Agents selling mutual funds (MFs) aren’t too different from door-to-door salesmen peddling room fresheners: The higher the manufacturers’ commission, the larger is the effort put in and, consequently, the higher are the sales. Last fortnight, market regulator, the Securities & Exchange Board of India (SEBI), put an end to the dubious practice of asset management companies (AMCs) paying high commissions to agents to increase their share of assets managed. SEBI has abolished the entry load, a fee that is deducted from the money an investor puts in an MF scheme. Funds are allowed to charge up to 2.5 per cent of the initial investment as an entry load. That 2.5 per cent is reimbursed by the AMC to the distributor as his commission.
What a waste
With the new fee structure, SEBI has addressed this investor concern. Distributors and AMCs, however, are the ones who appear concerned now. But then as SEBI Chairman, C.B. Bhave puts it: “We have to look into the interest of the investors first.” It’s indeed advantage investor now, as he or she will now decide how much to pay the agent. The agent, meantime, will have to disclose the trail fee that’s coming from the AMC.
Investor isn’t king
Voices of dissatisfaction from mutual fund customers
“I want easy access to the fund house for direct subscription since I do not want to pay entry load”
“I want all the services at my door step—right from getting help in filing the application form to depositing the cheque for my investments”
“I want objective advice that’s best suited to my needs and which is not driven by commissions received by my advisor”
“My advisor has given me incorrect advice due to which I have lost money. How do I ensure that he gets penalised for the loss?”
Source: CII-KPMG Mutual Fund Industry Study June 2009
Not everyone agrees. “Such fears are misplaced,” says Anup Bagchi, Executive Director, ICICI Securities. “While the AMC will have to educate the distributors on how to advise, the distributor will have to provide advice and better services to investors,” he adds.
It’s a valid argument but other distributors foresee operational hiccups. Surajit Mishra, Executive Vice President at Bajaj Capital, says it will be a mammoth task to collect two cheques (one for investment and another for the fees) from his 8 lakh MF customers.
The head of another large distribution firm, based in Mumbai, says: “We will try to mobilise more assets and earn more income from the trail fees which should compensate for the loss on the upfront fees.” Alas, that’s not quite what SEBI had in mind when it proposed advice-based selling.
—Rachna M. Koppikar