With new commission structure coming into effect from April 1, the gap between the commission payout structure of T-15 and B-15 locations has widened.
Last month, AMFI issued its best practice circular to AMCs in which it has proposed to put a cap on upfront commission at 1% and no cap on trail commission. The proposal has come in the wake of sudden rush of closed end funds in which a few AMCs are said to have paid high upfront commissions.
However, the industry body has excluded B-15 cities from the ambit of its new best practice guidelines. That means, distributor who brings in application from B-15 locations will continue to get commissions according to the old structure.
Industry officials and financial advisers say that such difference in commission structure may lead to mis-selling in B15 locations, especially in the case of closed end funds. A few MF officials to whom Cafemutual spoke to believe that the commission structure of T-15 and B-15 should be streamlined.
The chief executive officer of a bank sponsored fund house said, “A lot of mis-selling has been happening in small cities. It could be a dampener to AMFI’s best practice circular.”
The senior official of a foreign fund house is of the view that mis-selling cannot be curbed by putting a cap on commissions. “AMFI’s best practice circular aims to curb mis-selling. However, the issue cannot be resolved if commission structure is not streamlined. Fund houses will continue to launch close end schemes and lure distributors based out of small cities and town with high upfront commissions.”
SEBI has allowed AMCs to charge higher expense ratio on assets sourced from beyond the top 15 cities. Typically, fund houses pay high commissions for application received from these towns. Earlier, a few distributors were said to have routed T-15 application from B-15 locations to get more commissions. However, such practices have almost come to an end with stringent KYC norms, say fund officials.
Manoj Nagpal of Outlook Asia Capital says, “The effort to acquire an investor in any location is the same. The difference in commissions in B-15 locations can lead to mis-selling in such locations. I believe the structure should be streamlined to some extent.”
A Mumbai based financial adviser said, “AMFI’s best practice circular has not addressed the real problem of mis-selling. The new structure has further widen the gap between B-15 and T-15 commissions.”
“A few months back, a close end scheme having a complex structure mopped up good inflows from B15 locations. Such products are meant for sophisticated investors. The commission structure should be same for both B15 and T15 locations,” said a Mumbai based distributor.
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