As capital markets regulator Sebi mulls stronger checks against upfront commissions paid by mutual fund houses, the industry appears to be batting for a mix of trail and upfront incentive models for distributors.
While a majority of MF houses are in favour of paying a mix of trail and upfront commissions to their distributors, there are a few of them, who have already migrated to the full-trail model.
To check mis-selling of mutual funds, a Sebi panel is considering stronger checks against high upfront commissions paid by the fund houses to their distributors as it might be leading to forced movement of investors from one fund to the other.
Reports indicate that the Securities and Exchange Board of India may come up with rules asking all the 45 mutual fund houses to completely migrate to trail commission model for their distributors, doing away with the upfront commission.
On December 16, Sebi chairman U K Sinha interacted with the heads of 15 MF houses to discuss the issue.
India’s second largest MF house, ICICI Prudential AMC offers a mix of both trail and upfront commissions to its distributors.
“The distributors need to be compensated fairly for the efforts they have been taking. It should be always a mix of upfront and trail,” ICICI Prudential AMC managing director and chief executive officer Nimesh Shah said.
“The upfront commissions have become too high so it needs to be rationalised. But there is always need to be a mix of slight upfront and slight trail. In my company too, there is a mix of upfront and trail commissions,” he added.
UTI Mutual Fund offers a mix of both commissions to its distributors.
It offers a combination of 50:50 between trail and upfront commissions when it comes to incentivising its distributors for the sale of equity funds.
“We have got a deeply spread distribution network. We feel that retail distribution will get impacted once we move to an all-trail model. The retail investors need to be protected,” UTI AMC group president, sales and marketing, Suraj Kaeley said.
There are MF houses like Peerless Mutual Fund, which have already moved to a full trail structure where its 1,500 odd active distributors are assured the same commission for four years.
“It was in October, 2014 when we moved to full-trail model much before the discussion started over the topic in the industry. We don’t offer any upfront commission, but we do offer a reasonably high trail for four years that too at the rate of 1.5 per cent per annum,” Peerless Mutual Fund managing director and chief executive officer Rajiv Shastri said.
“As a result our equity fund, which was sized merely at Rs 35 crore as on September 30, has now gone up to Rs 50 crore, showing an increase of Rs 15 crore during the three months since we migrated to the full-trail model,” he added.