Mutual fund houses' cut in trail commission to hit advisors

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Mutual fund (MF) houses have slashed the trail commission paid to distributors and this could hit the income of independent financial advisors (IFAs) by up to 15-20 per cent.


On May 29, the additional expense charged in lieu of exit loads by fund schemes was reduced to five basis points (bps), from 20 bps earlier. In 2012, the Securities and Exchange Board of India (Sebi) had permitted fund houses to charge 20 bps of the assets under management of a scheme as compensation for ploughing back exit loads.


Fund houses have now gone ahead and reduced the trail commission paid to distributors by up to 15 bps. This reduction will be applicable on existing and future assets.


“Amfi has decided that every fund house should pass on the entire hit of 15 bps to distributors. Distributor bodies, however, want the reduction to be done proportionately, something the fund houses might not agree to,” said a senior official, on condition of anonymity.


Fund houses differ in how they pay commissions. Distributors might get a combination of upfront and trail, only upfront or only trail, depending on their need and clout in the market. Banks and national distributors typically opt for upfront payment; so, the impact of reduction in the trail commission will be low. IFAs, however, have broadly moved to the full trail model and will bear the largest brunt of the recent move.


For a full trail model, the commission could be 100-150 bps for equity schemes and 50-75 bps for debt ones. The best practices guidelines put out by Amfi capped upfront commission at 100 bps from April 1, 2015.


“On a consolidated basis, distributors will see their income going down by 20 per cent, which is significant,” said the person quoted earlier.


Experts say distributors will have to rejig their future earnings projection, as they had procured the business after assuming a certain cash flow. “Some fund houses will cut the entire 15 bps of commission; others might not. Everyone is adapting differently. It is for the fund house to decide what it wants to pass back to the distributor,” said the chief executive of a fund house.


Notably, fund houses have also been restricted to charging an extra commission of 30 bps for incremental flow from other than the top 30 cities, as opposed to beyond the top 15 cities earlier, from April 1. This means distributors will no longer be able to get the additional commission for fresh inflow from these 15 cities. 


The top 15 cities still contribute to about 80 per cent of the MF business.