A few fund houses have been offering higher trail commission in the first year and lower in subsequent years to select distributors.
In fact, a public disclosure on schedule of commission available on an MNC bank website shows that a few fund houses have been offering 1.65% as the first year trail commission and 0.65% in the second year, a difference of 1%.
A CEO of the large fund house requesting anonymity said that it would go against the spirit of SEBI circular to ban upfront commission. He further said that such a variation in trail commission across fund houses would encourage churning of portfolio.
According to him, SEBI is said to have noted this practice and may ask fund houses to pay uniform trail commission across the investment tenure.
On legality of this structure, a senior official offering such a structure said that fund houses have been paying trial commission within the ambit of regulation. “In most cases, we arrive at commission structure after discussing with our distributors. While a few distributors demand higher brokerage in the initial years to run their businesses, most distributors prefer uniform trail commission. Offering commission is a business decision as long as it is under the distributable TER.”
Citing an example, he said, “With an AUM of Rs.10,000 crore and distributable TER of 1%, a fund can offer up to Rs.100 crore from the scheme as trail commission. Now, it is prerogative of fund houses on how they want to distribute it among their distributors. Typically, distributors who give higher business get better structure.”
