Some have labelled the regulator’s recent decision to reduce TER’s (total expense ratios) of Mutual Funds as “penny wise, pound foolish”, but there’s no doubt that the intentions were correct – bring down the overall embedded cost of a retail investment product to benefit the end user. Having said that, nothing is quite so “black and white” in the financial services distribution business – a fact that has been underscored many a time over the years. A single regulatory shift will result in a cascading ripple effect that will result in a multitude of unintended consequences. Think back to 2009, when the cleaning up of ULIP’s removed distribution focus from the product altogether, or how the doing away of upfront commissions resulted in a proliferation of close-ended fund NFO’s. Here are five such outcomes of SEBI’s recent decision.
Banks will start focusing on PMS, AIF’s and structures
With Mutual Funds moving to an all trail model and also becoming 20-30% less remunerative to intermediaries, we’ll see large banks making a focussed effort to move their HNI clientele from Mutual Funds to exotic and higher earning investment products such as PMS’s, AIF’s and structured products. The recent underperformance of both debt and equity funds will be used as a selling point in this regard.
ULIP’s will make a comeback
The comparatively higher tax efficiency afforded by ULIP’s will now suddenly be touted as it’s redeeming feature. Most ULIP’s are now more remunerative than Mutual Funds, and we’re likely to see a renewed focus on this product, which has hitherto remained in the shadows since the reforms of 2009. We may even see Insurance Companies launching new and innovative ULIP’s in the coming months, as demand for these products go up.
There will be disruption in traditional distribution
Traditional distribution, which employs the standard feet on street model of acquiring and managing customers, will undergo a tectonic shift. Cost-wise, it would now become unfeasible to do such a business, unless distributors already have a sizeable base in place. Those who choose to bravely stay behind in the fray, will dramatically re-engineer their business models – cutting manpower costs, adopting technology to build efficiency and scale, and learning to operate on slimmer margins.
Smaller AMC’s will come into focus
Since the TER restructuring would be AUM-slab based, larger funds would end up having to reduce costs to a larger degree. If the past is anything to go by, the lion’s share of these cuts would be passed on to the hapless distributor! This will see distributors migrating a lot of their assets to smaller funds, which have the capacity to make better payouts. In a way, this will be a good thing, since it would promote healthy competition and take the power away from the big boys of the industry. A number of good performing but smaller AMC’s will see exponential business growth over the next three years.
Direct plans will become more expensive
A direct caveat of the TER increase would be the increase in the expense ratios of direct plans, by anything from 5 to 10 bps per scheme. In a way, this would have a net positive impact on the industry, as the divide between direct and regular plans would shrink, and lesser clients would venture into Mutual Funds unadvised (a high-risk endeavour, to say the least).