AMCs may pass on TER to brokers, distributors

Asset management companies (AMCs) may pass on a high share of the total expense ratio, or TER, impact to intermediaries such as distributors, brokers and registrar & transfer agents (RTAs).

The last round of TER cut saw AMCs pass on a major share (75-90%) of the impact largely to distributors. This time, however, given the inclusion of GST, trading cost and securities transaction tax (STT), the impact will have to be shared with brokers as well, said a report by Kotak Institutional Equities.

“The second-order impact in terms of extent and uniformity of pass-through and attractiveness to sell MFs by the distributors will have to be seen in the next few years. AMCs indicated that the commission ratio is just one of the factors that determine sales, and there are other important drivers such as fund performance, vintage of the brand and distribution reach,” the report said.

Similar to last time, large distributors with a sub-broker network will pass on the impact to independent financial advisers, or IFAs. However, unlike the last time, distributors face additional headwinds. The entire book will have to take the impact as against the shift to higher trail during the last round, and there is unlikely to be similar NFO activity as in FY2021-22 that led to higher commission payouts.

“There is a trade-off given the difficulty in selling SIPs of AMCs beyond top five-seven players even as mid/smaller players will now have considerable room to pay higher payouts. The distribution business will likely see stronger adoption of multi-product business (life and general insurance and loan origination), along with faster aggregation of individual IFAs with one of the large platforms,” said the report.

The industry could look at deliberating with the regulator on a few areas, such as separate dispensation for arbitrage funds, keeping GST/STT outside the TER as the change in rates will mean reworking the TER and the rule on distributor commission on switch transactions being made applicable for switch within the same asset class.
“With the key regulatory overhang now gone, AMC valuations are likely to be a lot more responsive to fundamental drivers such as flows and markets,” the report said.