There is a suggestion to cap upfront commission at 60 basis points of net total expense ratio (TER).
AMFI is said to have proposed two commission structures – upfront plus trail and all-trail model for distributors.
In upfront plus trail commission structure, the proposed commission payout would be 1% flat upfront and 60% of remaining net total expense ratio (TER) as a trail commission on perpetual basis. Assuming the net TER of a scheme is 2%, upfront commission and trail commission will be 1% and 0.60% (60% of remaining net TER i.e. 1%) respectively. This trail amount will be paid for all subsequent years.
Net TER is gross TER minus expenses. However, calculation of net TER varies across the fund houses since expenses differ across fund houses.
Under the second proposal, which is all-trail model, AMFI has proposed trail commission in the rage of 5-60% of net TER on perpetual basis. In the above example, all trail model will offer a commission between 0.30% and 1.20% (15% and 60% of net TER i.e. 2%).
|
Model/commission payout |
Upfront commission |
Trail commission |
|
Upfront plus trail |
1% |
60% of remaining net TER |
|
All trail |
Nil |
15-60% of net TER |
The proposal was made last week during a meeting of AMFI’s Operation and Compliance Committee, said a source. The new commission structure, if approved by all fund houses, is likely to come into effect from April 1.
The CEO of a large fund house told Cafemutual, “SEBI rules mandate that trail commission cannot be higher than net TER. To compensate for cap on upfront commission, AMCs will have to pay higher trail commission which can affect our bottom line. Thus, the board is working on a proposal to put a cap of 60% of net TER on trail commission.”
Earlier, there was a proposal to keep the trail constant for all subsequent years. There was a consensus that fund houses may hike trail commissions to compensate for the cap on upfront.
Another chief executive officer of a private sector fund house said, “There is a proposal to cap trail commission at 60 basis points. However, there is no clarity on whether this 60 basis points will be calculated on net TER or upfront commission.” He said that the final decision on commission structure will be taken next week.
“I don’t think this will happen. Fund houses will have to pay constant trail for all subsequent years,” said CEO of a bank sponsored AMC.
In an earlier interview with Cafemutual, HN Sinor, CEO, AMFI, when asked about banning upfront commission, said, “No, they won’t be banned. We were looking at whether we can adopt an all trail model. However, it would have disrupted the industry. An all trail model can be implemented in a calibrated manner over a period of time. As a first step, SEBI might cap upfront commissions.”
Last month, AMFI had proposed to put a cap on upfront commission at 1%.
Let us know your views.
