Asset management companies are worried over frequent churning of assets. Top AMC officials met last Friday to discuss ways to find a viable alternative to compensate distributors and root out this unhealthy practice.
A CEO of a midsized fund house told us that one approach being suggested was to ban upfront commission but some AMCs have opposed the move saying that the decision on upfront payouts should be left to AMCs. The industry is also evaluating some of the incentive structures prevalent in international markets.
“The issue is not about banning upfront commission. The issue is about how to deal with churning. We have to find a solution for reducing churn. There was a talk about banning upfront but it remained inconclusive. All AMCs will not agree with the ban since it’s a pricing strategy,” says a top official from a leading fund house.
Some officials expressed concerns that junket is the main cause of churning. “The churning is happening due to junkets. Distributors are being sent to exotic locations. This is the most unfortunate thing which can happen to retail investors who tend to suffer because of churning,” says a CEO of a mid-sized AMC.
Small AMCs argue that the top AMCs have a sizeable corpus under their exit load accounts and thus have the ability to pay higher commissions to distributors. Last year through its circular issued on 09 March 2011, SEBI said that fund houses can use the exit load corpus (maximum of 1%) to pay commissions to the distributor and to take care of other marketing and selling expenses.
“SEBI should ask for the churn data. The churning is happening mostly in banks but we have seen that IFAs are also churning. IFAs churn because of junkets. Global banks are not allowed to go on junkets. Banks are more revenue driven. Investors’ interest is being compromised while AMCs are bleeding. There has to be some solution to it without which the industry cannot sustain. People are paying higher upfront to garner short term assets. Complete ban is not a solution but unhealthy practices should be completely done away with. The trade off is whether you want to run an unhealthy balance sheet or grow the business steadily,” said a top official from the industry.
