MFs pick associates for distribution

Experts cite conflict of interest, suggest cap on commission earned

Many fund houses preferred to distribute their products through their own sister concerns and sponsors, thereby keeping the commission within the group. As a corollary, several top distributors earned a significant portion of their commission income from their own associates. The trend was more pronounced in asset management companies (AMCs) promoted by banks and financial services conglomerates.

This has raised concerns of conflict of interest where the investor's choice is restricted and is being forced to buy a certain product without considering his investment needs and performance of the fund.

The data assume significance at a time Securities and Exchange Board of India (Sebi) chairman has been pushing for more investor focus in distribution mechanisms for the industry. A report submitted by a committee headed by former finance secretary Sumit Bose on sales practices is also under consideration by the industry.

An analysis of commission data for FY15 from Prime Database showed at least five distributors, including four banks, earned more than half their commission income from mutual funds “associated” with them through common ownership or other partnership. Of the Rs 643 crore earned by these five distributors in aggregate, Rs 438 crore or 68 per cent came from associated mutual funds. Two of these distributors earned almost their entire commission income for the year by selling products of their associates.

Distributors who earned at least Rs 10 crore in commission in FY15 were considered for this analysis.

Similarly, 11 asset management firms paid a quarter of their total commission payouts to their associates. Commission so received by the related entities totalled Rs 443 crore.

Of these, one fund paid 72 per cent of its commissions to its parent and sister concerns, four of them gave 40 per cent of their commissions to related entites. The remaining gave between 25 and 40 per cent. Funds that paid Rs 10 crore or more in commission were considered for this analysis.

These numbers are seen by analysts as proof of the inherent conflict of interest prevalent in the industry when mutual funds have in-house distributors and then such a distributor tends to and is incentivised to push the schemes belonging to their group company mutual funds.

According to Pranav Haldea, managing director of PRIME Database, this might not always be in the best interest of the investor. Haldea suggested Sebi may consider placing a cap on the value of sales of in-house products as per cent of total sales or a cap on the commission which a distributor can earn from his in-house AMC.

Sanjay Sinha, founder, Citrus advisors, said: “It is a subjective issue. True test will lie in validating whether the portfolio of the customer has seen growth or not. Many banks displayed bias towards products of their own asset management companies. But it is important to go beyond the commission number. What is the nature of the fund and what is the performance. If the performance is good, then that is ample defence.”

Citrus' Sinha said he was not in favour of a Sebi-imposed cap. “It could go against the investors if blindly imposed.” He asks what if the analysis of the performance proves the investor has actually benefited by these forced choices.

At the distributor level, these numbers show the dominance of banks, which account for around a third of the market. While it is a lopsided battle given the reach and resources at the disposal of banks, the numbers show there is ample space for un-affiliated, independent advisors to create value for the investors through sound advice and by staying at arm’s length from the fund houses.