What will the IFA (Independent Financial Adviser) do now that the entry load has been abolished? They will sell life insurance till 2011. Once that also becomes fee based he will not know what to do. Correct? Well yes and no.
IFAs are perhaps the most agile persons in the whole chain of getting the mutual fund to the retail customer. So if he cannot sell mutual funds profitably (I doubt how many IFAs kept the upfront commissions with themselves anyway – most was being rebated) he will do the following things:
Charge new clients a fee for most of the services – filling up the KYC form, getting the redemption proceeds, making changes in nomination etc. I know of 4 or 5 IFAs in Mumbai who are now charging between 200 to Rs. 500 for each transaction.
Charge an upfront fee for all applications: If a client does a 3 year SIP for Rs. 5000, he might be willing to pay Rs. 5000 one time to the IFA. However a client doing a Rs. 100,000 SIP may be willing to pay only Rs. 5000. So it may not be a great substitute, but it helps.
Push the fund house: As long as Managing mutual funds means chasing Assets under Management the fund house will happily bleed the shareholder. So the bigger IFA will push the fund house for a higher, much higher, upfront. Already one is seeing 1.25% kind of pay out. Not bad for a community which thought it was dead.
Sell Portfolio Management Schemes: All brokerage houses and mutual funds now have a PMS scheme for Rs. 500,000. This is easy to sell at least in the metros of India. Go to a client and say “Sir you are now a HNI (which means everybody) you should not be putting money in a SIP – that is for poor people. You can now afford a PMS, so please….”. Works very well to the wannabe client!
Take up broking terminals: It is quite easy to churn a clients equity portfolio than a mutual fund portfolio. So take up an equity clientele and make him take position in Nifty. The brokerage can be a small %age but adds up to a nice big sum at the end of the day. Big brokers are scouting for people with some equity knowledge so it will help to have the IFA do it.
Life insurance companies and mutual funds will find some other ways to compensate – it is far cheaper to have an agent who will take a %age of the business rather than an employee. So various solutions are being worked out some of them will be acceptable, some not acceptable.
Financial Planning: The most abused word. Everything flies in the name of financial planning. So everybody and his aunt will go and get some degree, certificate, charter, and call himself / herself a financial planner. This will work because neither the client nor the provider knows what is to be done in financial planning.
Associations: The Ifa will form associations (like Faaida, Ifa galaxy, Ifa forum, etc.) that will keep talking, writing, screaming about the changes in the business. However, nothing useful can come out of this because the entry into the business is quite easy and amazingly the agents have to pay Rs. 1000 per annum to an association of the manufacturers! Amazing.
If there are big distributors with a good trail income he already realises that not getting the upfront commission is just a small loss – and in about 5 years time he can make up the commission through trail. However, agents and fund houses which specialised in NFOs (Dhirendra Kumar of Valueresearchonline.com called on fund house an NFO factory, if you remember. I do not wish to name it, but if you google ‘Nfo factory’ I am sure you can find out).
So the smart IFA will adapt, charge, sell direct equity, sell real estate, trade options and futures, or get into school education. There is no regulator there. Not yet.
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