All expenses incurred on distributors will be part of upfront commission.
AMFI has today issued its best practice circular to AMCs. The upfront commission has been capped at 1% while there is no cap on trail commission. These rules don’t apply to applications sourced from B15 locations.
The commission will be paid on distributable TER, which is gross TER minus operating expense. Assuming the distributable TER (net TER) of a scheme is 2% then maximum upfront commission will be 1%. This upfront commission will include expenses incurred on distributors in the form of junket, loyalty program etc. However, training has been reportedly excluded from such expenses. Gross TER on 15th of every month will be considered for such calculations.
Sources said that AMFI's earlier proposal was to put a cap on upfront commission at 2.25% and
3.50% on NFOs and ELSS respectively. However, this has no mention in AMFI's circular.
AMCs can decide the trail on their own but it has to be on perpetual basis. This means that trail commission will be unchanged in all subsequent years.
In the new commission structure, AMCs can choose not to pay any upfront and adopt full trail model.
|
New commission structure |
|
|
Gross TER |
2.25% |
|
(-) Operating expense |
0.25% |
|
Distributable TER |
2.00% |
|
Upfront + expenses incurred on distributors |
1% cap |
|
Remaining Trail |
|
Also, ‘upfronting’ of trail will not be allowed. In MF parlance, ‘upfronting’ means that the entire trail commission is paid at the beginning. This is a common practice in ELSS and other closed end funds.
Fund officials say that the cap on upfront is likely to hurt distributors. “This structure is neither good for AMCs nor for investors. Big distributors who used to get commissions in the range of 4% - 5% will not be pleased with 1% upfront. Smaller distributors will shift to selling other lucrative products. There is no cap on trail commission so AMCs can pay a trail of say 2% perpetual to compensate for cap on upfront,” says Aashish Somaiyaa, Managing Director and Chief Executive Officer, Motilal Oswal Mutual Fund.
AMCs are expected to revert with their feedback on the new guidelines by the end of this month. Sources said that 4 to 5 AMCs are not likely to follow AMFI’s best practice guidelines.
