Business impact of regulations in the Indian Asset Management Industry: Playing in the new market place
The financial year 2008-09 was a landmark year for the Indian Asset Management Companies (AMC’s). After a 50% year on year growth for 6 preceding years this year saw a drop in Assets under Management (AuM’s) by 17%. The year also saw introduction of regulatory measures by SEBI to empower investors and to protect investor interests. One such important measure was the abolition of entry loads as we knew it and instead allowing of the investors to directly negotiate commissions with distributors, depending on the nature and quality of service received. SEBI has also made mandatory the disclosure of all commissions charged by all competing mutual fund schemes.
This is in consonance with global trends wherein we see that globally regulations on investor’s protection and distributor commissions for asset management industry have been strengthened. It is seen worldwide that AMC’s charge entry load but there is full customer disclosure. The norms now applicable in India find no parallel except for in Korea and in the UK. Korea allows negotiation between distributors and investors with no fee payable to distributors by the AMC’s while the UK, (in a proposed legislation, to come into effect in 2012), the Financial Services Authority (FSA) plans to eliminate all commission payments for product providers and enforce financial advisors to agree on upfront fee payments with clients. The FSA has defined two categories of services, independent and restricted, with independent advisors not receiving and fee from product manufacturers and charging customers for holistic advice. Whereas restricted agents will offer basic services and will be tied to particular manufacturers. The FSA also plans to separate product fee from advisory fee and to bring a minimum qualification for advisors.
The impact will mostly be on the equity segment with there being a sharp decline in profits in the short term with a stabilisation of long term profitability. The maximum loss will be felt by Independent Financial Advisors (IFA's) particularly smaller IFA's, which act as transaction intermediaries and have the least ability to charge for advice. The loss suffered by distributors will have to be offset with AMC's giving higher upfront commissions or trail commissions. Banks and National Distributors (ND's) will be in a better position to charge customers up to 100 bps for Mutual Fund advice and transactions, due to their control over a larger share of the customer’s wallet. There will be a reduction in churning due to the increased exit load and the market could also see some consolidation with smaller AMC's unable to take the acute P&L stress. New entrants may also find it difficult. There will be higher growth in portfolio management services and alternates as there is growth in affluent/HNI segment and AMC’s and distributors also push higher margin products. Debt products within the retail segments may also emerge. With the loss in entry load fees there might be a reduction in geographical penetration beyond tier I towns as these were predominantly served by Smaller IFA's.
Distributors will focus on an advisory led pricing model by adopting a 'relationship value' view of customers. Bank owned AMC's must look to leverage captive infrastructure to retain all economies within the group, thus giving them a competitive edge. Additionally these AMC's will work more closely with proprietary channels to provide end to end marketing support. Independent AMC's have the opportunity to evolve different IFA platforms, as has been successfully done in Australia and parts of Europe. Additionally it is expected that the use of remote channels such as the internet, call centres etc. will increase across player categories as these are more cost effective.
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