Shrinking margins and the move to all-trail model seems to be deterring new independent financial advisers (IFAs) to join the industry. The number of new IFA enrollments, which is indicated by new AMFI Registration Number (ARN) in individual category, fell by 13% from 20,339 in FY18 to 17,625 in FY19. From April till October 2019, the industry has added 5,104 IFAs, with an average of 729 ARN registrations each month. If we assume the industry continues at the same pace of registrations (729 individual ARNs each month from November 2019 till April 2020, an addition of 3,645 IFAs), the total new IFA addition adds up to 8,749 in FY20. This could be a 50% drop in new ARN registrations in individual category in comparison to the previous fiscal.
Even corporates and banks seem to be going slow in adding feet-on-street team. New ARN registrations of corporate employees grew at a slow pace, increasing by 2% from 36,153 in FY18 to 37,048 in FY19. This is a significant drop in the growth, considering the growth recorded in the past few years. For instance, in Apr 17- Mar 18, new ARN registrations of corporate employees grew by 48% from 24,492 to 36,153.
“Instead of adding new IFAs in the industry we should look at how we can increase the productivity of existing IFAs. There are many IFAs who have not been able to scale up. The opportunity is there. It is just that they have to invest in their business,” says the CEO of a private sector fund house.
“There are only 12 IFAs above Rs 1,000 crores assets under advisory (AUA) in the country. Only 39 IFAs have AUA above Rs 500 crores. And there are only 326 IFAs who are above Rs 100 crores AUA. I think that number can easily be 10 times of what it is today. And that's the opportunity,” said Amit Bivalkar of Sapient Wealth Advisors.
A shift from upfront to all-trail means new IFAs have to put in capital from their own pockets to sustain their business till they achieve a decent AUA. A new IFA has to build an AUA of Rs 10 crore to earn a trail of Rs 62,500 per month, considering a commission of 75 basis point per annum. Before the all-trail model was implemented, many established IFAs had already moved to full-trail model. Full-trail model benefits IFAs in the long run with mark-to-market appreciation. However, budding IFAs used to opt for an upfront plus trail model which used to take care of their working capital. The era of upfront has now ended.
Fund houses are allowed to pay upfronted trail commission from their books on SIPs of up to Rs 3,000 per month, per scheme for distributors who get first-time mutual fund investors. Only the first SIP purchased by the investor is eligible for this upfronting. The commission is recovered on a pro-rata basis from distributors, if the SIP is not continued for the period for which the commission is paid.
To overcome the hurdle of declining margins, advisers are focusing on scaling up their businesses by adopting technology. Many IFAs are collaborating with stock exchange platforms like BSE StAR MF and NSE MF II for executing MF transactions, helping them cut costs and expand geographically.
