Foundation of Independent Financial Advisors (FIFA), Independent Consultants and Advisors’ Association (ICAA) and Ghaziabad Financial Advisors’ Association (GFAA) have expressed their concern over reduction in trail commission of distributors.
These associations have written to fund houses expressing anguish over the revised trail commission structure. ICAA has pointed that a large AMC has offered them a trail commission, which is much lower than the difference between the TER of regular plans and direct plans. SEBI norms say that the difference between the expense ratio of direct and regulator plans is the distribution commission.
ICAA has also raised its concern over setting a brokerage slab based on AUM. For instance, AMCs may offer better commission structure to a distributor having AUM of Rs.15 crore with the fund house than the one with less than Rs.15 crore AUM. In its letter, ICAA said, “Setting a brokerage slab at an AUM of under Rs.15 crore effectively means 95% of distributors will be in the lowest slab even though their investors are paying the regular plan TER. This is grossly unfair to distributors and their investors.”
All the IFA bodies have pointed out that SEBI’s objective of the reduction in TER was to get the fund houses pass on the benefits of economies of scale to investors and not a step to cut distributor commission. ICAA said, “Since the AMC is achieving economies of scale and not the MFDs, it should be borne largely by the AMCs.”
Another key concern that ICAA and GFAA have raised is reduction in trail commission in old assets. The IFA associations have claimed that AMCs have offered lower trail commission on old assets despite the fact that these AMCs would charge full TER in their regular plans.
FIFA expressed concern over passing on of the entire reduction in TER to distributors without even engaging in dialogue. “We regret that unilateral actions were taken without even consulting or discussing the issue with the distributors or their representatives. Further, we have not found any rationale in the unilateral action in passing the entire reduction/large proportion of the reduction to distributors,” it said.
FIFA has asked fund houses to let them know about the rationale for passing on the reduction in TER to distributors.
A senior official of a large fund house who received such communications said that passing on the entire TER cut to distributors is unjust. “The commission structure of distributors has reduced by 30%. Naturally, they will be angry. However, they should understand that this has come because of regulatory change. We are not in favour of completely passing on the impact of entire TER cut on distributors. In fact, we have absorbed most part of the cut. Let me tell you that our bottom line hit by 50% due to this. We have been talking with other vendors like RTAs, exchange platforms and bill desks to renegotiate costs. I believe that the cut should be absorbed by all stakeholders and not just distributors,” he added.
Another senior official requesting anonymity said that there cannot be a one-size-fits-all approach. “Before the implementation of TER cut, many AMCs paid upfront commission to distributors. But no one is factoring it in. Also, commission structure is a business decision between manufacturer and partners. Hence, I think AMCs should negotiate commission structure face-to-face with distributors. Finding the middle ground and working together can help us all grow,” he said.
