SEBI has banned upfront commission in mutual funds with immediate effect. In fact, the market regulator has directed fund houses to follow all-trail model to compensate their distributors.
In line with its earlier proposals, the market regulator has clarified that fund houses will have to pay such commissions from scheme and not from AMC book. In addition, SEBI has asked fund houses not to do upfronting of any trail commission.
However, fund houses can do upfronting of trail commission on SIPs subject to fulfilment of pre-defined conditions.
Here are the criteria
- Upfronting of trail commission is allowed only for first time investor based on Pan
- Fund houses can pay 1% upfronting on SIP of up to Rs.5000 for a maximum period of 3 years For instance, if a first time investor starts SIP of Rs.5000 for three years, distributors will get close to Rs.1800 as upfronting of trail commission
- Fund houses can claw back such a commission on a pro-rata basis from distributors if investors discontinue SIP for which the commission is paid
- SEBI will take appropriate action if it finds irregularity in this practice
Swarup Mohanty, CEO, Mirae Asset believes that upfronting of trail commission does not make sense for distributors. “We do not encourage upfronting of trail commission. It is better to stick to all trail model as distributors get commission on mark to market basis. If a fund does well, distributors will get healthy commission compared to what he gets through upfronting of trail commission.”
Srikanth Meenakshi, COO, FundsIndia too believes that upfronting of trial commission will hardly encourage any distributors to sell mutual funds. “A commission of Rs.50 on Rs.5000 SIP may not benefit distributors in any way.”
SEBI further clarified that fund houses can continue to hold and provide training sessions to their distributors. However, fund houses cannot reward or give non-cash incentives to their distributors.
In addition, fund houses can incentivize B 30 distributors with additional incentives but only through trail commission.
SEBI believes that shifting to all trail model can bring transparency in expenses, reduce portfolio churning and reduce mis-selling in mutual funds.
There is no mention on the rationalization of TER structure. This indicates that the market regulator may give some more time to the industry to reduce expenses.
