The mutual fund industry is gradually moving towards the ?all-trail model? of paying out commissions ? which means that distributors get staggered commissions based on how long their clients stay with the scheme.
IDFC MF is the second fund house after Franklin Templeton MF that may soon go the all-trail way, said sources. Templeton had adopted this model four months ago. Large bank distributors, including private banks, are also keen to switch to the all-trail model. HSBC, which collected the most by way of MF commissions in FY11 and FY12, has already shifted to the all-trail mode, according to sources. Among other category of distributors, select independent financial advisors (IFAs) as well as national distributor Bajaj Capital have adopted the all-trail model.
Fund houses have also increased trail commissions paid to distributors in the past few months. Trail commissions have risen by 25-50 bps for equity schemes and 25 bps for debt schemes. ?Given the recent regulatory changes and our overall focus on long term assets, we had introduced the all-trail fee model to all IFAs who were focused on long term equity assets and to a select IFA segment on the fixed income side,? said Gaurab Parija, national sales director, Franklin Templeton Investments, India.
?The feedback has been positive and we are now looking to extend the structure to the entire IFA segment, for fixed income assets as well.?
The move has been prompted by difficulty experienced by industry participants related to the ?clawback? of upfront commissions, a practice that involves recovering part of the initial commission paid to distributors if their clients exit the scheme before a year.
The practice of clawing back upfront commissions from distributors for exits within a year was started soon after Sebi mandated that exit loads be ploughed back to the schemes. This has created problems for both the AMCs and distributors. While the AMCs are facing difficulty in recovering the clawback amount from distributors, distributors are unable to accurately compute their earnings as the upfront commissions they earn are subject to clawback.
Let?s assume that a distributor is paid an upfront commission of 0.5%. If the investor exits the scheme after six months, the fund house will claw back 50% of the commission that was paid to the distributor. This effectively means the distributor’s commission will reduce to 0.25%. Earlier, distributors were not penalised even if investors move out within a year.
?HSBC has moved into the net sales or client retention model, which means fees paid to the relationship managers will be based on the duration the client stays with the fund house,? said a distributor. Banks pay relationship managers (RMs) based on the total sales of products.
Since banks now stand to lose a portion of their commissions owing to the new clawback structure, they will need to adjust the compensation package of RMs as well. ?Banks want to move to the all-trail model because of the unnecessary accounting problems associated with the clawback mechanism,? said Dhruv Mehta, chairman, FIFA, a body of independent financial advisors.
Industry observers said the all-trail model does away with the hassle of clawback as commissions are paid based on the time the investor stays invested with the fund.