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Small city distributors not happy with SEBI decision: Reports

SEBI allowed AMCs to charge an extra 30 bps as expense ratio provided the new fund flows from beyond the top 15 cities make up 30% of the overall assets

August 23, 2012 1:58 IST | India Infoline News Service
Distributors or independent financial advisors (IFAs)—who work as one of the intermediaries—between asset management companies (AMCs) and potential investors especially in the semi-urban and rural regions of the country, are not happy with the SEBI (Securities and Exchange Board of India) decisions announced on 16th August, according to media reports.

The market regulator in its board meeting had taken note of the lack of penetration of mutual fund products, inadequate distribution network, need for greater alignment of the interest of various stakeholders, regulation of distributors and issues concerning investor protection, and had approved some immediate steps.

Many small IFAs across the country had lost a major portion of their revenues from selling mutual funds. They want a clear view that would help to bring back the lost glory of the industry. In its decisions, SEBI allowed AMCs to charge an extra 30 bps (basis points) as expense ratio provided the new fund flows from beyond the top 15 cities make up 30% of the overall assets.

However, financial advisors said that by increasing 30 bps in expense ratio, it's not going to attract retail investment in mutual funds. According to them, investors must pay as advisors need to be paid for their services. These financial advisors in small cities would prefer increment in their trail-commissions rather than a rise in upfront commissions.

Trail commissions refer to the amount paid to agencies, distributors or firms selling mutual funds on a regular basis for the period that the investor remains invested with a mutual fund. Trail commission is usually paid every quarter.

In small cities, the awareness about MF schemes is less. There have been cases of mis-selling due to which people in smaller cities and rural areas are unwilling to invest in MFs. The average ticket size of investment in these cities is around Rs. 50,000 and a distributor has to travel around 50km to reach investors. Thus, it becomes difficult to sell MF schemes. Giving incentive to distributors is necessary as the cost of doing business is high in small cities. If trail goes up they would like to retain clients for a longer period of time, which will be good for all stakeholders.

Currently, on an average, upfront commissions to IFAs range between 10 bps to 50 bps (though in some cases it is as high as 1.5%) while the trail stands in the range of 30 bps to 80 bps, the reports added.

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