Commission cap hits fund sales

Particularly of closed-end, credit opportunity schemes; observers say mis-selling has reduced

The capping of upfront commissions for distributors to 100 basis points or one per cent from April 1 has hit sales of several categories of fund schemes.

Observers say sales of closed-end schemes, capital protection funds, credit opportunity funds and even some open-end equity schemes, which thrived on high upfront commissions, have got hit.

Market watchers say the cap has been positive for investors, as mis-selling of these schemes has reduced. “Some of the large distributors were guilty of pushing products that might not have been suitable for investors. For example, investors were made to buy closed-end funds, though they did not fully understand the lock-in nature of these schemes,” said Manoj Nagpal, chief executive, Outlook Asia Capital.

While 19 closed-end schemes were launched in the first three months of this year, only seven have hit the market in the next five months, the first of this financial year, according to data from Value Research.

A total of 54 such schemes were launched in 2014.

While capital protection schemes generally find favour in a volatile market, only 13 have hit the market in the five months to August compared with 14 in the first three months of calendar 2015. Of the four credit opportunity funds this year, three were launched before April.

“Some fund houses had a tendency to pay higher commission to push sales. The cap has brought some parity among fund houses and taken the greed away from the system,” said Dinesh Khara, managing director, SBI MF.

Market watchers say inflows into closed-end offerings in 2013 and 2014 were largely driven by the high commissions paid to distributors. Fund houses gave upfront commission as high as six to seven per cent for closed-end equity schemes, compared with one to two per cent for open-end ones.

The distributor community, especially the smaller of independent financial advisors (IFAs), have been hit the hardest. “We will take at least a year to adapt to this change. The cap will discourage new distributors from coming in as without upfront commission, they will have to put in more capital into the business,” said aone.

Added Dhruv Mehta, chairman, Foundation of IFAs: “Smaller IFAs focussed on smaller towns, as well as distributors who were looking to aggressively recruit and expand the business, will get impacted the most.”

The Sumit Bose committee recently recommended a complete phase-out of any upfront fees for agents, to curb mis-selling of financial products and rationalise distribution incentives. The committee was set up by the finance ministry last year.

"Any upfront commissions in any investment products and the investment portion of any bundled products skew seller behaviour and lead to mis-selling and churning. Therefore, these should be phased out completely," said the report.