Column : Regulating the distributors

Market regulator Sebis proposal to regulate the distribution business of the mutual fund MF industry is not without reason. Distributors are the final link to retail investors and they are making more profits than asset management companies.

In India,ballpark estimates put the revenue market share of distributors in the MF industry at 36,while it is 64 for asset management companies. But in terms of profits,the distributors market share improves drastically to a dominant 61. This,in other words,means that it might be more profitable to be a distributor than a fund manager. A recent Boston Consulting Group report mentions that during the period 1996-2004,market share of distributors in the overall US MF industry revenues increased from 61 to 76. In FY10,back of the envelope calculations show that the asset management revenues could have been in the range of Rs 3,100 crore. During the same period,distributor revenues are expected to have been around Rs 1,800 crore. While post-entry load ban from August 2009 has hit distributors pockets,their profits are still estimated to be more than those of mutual fund companies.

Anecdotally,a CEO of a large mutual fund mentions that the industry collectively made a net profit of Rs 900 crore in FY09. Assuming a 30 net profit marginsome of the top companies earn thatit is likely that the figure for FY10 will be around Rs 1,000 crore. In contrast,distributors are known to earn net profit margins in excess of 80since after the one time sale,the trailing fees they earn comes literally at zero cost. That puts their collective net profit at Rs 1,400-1,500 crore,which is much more than that of MFs. So,in terms of the industry value chain,it is better to be a distributor than an asset manager. That is perhaps the reason why there are more players in the distribution business than in mutual funds.

The distribution business is being increasingly conducted by banks. In terms of the channel mix,43 comprise independent financial advisors,30 banks,22 national distributors and 6 direct. As the industry evolves,the third party distribution model calls for greater regulation.

muthukumar.kexpressindia.com