), as they are called, can comfortably compete with savings bank accounts and other depositbased products.

"Even during market downturns when one would expect some shift in focus from equity funds to non-equity categories, there has been only a marginal shift," the survey found. However, this kind of focus helped the mutual fund industry, particularly equity funds in mopping up assets under management (AUM).

IFAs, thus, helped the industry in checking the trend of inflows drying up completely during market downturns in the past. This was mainly due to an estimated 8 million Systematic Investment Plans (SIPs) brought in by them and still running.

"However, such overdependence on equity funds leaves the industry more vulnerable to the ups and downs of the market," said Khatri.

The survey also found that IFAs do not undertake marketing and business development activities. Restricting their catchment area to their social network, they expect their growth to come from their existing clients - either through repeat business or referrals (around 70-90 per cent business comes from references).

While the onus is on the IFAs to adapt and progress under the changed circumstances, they feel that their voice and views are not given weightage by the regulators.

Courtesy: Mail Today