In its report published yesterday to recommend measures for curbing mis-selling and rationalizing distribution incentives in financial products, the nine-member committee headed by Sumit Bose, former Union Finance Secretary has proposed that the commissions should only be paid on reducing AUM based trail. For instance, in case of lump sum investments, the trail will decline over the tenure of investment and become nil after a certain period of time, the committee has proposed.
We asked advisors to give their feedback on this proposal.
Bengaluru based advisor Srikanth Matrubai says that there should not be any change in the existing trail structure. “The existing trail structure is ideal as it aligns the interest of advisors and investors. If the trail becomes nil after few years, it can encourage undesirable behavior from distributors. Our job does not end after recommending a product. Once the trail becomes nil the distributor can ask client to switch to another fund.”
Currently, distributors get a trail commission of 50 basis to 75 basis on the assets under advisory. If the AUA grows, their income grows and vice versa. Trail commission forms a major part of advisors revenue. At a time when many advisors are moving to all trail model, this proposal has come as a shocker.
The committee has also proposed that the trail should reduce or become nil after a period of time if SIPs are terminated by clients. Delhi based advisor Pallav Agarwal is of the view that it will negatively affect the SIP market. “Many distributors are trying to build SIP model. Investors typically stop SIPs after three to four years. If distributors have no incentive after SIPs are terminated, they would be inclined to churn.
Pallav says if commissions are reduced further, distributors would be forced to switch to other products like insurance, which offer higher commissions. “So far I was only doing mutual fund business but now I have started with insurance,” adds Pallav.
Pawan Agrawal of Accord Financial says “IFAs earn only after two or three years in SIPs. No distributor would be interested to service if the trail stops. There is no guarantee that reducing trail would help investors. It is just an experiment.”
AMC officials say that if trail is reduced even existing distributors would find it difficult to sustain. “Mutual fund is a push product so there has to be reasonable incentive for distributors to sell. The number of active distribution force which was 40,000 earlier has come down to around 14,000 now. Any reduction in trail will further bring down this number and we won’t be able to attract new distributors. Even existing distributors will find it difficult to sustain,” says the sales head of a foreign fund house.
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