AMFI is working on a model wherein investors will pay a charge to distributors instead of upfront commission from MFs
Mumbai: AMFI is working on a distributor compensation plan that will replace the upfront commission paid by mutual funds with a charge directly collected from investors.
The industry body is planning to approach SEBI after having discussions with its board of directors and stakeholders in the industry.
AMFI feels that the crux of the problem lies in finding out how to incentivise distributors who sell mutual fund schemes. “We have been working around this aspect. You cannot leave distributors high and dry. The major irritant is around the upfront commission that is being paid.” H N Sinor, Chief Executive, AMFI, told Cafemutual.
Mutual funds are debating whether the new compensation model could solely be trail commission based on assets under advisory. “We are examining whether it should purely be on trail basis or whether there can be a schedule of charges displayed on the AMFI website which investors need to pay to distributors,” Sinor said.
The charges to be collected from investors can either be collected separately by the distributor or paid along with the cheque drawn for investment.
SEBI had abolished entry load from August 1, 2009. Following the ban, fund houses started paying higher trail commissions to incentivise distributors.
The idea of embedding a commission schedule in the application form itself comes in the wake of the cumbersome nature of collecting two cheques from investors – one for the investment and another for the charges.
SEBI has allowed fund houses to pay upfront commission from their own profits but not all of them generate enough revenues. Fund houses pay 0.50-0.75 per cent upfront commission to distributors.
The large and established mutual funds have the resources to pay upfront commission to their distributors but smaller and new mutual funds have little room for incentivising distributors.
“If SEBI asks mutual funds to completely do away with upfront commission, we can release trail early. But there is no written confirmation from SEBI. We are paying upfront and nobody else has stopped paying upfront completely,” said the marketing head of a leading fund house.
A senior official from another fund house said the industry is trying to work out a mechanism to collect upfront charges from investors at the time of investment itself and accordingly, propose it to SEBI. “Since distributors are not able to charge, we are trying to find out what could be the different kind of charges for different investors,” said the marketing head of another fund house.
“SEBI was pushing to abolish upfront commission too, but AMFI has succeeded in preventing it. AMFI is now planning to bring in a mechanism by which fees can be charged along with the acceptance of the application form itself. This will bring in transparency,” a leading distributor based in Delhi said.
