Distributors may no longer get the entire commission in closed end funds upfront.
AMFI is mulling a proposal to cap upfront commission at 100 basis points and keep the trail constant for all subsequent years. If these suggestions were to be accepted unanimously by all fund houses, we could see a change in the commission structure of distributors. To compensate for the cap on upfront, some AMCs may hike trail commissions.
We asked fund houses on how they would restructure their commission model if AMFI’s proposal sees the light of the day.
Life won’t change much for emerging AMCs, who have traditionally been paying modest commissions. “We don’t run a loss making scheme. As a fund house we need to make money. We are not paying high upfront anyways. There might be some tweaking of commission,” said the CEO of a bank sponsored fund house on the condition of anonymity.
Some feel that capping upfront will be disadvantageous for distributors, especially smaller IFAs. “I think it affects small distributors. Moreover, we need clarity on whether the commission structure would be applicable to past AUM. Capping upfront will lead to distributors to quit mutual funds. Moreover, an industry body should not be deciding the pricing in a free market. It is anti-competition,” said a senior official from a large distribution outfit.
Another proposal mulled by AMFI is to do away with ‘upfronting’ practice, which happens in ELSS and other closed end funds. So, instead of getting three year trail in advance, the commissions would be spread out over three year or till the age of investment. Some feel that this might in fact benefit distributors since they can get higher trail if there are mark to market gains. “The biggest casualty will be closed end funds, especially ELSS. Distributors need cash flows to cover their client acquisition cost. There is no major change in the commission structure per say. It’s just the cash flow which is getting affected,” said Himanshu Vyapak, Deputy CEO, Reliance Mutual Fund.
For instance, some AMCs were paying 1.50% upfront and no trail in the first year in open end funds. In future, AMCs might pay 75 basis upfront and 75 basis trail. Going ahead, fund officials say that upfront commissions will be reduced and trail might go up.
The capital requirement for distributors will go up. “So far AMCs were supporting distributors by paying upfront to cover client acquisition cost. Now, the capital requirement in business will go up,” said Vinod Jain of Jain Investments.
Some say that that there will be no impact on the industry immediately but industry’s viability will be affected in the long run. “If you want to increase the base of MF investors to 10 crore, you can’t go to the same set of distributors and expect them to bring in more clients. More distributors are required in the industry. In order to expand the industry, we need to reduce entry barriers for newcomers,” said a Mumbai based distributor.
The proposal sent out by AMFI to AMCs is ambiguous in its current form. “There are a lot of clarifications required by us. For instance, whether this rule applies to B15 cities? AMFI says that the total payout should not exceed a certain percentage after deducting operating expense. However, we need to take care of fixed expenses as well. The demand for more trail payout will increase and AMCs would prefer to pay lower upfront,” said the sales head of a public sector fund house.
While AMFI’s proposal is based on the decision taken by AMFI board which consists of CEOs of 15 AMCs, some feel that all AMCs need to come on board to form a consensus on this matter.
Let us know your thoughts.
