AMFI’s recent move to put a cap on upfront commission has streamlined the commission structure of distributors across fund houses.
H N Sinor, CEO, AMFI told Cafemutual that the cap on upfront commission will help emerging AMCs and ensure a level playing field among large and small AMCs.
Last month, AMFI issued its best practices circular to AMCs in which it has proposed to put a cap on upfront commissions at 1% and no cap on trail commission. AMCs can decide the trail on their own but it has to be on perpetual basis. Also, AMCs have a choice of not paying any upfront and adopting full trail model. The new commission structure has come into effect from April 1.
A senior official of a bank sponsored fund house believes that AMFI’s move would give an opportunity to mid-sized and small AMCs to compete on a level playing field with large AMCs. “Though managing or controlling pricing is against the true spirit of business, AMFI had no other option. A few AMCs have misused the pricing freedom to gather assets. However, mid-sized and emerging AMCs have limited resources. We cannot pay fat incentives to grow our business. We can only focus on delivering optimal performance to gather assets.”
Justifying AMFI’s move to put cap on commissions, the chief executive officer of a bank sponsored fund house said “The industry has always misused its freedom by launching a spree of funds and amortizing commissions. Many fund houses grew their assets through unethical practices. This time too a few fund houses have paid upfront commission in excess of 8% to distributors to garner assets. Perhaps, putting a cap on such payouts was the only way out of this problem.”
However, some officials have a different view. A senior fund official from a foreign fund house had earlier told Cafemutual that the new commission norm will restrict their growth. “We don’t have too many schemes and we have to compete with the existing funds having a track record of performance, dividend payment etc. Distributors spend a lot of time and effort to acquire clients and they deserve to be adequately compensated for this.”
Another senior official of a foreign fund house seconds the view, “Why would distributors sell schemes of emerging AMCs if they can get equivalent commission to sell funds with a good track record. Also, the effort to sell such schemes is comparatively less. AMFI should have allowed fund houses to pay upfront commission within the net TER.” Typically, net TER of small sized schemes are higher which would subsequently help emerging fund houses to pay more incentives. Net TER is gross TER minus expenses. However, net TER varies across the fund houses since expenses differ across fund houses.
Though most small fund houses have agreed to comply with the new AMFI circular, many say that they are complying in order to avoid locking horns with SEBI. The sales head of a foreign fund house had earlier told Cafemutual that his fund house has adhered to the best practice guidelines as they don’t want to fight with AMFI or SEBI.
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