Franklin Templeton is perhaps the first among the large AMCs to embrace a full-trail commission model for its entire IFA fraternity. While most AMCs offer this as an alternative, few have actually gone the whole hog with implementing what is widely regarded as a true win-win commission model, across the entire channel. Harshendu discusses the rationale behind this bold and path-breaking move and how he sees the distribution models evolving in response to the rapidly changing landscape.

WF : You have moved to a full trail model for commission payments for your IFA channel recently. What was the thinking behind this bold move?

Harshendu : Given the recent regulatory changes and the overall thrust, we had introduced the all-trail fee model to select IFAs who were focused on long term equity assets. We later extended the same to the entire IFA segment. Given the characteristics of this segment, we felt that an all-trail model would be appropriate.

Such a model with a focus on rewarding asset retention is good for the industry as well as our partners, as it brings stability and sustainability to the business. Also advisors can potentially earn more fees compared to an upfront model, as the trail fees are based on the latest valuation of assets (compared to the initial amount).

WF : How have your IFA partners received this move?

Harshendu : The feedback has been positive given the nature of the IFA segment. As mentioned earlier, we had introduced this concept to select IFAs. Based on the positive feedback and increased requests we extended the structure to the entire IFA segment.

WF : Many AMCs continue to believe that upfront commissions are vital to sustain distributor interest in this business. How do you plan to manage expectations from distributors who continue to be keen on upfront commissions?

Harshendu : We don't see much of a conflict, as this structure is currently applicable to the IFA segment that has traditionally been comfortable with a higher trail fee model. In that sense, we will continue to cater to the varied needs of our partners. Interestingly, we have been receiving few requests from non-IFAs to get enrolled into the all-trail model. In any case, for the new cadre of distributors, we can consider upfront and trail model as they might not have adequate assets to generate trail fees.

WF : Though the regulator announced several reforms last August to broaden the retail reach of the industry, recent industry data seems to suggest that there is further concentration of business flows from the larger towns and within them, the larger distributors. Is the drying up of retail flows from smaller towns purely a function of continued market volatility or are there other reasons behind this trend?

Harshendu : The industry flows data needs to be analysed from an ex-liquid/liquid plus (short term) perspective. Otherwise, large cities will always dominate gross flows. Our understanding is that the long term asset flows (non-liquid/liquid plus) from smaller cities/towns (B15) has been quite healthy and has been increasing. Whilst the increase is not substantial, as the new regulatory changes percolate down, the share of smaller towns should increase in the coming years.

WF : Although it is still too early for some of the new measures like the new distribution cadre selling simplified products, cash based investing etc to really show tangible results, do you see these moves as material game changers in the long run or are they likely to have only a limited impact?

Harshendu : Yes, the combination of these measures and an industry focused on fundamentals (rather than asset gathering) should have a positive impact in the long run. However, we continue to believe it is important that regulators and policy makers focus on encouraging long term savings in India and allow asset managers to manage those long term savings pools (be it insurance or pension). These segments constitute a large chunk of industry assets in the developed markets.

WF : How do you propose to expand your retail footprint in the coming years?

Harshendu : Additional flexibility in terms of TER and fees should be utilized to enhance operational efficiencies rather than blindly focusing on physical presence in smaller towns. This is not scalable and needs to be married with appropriate technology to ensure operational efficiencies. We have kick started quite a few infrastructure initiatives using technology and alternative distribution channels, on this front. In a large and populous country like India, an asset manager is better off focusing on having an optimum mix of technology and alternative distribution.

WF : Now that we have advisor regulations in place, how do you see distribution models evolving over the next couple of years?

Harshendu : The distribution landscape has been undergoing a change as regulatory measures and higher market volatility, have led to increased focus on financial planning and advisory. While larger distributors benefit from an established presence/infrastructure and clients, India has a large chunk of IFA segment (unlike other Asian markets). Those IFAs who have strong relationships and have focused on adding value to clients have benefitted from a loyal client base.

The policy thrust across the globe appears to be on promoting advisory and removing any conflict of interest due to fees. However, we believe that there will always be room for varied business models to co-exist.