In a bid to curb mis-selling, SEBI is said to be working on a formula which will bring down the difference between upfront and trail commissions, say to around 50 basis points, said sources in the know of the development.
“The industry was not able to work out a solution and thus it wanted regulatory intervention. There will be some upfront to incentivize small distributors. However, there will now be a slight difference only between upfront and trail,” said a SEBI MF Advisory committee member.
This means that the payout in the first year might come down dramatically. “Distributors will have to bring in capital to sustain their business. The trail commission can go up as the holding tenure increases,” suggests Vinod Jain of Jain Investments.
Also, the regulator might ask AMCs to discontinue ‘upfronting’, said the source. In MF parlance, ‘upfronting’ means that the entire trail commission is paid at the beginning. This is a common practice in ELSS and other closed end funds. “There was nothing like high upfront commission. It’s just that the entire trail was being paid upfront at the beginning,” said the above quoted official.
Fund officials say that aligning trail and upfront would discourage distributors to mis-sell and churn. Arvind Sethi, Managing Director & CEO, Tata Mutual Fund, had earlier told Cafemutual that the pricing structure should be structured in such a way that it doesn’t incentivize distributors to churn. “We can pay 1-1.25% upfront and 1% trail in the first year which can go up to 1.50% in the second year and so on on so there’s a balance and the distributor is not incentivized to churn. Some amount of upfront is required to take care of distributor’s cash flows.”
Some say that upfront should not be abolished completely. “Upfront is required to take care of working capital needs of new IFAs. Large distributors like banks don’t need working capital to sell mutual funds. The industry can work out a system in which upfront commission can be paid depending on the assets under advisory (AUA) of the distributor. For instance, some upfront can be paid to distributors till their AUA reaches Rs. 5 crore and can be discontinued thereafter. I don’t know whether it’s practical to implement but there should not be a blanket ban on upfront,” suggests Amit Trivedi of Karmayog Knowledge Academy.
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