End of an era in the fund industry
There is much more to the ban on upfront commissions than what a simple reading of the two small paras in SEBI’s Oct 22nd circular would suggest. And beyond these implications on distributors and fund houses, there is a deeper sense among fund houses of the end of an era for the fund industry – the era of “jugaad”.
A movie show for distributors in a large Gujarat city was cancelled recently – on the day of the show. At least two foreign trips that were in the pipeline, which were already communicated to distributors who had qualified, have been cancelled in the last week. Advances paid to event management companies for some distributor trips that were in the pipeline have been written off.
AMCs are scrambling to understand the full implications of the Oct 22nd circular that bans upfronting of any kind and makes it mandatory to debit all forms of commissions and related expenses only to the schemes and not to AMC books. And, as the implications of the circular sink in, sales teams have swung into damage control mode – to stay execution of any plans that were made, which may now fall afoul of the Oct 22nd circular.
Its not just upfronts – here is how distributors’ lives will change
Its not just that upfront commissions have been banned and all commissions will now be on full trail model. Here are some of the other ways of life that will change in the distribution world – at least for the large and mid-sized IFAs and big distribution houses, who got something beyond the agreed commissions:
There’s a lot that will now change in fund houses as well:
End of the era of “jugaad”
Perhaps the biggest change that is now visible in fund houses is a recognition that the industry has finally run out of “jugaad” solutions to keep running business the way it was being run. And a clear recognition that the current SEBI management that is overseeing mutual funds is fully aware of ground level realities and will brook no nonsense of any kind.
In an ideal world the quality of the product (long term track record of the fund and perception of the brand that offers it) should be the primary determinants of business volumes. While over the years, this facet has become increasingly the most important driver at a product level, it would be fair to say that our industry has tried to use its ingenuity to the maximum, to find ways of supplementing sales growth at a fund house level, beyond what its flagship products were delivering on pure merit. We have seen NFOs, dividend stripping, bonus stripping, closed ended funds, contests, incentives of all kinds, work-arounds to AMFI best practice guidelines – the list is endless.
The sense that one now gets when one speaks with fund house leaders is that the era of jugaad is now behind us. As this industry attempts to move into its next level of growth, the thinking will now shift from tactical to strategic, from short term to long term.
Distributors who made the move of shifting from tactical to strategic thinking, switched years ago to an all trail model. Distributors who thought long term ensured that they maintained high levels of transparency with clients on commission disclosures, and stepped up their advisory skills to demonstrate value add vs direct plans. These are the distributors who will most likely thrive in the new environment, perhaps at the expense of those who focused only on tactical measures and short term thinking. There is pain ahead for distribution – from shrinking margins and disruption of market tailwinds. Those who will overcome this pain and gain market share are most likely the ones who saw through “jugaad” early on for what it always was.
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