A day after the Association of Mutual Funds in India (Amfi) announced a cap on upfront commissions at 1%, dissent among distributors is out in open. Financial Intermediaries Association of India (FIAI) in a statement said it is not in favour of fixing prices or mandating pricing formulas and/or jointly deciding pricing matters for the distribution of mutual funds as such initiatives are generally considered to be against free trade practices.
On Thursday, Amfi in its circular stated payment og 1% upfront commission will be applicable from April 1. While there will be a cap on upfront commissions, fund houses can decide the trail on their own on perpetual basis. Trail commissions are paid to distributors as long as investors stays invested in scheme.
“The circular also says that, we can adopt full trail model also wherein we will not pay any upfront commissions and pay on trail commissions,” said a marketing head of the leading fund house.
The last few months have seen many a slew of new fund offers to ride the surge in the equity markets. But at the same time, several fund houses were paying upfront commissions as high as 5-7% on equity, equity linked saving schemes (ELSS) and close ended equity schemes to distributors. Market regulator, Securities and Exchange Board of India (Sebi) had expressed discomfort with such high upfront commissions.
In its release FIAI also stated that, “We strongly recommend a status quo on the present commission structures as many advisors and distributors have made business plans and invested on the basis of the estimated cash flows as per the prevailing pricing structures. This move to reduce commissions will hurt the investor and may lead to many small independent financial advisors (IFAs) quitting the business and leaving investors under-served. Only some distribution entities like banks, national players and IFAs with a big trail book, would be able to survive this pricing shock, but with bleeding balance sheets.” FIAI was formed as a financial distributors’ body to strengthen the cause, development, education and progress of the industry.