FIAI has submitted a representation to SEBI MF Advisory Committee in which it has flagged issues related to commission structure of distributors.
Recently, in a representation sent to SEBI’s MF Advisory Committee, Financial Intermediaries Association of India (FIAI) suggested that any disruption in the commission structure will be counter-productive for the industry and can reduce the penetration of mutual funds.
FIAI formed in 2009 represents a group of national distributors and private banks.
“The existing commission structure is a major dampener for any individual to become a distributor. For instance, if an all trail model is to come in force, a person who wishes to become a distributor has to collect Rs. 1.20 crore of equity mutual fund assets in order to receive a top line revenue of Rs. 10,000 per month (1% trail commission per year). At an average ticket size of even Rs. 50,000 per transaction, this means that he has to work with over 240 clients to earn his Rs. 10,000 a month, that too after the first year. And this is only the revenue. If he has to account for the costs involved in even meeting these 240 clients, that alone will work out to a rather substantial sum and his net earnings will not be more than 50% of his commissions. On the other hand selling a single policy of Rs. 50,000 premium every month, will give the life insurance agent a commission of Rs. 10,000,” wrote FIAI.
In its
seven page representation, the association has made an observation on churning.
FIAI is of the view that poor performance of schemes leads to portfolio
churning. Citing an example of the top 20 best performing funds and top 20 poor
performing funds as on September 2014, the association highlighted that schemes
with highest net inflows have significantly outperformed their benchmarks whereas
schemes with net outflows have significantly underperformed their respective
benchmarks, indicating churning is due to the poor performance of schemes.
Source: FIAI
“In some situations, we do believe that churn is linked with mis-selling, although both these are not one and the same. Much of the mis-selling doesn’t result in churn and much of the churn is not because of mis-sell or wrong advice. We firmly believe that the correlation of poor performance to redemptions is far higher than any other reason, including distributors’ advice on quick churns. The time now is for the mutual fund AMCs to focus on quality of performance of their mutual fund schemes and ensure that these schemes provide appropriate returns to investors and thereby reduce the need for the investors to constantly look for other opportunities to shift into and churn their portfolios.”
In order to encourage the confidence of investors, the association has recommended that the industry should focus on streamlining complaint redressal mechanism. “It will be more appropriate to investigate and settle investor complaints case by case and to ensure that both the mutual fund AMC and distributors remain within the overall ambit of responsible selling and providing superior customer service,” said FIAI.
The association has requested SEBI MF Advisory committee to put the proposal of banning upfront commission on hold. Also, the association has asked the committee to give them an opportunity to present their case before reaching any conclusion.
