Upfront commissions to be capped at 1% from April 1 while trail is likely to be finalized soon.
In its board meeting held today, AMFI has decided to cap upfront commissions at 1% from April 1. “All members agreed on upfront commission but we are not sure about the trail structure as of now,” said an AMFI board member.
“We
have proposed a cap of 100 basis points on upfront commissions. There will be
full freedom on trial commission. There are some loose ends. There are some
operational issues which have to be sorted out,” said H N Sinor, Chief
Executive Officer, AMFI told Cafemutual.
The Chief Executive Officer of a private sector fund house told Cafemutual, “AMFI members have unanimously decided to cap upfront commission at 1%. In addition, each fund house can independently decide trail commission. However, trail would on perpetual basis.” It means that if a fund house decides to pay a trail commission of 1% a year, this pricing structure has to be constant in all subsequent years.
The industry body is expected to come out with a set of guidelines on the new commission structure for distributors by this week.
Earlier, 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%).
SEBI rules mandate that trail commission cannot be higher than net TER.