An increasing number of HNIs are openly bargaining with fund distributors to get a share of trail commission
The confusion over accounting of trail commissions continues to rattle the mutual fund industry. On the one hand, there was a clear need to stop the practice of tying investors to a specific distributor in perpetuity or to ask them to get a no-objection certificate in order for them to shift to another distributor.
In late December, the Securities and Exchange Board of India (SEBI) directed the Association of Mutual Funds in India (AMFI) to implement its own earlier decision that said that funds should pay trail commission to new distributors when the client has moved away from one distributor to another.
Moneylife Digital has reported earlier (see here) on the confusion arising over implementation of this rule without examining all the issues and consequences. It has led to a raging battle to transfer assets under management (AUMs) by hook or by crook. Distributors tell Moneylife Digital that investors are being asked to sign a scrap of paper where the fine print permits the transfer of their AUM to a new distributor; these sources say that banks have been especially active in obtaining such a transfer under the guise of consolidating investors' accounts.
With independent financial advisors (IFAs) reluctant to service small investors after SEBI scrapped the entry load, it has been a happy hunting ground for banks to get the business of such customers. Naturally, IFAs are outraged. They are especially angry at mutual fund companies that are in a hurry to accept and act on these requests to transfer AUMs. The game has shifted from serving the investor to running after trail commissions.
Moneylife had earlier reported that the chase for trail commission business is gaining traction among the largest banks and financial advisory firms like HDFC, NJ IndiaInvest and Prudent Corporate Advisory Services who are actively encouraging their team to snatch AUMs.
"Now I am getting threatening calls from high net-worth individuals (HNIs) saying that now that you are getting paid (trail commission), how much (of the commission) are you ready to part with me, or I will transfer the AUM. I have no option but to agree, otherwise he (the HNI) will move to some other broker," says an IFA.
But many agree that who deserves the trail commission is the moot question. When an investor who has bought a scheme from distributor A and transfers it to B, the general understanding is that B will begin to earn the trail commission. And hence the rush to get investors to sign a transfer form. But B has done nothing to earn that investment, so some IFAs themselves admit that it seems unfair that B has to be paid. On the other hand, A cannot continue to earn the trail when the investor has moved away. So should trail commissions be abolished when an investor shifts to another distributor? Some agree, even though it would deal yet another blow to the IFA industry. The solution is obviously to find another way to compensate advisors.
What is worse, the only beneficiary in all of SEBI's actions seems to have been banks and bank distributors. Was this the end goal that SEBI had in mind when it scrapped entry loads? And shouldn't the regulator have examined the issue of trail commissions fully over the past couple of years, when investors had been complaining about not being able to switch IFAs?
Top SEBI officials have taken the position that the industry will learn to swim and find a solution. But as things stand, mutual funds are only sinking with large sums of money flying out of the industry. That result defeats the government's stated objective of encouraging retail investors to participate in the capital market through mutual funds. Isn't SEBI completely out of sync with this objective?
As suggested last time, we got a weak rally. The market trend is still up. Watch 16,500 on the Sensex
Last week, we had said that we expected a weak rally under which the Sensex will reach about 16,500 and possibly to 17,000 before pausing or going down again. There was a rally and it was weaker than we thought. It stopped at 16,200. At the end of the week the Sensex gained 237 points. The trend is still up.
The market perked up following strong global cues after debt-stricken Greece was rescued. However, fears of a possibility that the government may start to unwind its fiscal stimulus in the forthcoming budget continues to weigh on market sentiments. On Monday, 8 February 2010, the Sensex was up 20 points from Saturday’s close, ending the day at 15,936 while the Nifty closed at 4,760, up 3 points.
According to EPFR Global, that tracks foreign inflows, emerging market equity funds lost $1.60 billion in weekly withdrawals, the biggest outflow in 24 weeks. The report further added that investors pulled out almost $1 billion from global emerging market stock funds in the week ended 3 February 2010, the most in more than a year.
On Tuesday, 9 February 2010, the Sensex shot up 107 points to close at 16,042 while the Nifty closed at 4,793, up 32 points. However, on Wednesday, 10 February 2010, the Sensex declined 120 points from the previous day’s close. During trading hours, Subir Gokarn, deputy governor, Reserve Bank of India, said that he was not in favour of targeting inflation and also said that domestic growth drivers would depend on significant increases in capital inflows.
Finance minister Pranab Mukherjee said that the economy could grow at around 7.75% in the 2009-10 financial year ending in March. He said that with latest GDP data for 2009-10 indicating 7.9% growth in the second quarter, the growth outlook for the next two quarters and for the whole year is expected to be in the higher range of most predictions for the Indian economy.
C Rangarajan, chairman of the prime minister’s economic advisory council, said that the government could provide a roadmap for exiting from the fiscal stimulus when it presents its budget on 26 February 2010. He also said that the stimulus exit should be a gradual transition. The RBI will watch the price situation before taking any action on the monetary front, he said.
According to reports, commerce secretary Rahul Khullar said that the finance and commerce ministers are scheduled to meet later in the week to take a decision on the continuation of the stimulus package for exporters. He also stated that exports grew 13% in January 2010 over a year ago.
On Thursday, 11 February 2010, the Sensex shot up 230 points, while the Nifty closed up 70 points. The stock market was closed on Friday, 12 February 2010, on account of Mahashivratri.
Meanwhile, data released by the government showed that annual food inflation rose for the third straight week. The food price index rose 17.94% in the 12 months to 30 January 2010, higher than an annual rise of 17.56% in the previous week. The fuel price index rose 10.44% and the primary articles’ price index rose 15.75%.
After trading hours on Wednesday, the central bank said that it would introduce (from 1 April 2010) a new base rate to price credit more transparently, replacing the existing benchmark prime lending rate (BPLR). The apex bank said that the base rate will be the new reference rate for determining lending rates. According to draft guidelines, the RBI has proposed that the actual lending rate charged to borrowers would be the base rate plus borrower-specific charges including product-specific operating cost, credit-risk premium and tenure premium. The base rate will be applicable for all new loans as well as for old loans that come up for renewal. Existing borrowers who want to switch to the new system before the expiry of their contracts should agree on the revised rate structure with the banker, it said. The base rate could also serve as the reference benchmark rate for floating rate loan products, apart from the other external market benchmark rates, the RBI said.
GMR Industries may be a good play on the rising fortunes of the sugar industry