Fund houses consider different options as they seek to build consensus over the sensitive issue of distributor commission.
Mutual fund houses are mulling over doing away with upfront commissions in a phased manner, though so far unanimity continues to elude the industry.
“We want to move to a zero upfront regime in a phased manner, by capping it a certain percentage initially. There are two schools of thoughts within AMFI. Once we arrive at a consensus, we will take it forward. There are strong views both for and against banning upfront commission,” says a marketing head of a foreign fund house.
There are three options being considered:
- Each AMC to decide its own upfront commission (status quo)
- Abolish upfront and hike trail linked to stickiness of assets
- Higher upfront for business of up to Rs. 5 lakh or higher trail commission (no upfront) for business of more than Rs. 5 lakh
Some are of the view that the ‘pricing’ or upfront commission should be best left for AMCs to decide.
However, a few others believe paying higher trail commissions is a win-win situation for both AMCs and distributors – distributors will not churn portfolios while AMCs are assured of long term assets. A higher trail (with no upfront) for big distributors like banks and NDs will help them generate enough cash flows to run their business. But this model doesn’t work well for IFAs bringing in small ticket applications.
The debate over IFAs inability to charge fees from clients still continues. Some of them have made the transition, while others are yet to find a way to get a separate cheque from clients. Distributors, especially financial planners, mainly rely on fee income, apart from the trail, thus having little to worry about upfront payouts. Some distributors charge a percentage fee based on AUM or a fixed upfront fee.
Also Read: AMCs divided over banning of upfront commission.
