AMFI’s move to cap upfront commissions has divided the distributor community. We spoke to a cross section of distributors including established IFAs, national distributors and new entrants to get their views on this issue.
Vinod Jain of Jain Investments believes that the move to cap upfront can create entry barriers for new advisors to enter this profession. “It will create bottlenecks for new advisors to enter the industry. The capital requirement in business will go up. It will affect the growth of the industry in the long run,” says Vinod Jain of Jain Investments.
Financial Intermediaries Association of India (FIAI) is of the view that capping upfront commissions would lead to exodus of small distributors from the industry. “Since phasing out of entry load, upfront commissions and marketing allowances have funded new investor acquisition costs. After this move, all surviving distributors might focus on their HNI and existing clients and they would not have adequate budgets to fund new investor acquisition programs. Overall, this move is investor and distributor unfriendly. We fear that several more small distributors will leave the industry or shift to selling other products. And any effort to bring in the much needed new distributors, will become a lost cause.”
Chennai based IFA Alagappan Thenappan who operates on all trail model is of the view that the move to cap upfront commissions at 1% will only affect banks and national distributors. “I operate on all trail model. This way I’m able to earn more revenue because of market appreciation. The 1% cap will not impact small IFAs because they don’t get 1% upfront anyway. It is only banks and NDs who are able to command higher commissions.”
“It
doesn’t affect us much. Distributors who have large assets under advisory would
be happy to operate on trail model. Open end funds never paid such high
commissions so it doesn’t make much difference. It will affect only those who
have started out new in this business. However, AMC’s ability to pay higher
trail may get restricted due to the new pricing formula,” says Lovaii Navlakhi
of International Money Matters.
Rajiv Shastri, MD & CEO, Peerless AMC explains the benefit of all trail model for distributors. “If a fund house were to offer 1% upfront and 1% trail, it would be paying 5% over 4 years. In comparison, a fund house following the full trail model ends up paying 6% (1.5% for 4 years) even without market appreciation. In case markets appreciate, the relatively higher trail commission gets paid on the appreciated amount and the difference grows even larger.” Peerless AMC has adopted all trail model since October 2014.