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MF News AMFI’s proposal to ban upfront commissions draws flak from many distributors

AMFI’s proposal to ban upfront commissions draws flak from many distributors

Banning upfront will create bottlenecks for attracting new IFAs in the MF fold, caution experts.
Ravi Samalad Nov 30, -0001

Banning upfront will create bottlenecks for attracting new IFAs in the MF fold, caution experts.

In its board meeting held recently, AMFI has put forth a proposal to its members to consider doing away with the practice of paying upfront commissions. Distributors are eagerly waiting to see whether the proposal goes through.

However, distributors need not worry as yet because AMFI will take into consideration their feedback before reaching any conclusion. “We will hold discussions will all the industry stakeholders including IFA associations before crystalizing anything,” H N Sinor, CEO, AMFI told Cafemutual.

Cafemutual asked a cross section of industry experts on what they think about the idea of abolishing upfront commissions.

Some fund officials say that banning upfront can have severe repercussions on the growth of the industry. They point out that a large number of distributors went out of business after the removal of entry load. “You need to incentivize distributor’s efforts. The industry is seeing some inflows in equity funds after a long time and the removal of upfront will discourage distributors from selling mutual funds,” said D P Singh, CMO – Domestic Markets, SBI Mutual Fund. Due to the revival in markets, the industry has seen net inflows of Rs. 33,790 crore in equity funds from April till September. A large part of this inflow came in existing funds.  In contrast, equity funds saw net outflows of Rs. 7,627 crore in FY13-14.  

“Paying 6% upfront and charging 3% TER will certainly hit AMCs. There should be sanity in the market. As far as upfront incentive is concerned, let the market dynamics decide the commissions. There should not be any rule guiding the business practices of AMCs,” adds D P Singh.

Some experts feel that the removal of upfront can directly hit the working capital requirement of distributors, especially the smaller ones. “Upfront is required to incubate new IFAs in the business. Banning upfront will not pose a problem for established IFAs having sizeable assets under advisory. Upfront is paid to IFAs to take care of their working capital requirements. National distributors do not need working capital to sell mutual funds. It’s the smaller IFAs who will be hit the most. SEBI should not micro manage AMCs,” said Amit Trivedi of Karmyog Knowledge Academy.

The idea of moving to an all trail model is not new. This issue has been debated for a long time in the industry to control the menace of churning. During the entry load era, upfront commission was considered as the main incentive behind churning. The introduction of claw back rule in 2013 has been able to control this unhealthy practice to some extent.

Currently, AMCs pay upfront commissions from their own pockets. Smaller AMCs grudge that the big guys have deeper pockets to pay upfront commissions which creates an unfair advantage in mobilizing assets in NFOs. To keep up with the competition, even medium sized players have to hike commissions to remain competitive.  

Upfront commissions caught everyone’s attention after the launch of flurry of closed end funds, which are said to have been offering high commissions. A section of the industry feels that such high upfront incentives induces mis-selling.

However, some say that the upfront commissions paid in closed end funds is attracting undue attention. They say that paying commissions upfront in a lock-in product is not such a bad idea. AMCs know that the money will remain invested for say three or five years. Thus, they don’t mind paying commissions upfront. Paying upfront will hurt AMCs in case of open end funds as the money has to be collected back from IFAs in case of early redemptions due to the claw back rule. “If paying high upfront is a problem then SEBI should not allow AMCs to launch closed end funds.  The regulator, distributors and investors should equally share responsibility. Distributors are selling closed end funds because SEBI has allowed such funds to be launched. And investors know that they are locking in money for three years,” observes Amit.

It is not certain if AMFI’s proposal will be unanimously accepted by majority of AMCs as the industry seems to be divided on it.

Let us know your thoughts.

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