Distributors frown upon AMFI proposal to shelve upfront commission

In 2013-14 the industry paid close to Rs 2,600 crore to 329 distributors, which resulted in net outflow of over Rs 36,000 cr of assets under management

The proposal by the Association of Mutual Funds of India (Amfi) to abolish upfront commissions has not gone down well with the distributor community.

The Financial Intermediaries Association of India (FIAI), a mutual fund distributor body, has written to Amfi that the move will harm the Rs 10-lakh-crore Indian mutual fund sector.

Meanwhile, Amfi has written back to the distributor community stating that it is mulling a system that will be beneficial to all stakeholders.

In a letter dated October 14, FIAI stated: “We may understand the need for up-front commissions to be rationalised, not entirely abolished. Upfront commissions are critical to the business cash flow… Removal of upfront commission will severely restrict the ability of new distributors to set up a new business…(while restricting) existing distributors (from expanding to new locations)…This will lead to a very low rate of new client creation.”

On its part, Amfi has pacified distributors that no decision has been taken or any representation has gone to the capital markets regulator in this regard.

“The Amfi board has been discussing various models for commission payouts to devise broader contours that could be a win-win for all stakeholders,” H N Sinor, CEO of Amfi, had said in another letter dated October 27.

In the letter, Amfi raised concerns over high commission in relation to actual business.

In 2013-14, the industry paid about Rs 2,600 crore to 329 distributors that resulted in the net outflow of Rs 36,000 crore of assets under management (AUM).

“We have the data of each of the 329 distributors. We are sorry to say that the industry has not gained anything from their activities despite high commission paid to them,” the Amfi letter stated.

Amfi is said to be working on a model that will involve the investors paying a fee to the distributors, instead of the upfront commission that mutual funds used to pay to the distributing channels.

In the recently-conducted Amfi board meeting, asset management companies debated whether the new payment model for distribution of products should be based only on trail commission depending on the assets.