SEBI asks mutual funds not to pay upfront commission from load accounts

The SEBI directive means that AMCs will have to pay upfront commissions out of their recurring expenses accounts or from their own pockets

In a move to bring protect investors’ interests, market watchdog Securities and Exchange Board of India (SEBI) has mandated all asset management companies (AMCs) not to pay upfront commission to distributors from the load account. They can now pay upfront commission only from the recurring expenses account or from their own pockets. AMCs will have to comply with this new rule from 1 April 2010.

It may be recalled that Moneylife had earlier reported on how fund houses were paying upfront commissions for ELSS and other schemes to garner assets. (Read here).

After the ban on entry load by SEBI, fund houses were paying upfront commission from the load account. If an investor exits from the fund before the lock-in period, the exit load was transferred to this account. The commissions were as high as 2.5%-3%. Money held in a load account is supposed to be invested for the schemes and investors but AMCs were using this fund to pay upfront commission and for marketing purposes.

The new rule spells good news for investors but Independent Financial Advisors (IFAs) are up in arms. They feel cornered and discriminated against especially since insurance companies are able to offer lavish incentives to their agents.
According to sources, AMCs may now increase the trail commission or decrease the exit load in order to stop churning. AMCs were paying upfront commission which included trail of either one to three years or after negotiating the terms with the distributor. Distributors will now have to depend on the trail commission which is around 0.25% to 0.50%. If an investor holds Rs1 lakh investment in a mutual fund for six months, then the distributor gets Rs125 (0.25%) as trail commission.
“People expect to get money from the advisor rather than giving money to the advisor. The IFA does not get any money for selling Rs10,000 in a mutual fund. He may get it only if the investor holds on to it for six months or one year. The day-to-day survival of small IFAs will become difficult after the new SEBI rule, “said Ramesh Bhatt, CEO, Aniram, a Chennai-based IFA.

“Most of our customers give cheques of Rs10,000-Rs15,000. IFAs have to do 10 times more business now. Most of them will move out from the fund industry,” added Mr Bhatt. According to sources, AMCs will now only be able to pay 25 to 30 basis points of upfront commission. “It will mainly affect the smaller IFAs. The market will not expand,” said an IFA. “Sundaram Entertainment Fund had paid 1.50% upfront commission for one week. They had announced a dividend and wanted to capture maximum money by paying an upfront commission. Earlier when 2.25% commission was paid, we paid 25 paise as service tax and were left with 2% out of which we paid cash back of 1.75% to the investor,” said a distributor.

SEBI had earlier mandated AMCs not to pay dividend out of the unit premium reserve. The hefty dividend payout was merely a marketing tool by fund houses to attract more investors. The AMCs contacted by us did not wish to react to the new SEBI directive.

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    COMMENTS

    gautom

    1 decade ago

    is sebi chairman is a full nonsense ?
    what he think, mf business are increase in north east ? we are going to protest against mutual fund industry . they have not selling/mobilize mutual fund in north east.

    ANIL SHARMA

    1 decade ago

    Rakesh Kumar

    1 decade ago

    this way only unemployement is increasing, as there are lacs of IFA have only source of income from MF industry, so what we think this way at the end you are also increasing unemployement, Mr bhave says "IFA should ask profesional fees from investor, what does he think, for investing in sip of rs 500 who will give extra to IFA, i am not an IFA but i am investor, but still i know my IFA has stopped coming to me and for all work related to mf i need to go to AMC office or its registrar. if he think this way he gonna make the people of india like foreign country, so stop dreaming without making our fundamental economy strong and sound and investor more knowledgble.

    pankaj

    1 decade ago

    it is a part of financial politics....sebi is under the effect of trial and error mathods of investments policies....

    arjun rajput

    1 decade ago

    For ur knowledge shri suresh subramanian in ur first investment u must had taken the help of mf distributor, & in case of LIC POLICY there is no harm to any policyholder because LIC gives fixed bonus from the first year onwards on the sum-assured which is even 50% plus than the premium of first year so donot amuse urself on ur smartness.

    subbarao

    1 decade ago

    I am invest so many funds. Suggest the newfunds

    ChAITANYA

    1 decade ago

    I wants to say something to Mr. Suresh Ramasubramanian, that in India all the investor don,t know how to do the trading online for MF. For you its fine, but what about other investors.

    Pravin

    1 decade ago

    Ask Mr Bhave leave the job, to sell mutual fund & survive on mutual fund commission. Commission is very high other than any industry.

    Benzi Thomas

    1 decade ago

    Dear Bhave,
    Have you ever seen the people in rural India? MF Industry is becoming rich man's apple. What are the measures you have taken to educate the poor citizens of India? Is it enough to convey the message of MF industry? Participation in the development of India is isolating the common man, thereby boosting the FIIs and causing greater volatility. If any problem occurs, they will take their flight again. All these rules have to be implemented periodically as the Invesors in india are capable to stand their own unless it will be a great failure. Don't kill this fraternity

    Suresh Ramasubramanian

    1 decade ago

    It is amusing to see the various IFAs / agents come up with one excuse or the other.

    Only slightly valid point I saw was from Manoj who asked whether paying out of their own corpus rather than premium means the bonus declared wont be decreased.

    In my perspective .. the bonus is quite variable anyway according to the market situation, fund performance etc. And I tend to invest in growth plans that dont have anything to do with dividend at all so that is not much of my concern.

    Right now I can, and do, make all my investments directly using online trading sites provided by the various mutual funds that I invest in *** (http://investor.hdfcfund.com for hdfc, for example).

    I dont need to pay a single paisa in commission to any agent. So that's good. Only problem is LIC insurance policies where there is no way to buy the policy except through an agent as far as I can see. And if you use an agent there, his commissions + the management fees etc charged are far fatter than those for mutual funds so that about 40..50% of your first 2..3 years premium just gets gobbled up..

    I only invest in 3 funds by the way .. buy in dips and stay invested during peaks .. All growth plan growth option. Reliance Regular Savings Fund Equity, HDFC Equity Fund and SBI Magnum Sector Funds Umbrella Contra Growth. And I track those funds very closely indeed.

    rv

    1 decade ago

    bhave should be bitten by all distributors,as he is changing the rules day by day

    NIRMAL KUMAR JAIN

    1 decade ago

    Goverment of india wants from public of india that invest much to grow the economy of india but how it can possible without the working hands life mutual fund advisior without commission how a mutual fund advisior can work in market.

    P. Ravi Krishnan

    1 decade ago

    Only way for AMCs is to reduce their administrative expenses for the sake of IFAs from whom former is getting business. It is observed that AMCs are spending heavily on Agents/Investors conferences with lunch/dinner. Moreover, they are enoying luxurious life by staying in five star hotels, enjoying holidays in various resorts & tourist places, travelling in air conditioned taxis, trains, & flights. While IFAs are doing business with their sweat & blood.

    ARUN

    1 decade ago

    MR. BHAVE WANTS TO KILL THE MUTUAL FUND INDUSTRY. THE DECESION OF NOT PAYING COMMISSION WILL PROVE THE DEATH NAIL FOR MUTUAL FUNDS AND WILL AFFECT THE FUND FLOW TO THE INDUSTRY WHICH WILL PROVE TO BE SLOW POISION FOR THE INDUSTRY.

    Ram Krishna Chauhan

    1 decade ago

    If really SEBI wants to benefit the investors than its officers must study the ULIP Plans of private insurance companies & see the heavy charges deducted whichare 7% to 50% in first year & 3% to 9% from second year onwards in all ulip plans. These plans are made to give benefit firstly to insurance companies ,secondly to agents & lastly policyholders are merely fetching any returns because most of the investors get loss in regular premium plans even after the period of 3 years+. One more important fact is that these insurance companies gives policy to 60 years plus persons also without any risk coverage on their life but charging same heavy charges from these innocent citizens. Sebi must perform its duty by stopping insurance co's to sell such products & ban all charges, which SEBI has done against the mutual fund entry load case. Jai hind.

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