High commission is shown in CAS (Consolidated Accounts Statement) when I work for national distributors. What should I do?
True. This is a big concern if you are working as a sub broker of national distributors. Because of their high volumes, national distributors get higher brokerage which is shown in CAS (Consolidated Account Statement). When clients notice the amount of commission they may get concerned. You should explain the reason for the same to the client and disclose the actual commission you get. Having said that, yes; this is a challenging situation.
Are Mutual Fund better than Life Insurance for clients and advisor as far as commissions are concerned?
Mutual Fund offers best opportunity for IFAs to grow as compared to other products. This is because trail is paid on entire assets every year, even on the appreciation amount. Also, due to exceptional liquidity, investors are comfortable investing large sums of money in mutual funds. In life insurance, since there is long term lock in, investors generally don’t commit big premiums. In the first few years, life insurance commissions may be high but beyond that, mutual funds offer better rewards, both for clients and distributors. I have given given revenue comparison in my book ‘Mutual Fund Handbook for IFAs‘
Is trial going to be banned? If yes, what is the future of mutual fund distribution business?
There is no such news as of now. Infact, the recent changes made by regulator on the TER structure (which came in effect from 1st April’2019) in itself might be an indication that trail comission is going to stay in the foreseeable future. This is because trail is down by almost 25-30% for most distributors. Low comissions reduces conflict of interest which SEBI wants. Also, the fee model hasn’t really taken off in India and regulator is aware of that. There are no guarantees but I think trail is here to stay for some time.
Let’s say, trail is further reduced and total yield on AUM drops to 0.50% per year. I think this is still sustainable. Build your business model where trail is 0.50%. The silver lining is that – the difference between direct and regular will reduce which will help in retaining clients who earlier wanted to move to direct.
Even if I take a scenario where trail is stopped, it is not the end of the road. You can become a Registered Investment Advisor (RIAs) and charge a fee. Today, you may think charging a fee is difficult but when commissions are banned, clients will be prepared to pay a fee. Yes, it may be difficult in the beginning and income will drop for a few years and many distributors will .
Every business is dynamic. Nothing is guaranteed anywhere. You will have to change yourself. I believe, if you have AUM of clients with you, you will find a way to earn. As far as clients believe in your advice, you will be remunerated. You should also do your own financial planning before such thing happen. Save money. You will be able to face it better. (31st July’2019)
What is the best to charge a fee to my clients?
For charging clients, you first have to get registered with SEBI as an investment advisor. Once you are licensed to charge, the best way to charge would be as a % of AUM Basis. This may be a bit difficult to convince the client and you need to create a lot of value for clients to pay you an AUM based fee. Other models of one time charge or transaction wise charge won’t work for long and won’t allow you to become big. (14th Apr’18)