Pressure Building on Distribution Business ..Series 1

Once upon a time one of the seniors of the financial distribution industry said salaries should remain low and not too high since tall trees are cut down first.  The distribution industry jobs are at stake and the market will witness a significant jump in MFD’s.  Well, the Indian stock market climbing from 20000 Sensex levels to 85000 not only made money for the investors but also for the employees who were quick enough to negotiate, change jobs and move ahead as complete packages with their seniors. In the last 4 years Indian financial market grew significantly and the quality of investors too.

The distribution industry went through a radical change in business processes, revenue generation model and most importantly technological changes.  In the last 4 years, the Indian financial distribution business changed dramatically where discount broking took centre stage and threw the industry into a structured product segment shifting away from AUM-based products. It has been noticed that those employees who used to sell AUM-based products were trashed by their senior management since they were not selling structured products so aggressively during the last 4 years. This discount broking panicked the industry which led to a myopic vision of a structured product sales machine rather than having a long-term AUM business model.

Last 4 years structure product sales have taken centre stage in the financial distribution industry where PMS and AIF ( CAT II and III) found significant growth in revenue products followed by guaranteed insurance products.  The AUM-driven business got shifted into short-term myopic-driven products where churning change of broker code was easier and the longevity of investments was short ( due to the blessing of the RM who sold the products). It has been found that those employees who failed to sell structured products were simply asked to leave. Irony of the life is that now the same employees are called back to join.

Third-party products and structured products became the misguiding force and shifted most of the Indian financial distribution companies from AUM-focused products. The biggest boon of AUM-based products is that one gets a long-term trail income and it’s a stable business for growing valuations and stability. Suddenly it is being found that a few distribution companies suddenly realised the potential of Trail based income products and hence they have all jumped into the waters.  Recently I was speaking to one of the key heads of a financial distribution industry and was surprised to find how the unlisted share market has helped to increase revenues and find justification points for employees.

Swiggy sold at 450 and even at 500 per share. OYO has been sold at 55 and even at 80. NSE were at 2500 during November 2023 and by May 2024 it was around 5500 and later 6200. Well, these are not lottery numbers but prices at which the distribution houses in the financial world have sold unlisted shares. Well, the best disclaimer was prices are subject to change as per market rate. The unlisted shares have been the biggest survivor for the distribution industry and this also led to new entrants into the stiff competitive market of distribution.

In the last couple of years, system of revenue model has changed dramatically and the scenario analysis switch was put off. The biggest threats are now listed below:

1)      Falling market and the threatful geo-political market creates less opportunity for structured products.

2)      High package justification becomes difficult

3)      Many employees start their businesses and leave the organisation with COBs only

4)   AUM building business gets setbacks since sudden realization does not lead to a sudden spike in the business since it’s a long-term game.

5)      Without many FII’s the show of DII’s will not exist for long and hence that’s an inbuilt risk.

6)      The biggest problem is that even if AUM focused business model is being started now, the justification of salaries is far away compared to the 100% salaries offered. 

Pa  The last 4 years have seen stupendous growth in the distribution industry. Well, the profit numbers of the Indian leading financial distribution industry, and the growth of the stupendous number of Mutual Fund Intermediaries speak loudly about this growth. Another thing that speaks the same language is the high growth of packages and incentives in the last 4 years. Many of our Industry friends from the financial distribution industry have grown their salaries by 100% and in a few cases 150%.

The lollipop of ESOPs has also grown significantly in Indian financial distribution packages being offered to the employees. In the last 4 years, it has been observed that the shift of job and the pay hikes from change of job have been so high that getting candidates was a nightmare Team building exercise was more focussed towards packages rather than the quality and experience of the candidate.

During this time many of the same group of financial distribution friends who did not change jobs and remained ( so-called loyal) to the same company felt left out. But well the Indian stock market is the most unpredictable one where change of guards leads to significant issues going ahead in  CY 2025. The biggest challenge for the heads of the financial distribution Industry will be how to fix up the revenue mix keeping the high-paying salaried staff. If one analyses the cost of operating the business of the financial distribution Industry one will find employee cost is high compared to IT cost and profit per employee is just floating and not sailing enough. Further compliance costs are just growing day by day since revenue growth has led to compromise on sales processes and ethics.

Scenario analysis is an important aspect of business which have been ignored in the financial distribution Industry and this is the grey part where the sustainability challenges will spill over.  Very soon we will find large trees counting will begin and will be questioned hard. On the other hand, most of the financial distribution industry have done the higher on a concentration-based approach where the salary hikes have been in urban cities only and less focus on Ties 2 and 3 cities.

Justification of salaries is now going to be a nightmare post-Mr. Trump coming up with various changes in the Indian financial market, with the recent changes in insurance revenue models. In 2025 we will witness many of our friends become Mutual Fund Distributors who will start their businesses and build a minimum of Rs 50 to 100 cr of AUM. Hence the Indian financial market will witness a quantum jump in quality MFDs who will now sell products to the same clients focusing on sustainable AUM and not short-term revenue triggers.