Upfront fee paid by fund houses to distributors likely to end soon

Upfront commissions paid by mutual fund houses to distributors and independent financial advisors (IFAs) could soon be a thing of the past. This issue came up at a meeting called by SEBI with the CEOs of mutual funds in Mumbai on Tuesday.

SEBI had asked the Association for Mutual Funds in India to take a decision on upfront commissions. But sources said that the industry is divided over the banning of upfront commissions. The ball is, therefore, back in SEBI’s court.

“On an average, a fund house pays 3 per cent for open-ended and 6 per cent for closed-ended schemes as upfront commissions. Banning would result in huge savings for larger fund houses which have been using the fungibility of expenses to fund these commissions,” said a CEO of a mutual fund, who did not want to be named.

“In my opinion, it should be done away with as it induces mis-selling. And the argument that IFAs will leave is a short-term pain that the industry has to endure since they never struck big deals for fund houses barring a few cases, here and there,” he added.

According to experts, banks which used to be a source of big deals (₹10 crore and above) for mutual fund schemes would now be put off as they used to negotiate better upfront commissions from fund houses. Trail commissions though, range only between 0.5 per cent and 1 per cent.

The industry has also been concerned about the enrolment of newer IFAs into the system with fresh enrolment being not very significant on fear of poaching by rival fund houses, experts say.

“The trail-only model would force many existing IFAs to leave while new recruits would have to wait for one year without any income before they receive their trail commissions, which is unviable,” said another fund house CEO.

“Upfront commissions based on the premise that markets will surely boom in the next three years and ensure that funds houses end up in the green despite high initial expenses is flawed because there is cost of capital also to be recovered for that period,” he added.

According to those in the trade, exclusive products for markets beyond the top 15 cities with higher total expense ratio and graded commission structure for IFAs with those having lower annual income getting higher percentage as upfront commissions were possible solutions.

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