Prepare for 23% reduction in trail commissions
Extract from 7th annual Wealth Forum Advisor Confidence Survey 2018
Business Confidence Section
Wealth Forum invited 350 of India’s leading IFAs from 46 cities to participate in the 7th edition of the Wealth Forum Advisor Confidence Survey 2018, which was conducted in July 2018. All invited IFAs form part of the top 5% of IFAs in respective cities. We received responses from 243 leading IFAs from 45 cities, which has been compiled into a comprehensive survey report.
This is an extract from the Business Confidence Section of the survey report, which features confidence levels of India’s leading IFAs on business volume growth, revenue growth and worries around potential reduction in trail commissions over the next 3 years. India’s leading IFAs expect trail commissions to drop by around 23% from present levels over the next 3 years. Volume growth has to therefore remain strong, to make up for this significant dent in income.
With expectations of market tailwinds muted, confidence in volume growth has taken a knock. That said, a score of 8.2 is still a very healthy sign of confidence in continuing business volume growth, albeit a tad lower than what we saw last year. Following the pattern of the last couple of years, South continues to be the most circumspect on growth, with East emerging as the most confident region on volume growth.
The dip in confidence on revenue growth is a lot sharper, with all regions showing a significant decline vs last year. The manner in which the recent 15 bps expense ratio cut was handled in terms of trail reduction has brought in considerable nervousness on trail commission structures.
There is a fairly high level of concern that the 15 bps episode is not the last of what we are going to see on reduction of trail commissions. Across all regions, India’s leading IFAs are concerned on margin squeeze from reducing trail commissions over the next 3 years.
With more than half the survey respondents believing that trails will come down between 10-25% in the next 3 years, and almost a third believing it will be a lot more severe at 25-50%, the average trail reduction expected by India’s leading IFAs over the next 3 years is a substantial 23%. If you are earning a 1% trail, our survey respondents suggest that you should get ready for something closer to 75 bps over the next 3 years.
Trail commissions have gone up fairly substantially over the last 4 years and at the top end are now almost equal to distributable TER for new assets. If expense ratios come down over the next 3 years as seems to be widely expected, trail commissions will reduce. The key is how this reduction is managed in a manner that is seen as fair and equitable.
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