IFA bodies across the country such as Foundation of Independent Financial Advisors (FIFA), Independent Consultants and Advisors Association (ICAA) and MFD Universe have requested AMCs to level trail commission across old and new assets.
While IFAs claim that they get close to 80 bps trail commission on assets mobilized after 2015, they get between 15 and 30 bps on assets built before 2015. These bodies believe that such a discrepancy in commission could encourage churning in the MF industry, which is not good for investors.
Why this difference?
In 2015, AMFI had issued a best practices circular on commission structure of distributors to create a level playing field across AMCs. While AMFI had put a cap of 1% on upfront commission, it asked AMCs not to do upward revision on existing trail brokerage. Before 2015, most AMCs paid upfront commission to distributors along with trail commission of 50 bps on an average.
However, most distributors feel that this circular has become redundant after SEBI banned upfront commission in October 22, 2018.
Later, AMCs reduced trail brokerage on assets of distributors twice due to reduction in TER in lieu of exit load and the recent TER cut. Since the trail commission on old assets was already close to 50 bps, the impact of these consecutive TER cuts is more acute on such assets.
AMCs view
The sales head of a large fund house requesting anonymity said that distributors should factor in upfront commission paid to them before 2015. He said, “We had a commercial arrangement based on business dynamics then. We have paid healthy upfront commission before 2015 along with trail brokerage and made our projections for future growth.”
When asked if this would encourage churning, another sales head of top AMC said that this is easier said than done. He pointed out, “Majority of pending KYC cases are in old assets. Distributors will first need to complete KYC before executing any transaction on such assets. Secondly, churning is against the spirit of business and AMFI code of conduct. Finally, there would be problem with their due diligence if they churn.”
IFA associations view
IFA associations say that AMCs should negotiate commission structure face-to-face with distributors and find the middle ground.
Associations say that SEBI norms say that the difference between the expense ratio of direct and regulator plans is the distribution commission. They said that the existing trail commission on new and old assets is much lower than the difference between the TER of regular plans and direct plans.
