Fund houses could tweak the commission structure by reducing the upfront commission as SEBI has said that exit loads will now have to be ploughed back to the schemes.
AMCs would now either claw back (recover upfront commission in case of early exit) commissions from IFAs or reduce the upfront commissions but increase the trail.
“Clearly, if all interests have to be aligned, then we should be moving to a full trail model. This may not stop AMCs from continuing to pay an upfront commission; however, this will be based on a clear rule of claw-back in the event that the money moves out within a specified period. The direction from SEBI is clearly to pay more attention to increasing retail penetration,” says a sales head of a domestic fund house.
Puneet Chaddha, CEO, HSBC Mutual Fund holds a similar view. “Upfront commissions would either come down or AMCs will look at claw back in case of an early exit.”
While AMCs could claw back commissions from IFAs they could face problems while dealing with banks. “Banks cannot recognise income which can be clawed back later. AMCs could continue to pay upfront to banks or pay them a trail only. As long as AMCs can claw back they would pay an upfront. But the rules don’t stop any fund house from paying upfront commission,” adds the sales head quoted above.
With the option to claw back commissions, fund houses say that churning will come down in the days ahead.
Direct applications
SEBI has asked AMCs to run an additional plan for direct investors. Fund officials say that majority of institutional clients will prefer to invest in the ‘direct plan’ which would have a lower expense ratio.
To ensure that distributor’s commissions are not impacted, AMCs are thinking of formulating a uniform expense structure depending on the type of investors in a debt scheme. “The uniform expense structure could be arrived at by looking at the underlying category of investors invested in a particular scheme. If the scheme has predominantly institutional clients then the expense structure would mirror that,” says Puneet.
“The impact if any will be on the margins of distributors bringing in institutional funds since clients will have their own internal auditors mandate them to invest in the lower expense plan or the direct plan. The distributor can continue to service the customer since it is not difficult to tag this direct business to a distributor. This is because going forward ‘Direct” will be a plan / option, so the ARN of the distributor will continue on such investments with the appropriate ‘Plan’ being ticked on the application as ‘Regular plan’ or ‘Direct plan,” says a CEO of a mid-sized AMC.
