Harsha Viji, Managing Director, Sundaram Asset Management shares his views on upfront commissions in a detailed note. Read on to find out his views.
At
Sundaram Mutual, our current thinking is to chart a mid-course between the
current situation (i.e. no limits) and the 1% upfront cap suggested by the AMFI
Board. I would like to layout our thought process and tentative course of
action.
Rationale for differing from AMFI’s current thought process:
- Looking at the history of the in industry we have seen the dangers of volatility in regulations and swinging from one extreme to another (entry load is a case in point). Mr. UK Sinha has made reference to upfronts as high as 10%, and this is certainly a valid point. We must react; but moving to a 1% cap and giving guidance on trail could be a bit of an extreme reaction. Upfronts in the US are often in the 5% range, UK – 3% range, and competing financial services products also offer higher commissions in India (Life 3-15%, general insurance 10-15%, fixed deposits from 1.5-3.0%). Our industry does not exist in a vacuum, and we need to consider these as well
- We are very concerned that concerted industry action on pricing can be challenged by distributors under the CCI as amounting to a ‘cartel’. While I believe this is not the intent or the tenor of the current proposal, legal action from small distributors (which is likely) will muddy the waters and lead to unnecessary bad press for our industry – particularly when we are trying to attract new IFAs into the market
-
The drastic cut to 1% does not bode well
for economics of smaller distributors or new entrants into the distribution
game. Several distributors have also ramped up manpower in the last 6 months in
expectation of business. Cash flows upfront to compensate for salesforce costs
are essential for many distributors. There cannot be a ‘one size fits all’
brokerage model, All trail model is theoretically very good, but again – in a
spirit of disclosure – our own distribution is weighted heavily towards IFAs
where this can be a real concern.
Potential
Alternate Model
SEBI’s
concern that excessive upfront commissions could bias distributors’ advice is a
valid one, and we do not in any way have a problem with AMFI’s efforts to
address this concern. The suggestion to refine the colour coding of risk for
example is an excellent initiative. On the upfronts, a ‘middle path’ between
the current situation and the 1% limit on the table may look as follows:
1. We all contribute to investor education.
Some part of these funds can be set aside by each AMC individually or in a
central pool to run campaigns specifically targeting mis-selling. We are
planning to divert a substantial part of our budget towards this in FY15-16
2. We are all in a ‘wait and watch’ mode on
commission structures. As an initial step, we are planning to cap our upfront
commissions (including upfront trail and ‘shelf fees’ etc) to 4%. In the spirit
of transparency - our current average upfront runs at about 1.6%, and we do not
expect to significantly alter that. 4% is only a cap. It sits well with
international benchmarks and commissions on competing products, and I would
like to submit for discussion that 4% is a number we can rally
3. Sundaram Mutual has been at the
forefront of close ended equity fund launches last year, This year, in keeping with the spirit of
SEBI’s directions, we are planning to dramatically reduce the launch of close
ended funds, and to stick to our 4% cap even if we do.
4. We are also following the lead of some
larger AMCs who have the best practice of ‘welcome calling’ investors in higher
risk funds and ensuring they have been properly advised on the risks of the
fund – and to take action against distributors when warranted.
To summarise, I believe the steps taken by AMFI towards addressing SEBI’s mis-selling concerns are well intentioned and in the right direction. However, they seem a little drastic which could be counterproductive in expanding the distribution base, and could wave a red flag inviting legal challenge. That is the last thing we need right now. Come 1stApril we are planning to cap commissions at 4%, reduce close ended fund launches, make call-backs to customers in higher risk funds and spend investor education funds to combat mis-selling.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.