The rules of (Portfolio Management System) PMS make the industry more transparent but at the same time, it creates a problem for industry players. IFA Industry has been under pressure from the day the expense ratio of MF starting coming down followed with Direct Plans. Well, I am speaking for the ones who are not big shot IFA in the industry but for the average category. Online platforms have changed the rules of the game and now the new rule of PMS will change further. The distribution industry has been reeling under revenue pressures due to falling of margins and revenues.
There is no doubt that the new rules on PMS will bring radical benefits for the investors. SEBI has made it clear that portfolio managers cannot levy upfront fees in any form from clients. Operating expenses charged for portfolio management service (PMS) shall not exceed 0.5% a year of the client’s average daily assets under management (AUM). These steps are wonderful for the investor who used to be dark in certain PMS investments. Portfolio managers are asked to report performance data net of all fees and expenses (including taxes). Earlier the performance data was before fees and expenses. This makes performance comparison easy for investors. The new breed of investors will not burn the fingers like historically but will get one of the best of the products to invest for long term wealth creation. Complex products should be more transparent but it also comes with baggage for the industry.
An IFA was selling PMS to survive his business and run the show. The new guidelines where upfront is being scrapped and the trail will be paid –itself creates pressure on the business planning. All it can be witnessed that for an IFA FY-21 onwards will be challenging and advisory model-based approach needs to be adopted.
PMS has been one of the hot products for the IFA community since the earning was significantly high. At the same time, the increase of the minimum Application Amount from Rs 25lacs to 50 lacs was the 1st step and now the final part of the new rules came up. Further Direct Plans for the same segment will be coming up which will erode the premium being enjoyed over the regular ones. The Direct Plans will promote an advisory business model for the IFA.
One of my biggest fear is that the distribution industry in the coming month will shed more manpower and many people will be either starting their own or will change the industry. The margins are falling down and hence this carnage seems to be unavoidable. A significant number of talents will be on the street in the coming months which will be a challenge for the Industry. In the last couple of years, the industry has changed dramatically and gone ahead it seems it will change the past completely into a “Page of History”.
Direct plans will throw away a few players from the industry as most of the clients under the PMS are HNI or Ultra HNI segment and hence they are more informed about the subject. Direct plans will slowly bring clients closure to the manufacturer end and hence the role of IFA will be to play on advisory cards rather playing on being a salesperson.
Flows will get impacted when these type of transparency are brought into action. But the biggest question is that are all IFA ready to shift into Advisory model in the coming days. Are they capable enough to advise and earn from the same? Will the current customers will pay an IFA for the advice.
The rules of the game for an IFA are changing. They have to be knowledge-driven and advisory driven organisation. Time has come to move from sales-based advisory to advisory based Sales. Regulators are clear to communicate that they want an IFA to grow and develop gradually and forget the traditional model of the business process.
All it can be concluded is that industry is going through changes and the change comes with a cost.