No entry load: Distributors spooked

The Securities and Exchange Board of India’s (Sebi’s) decision to do away with the entry load for all mutual fund schemes has queered the pitch for distributors.

Sources said that most of the distributors were waiting for the official Sebi circular to get some clarity on the issue.

What has spooked the industry is the abolition of the entry load. Earlier, distributors were assured of at least 2.25 per cent fees when retail investors bought any equity scheme. For instance, if a cheque of Rs 100 was given to the distributor, Rs 97.75 was invested and the rest Rs 2.25 went to the distributor as commission. However, at yesterday’s meeting, the Sebi board approved that the entire Rs 100 would henceforth be invested and the investor would issue a separate cheque to the distributor towards the commission mutually agreed upon by the two.

What this decision means is that distributors are no longer assured of a particular amount of commission because fund houses cannot make it mandatory for the investor to pay the same. “This is going to hit the retail distribution quite badly. Distributors will not show interest in selling mutual fund schemes to retail investors. Even fund houses will be affected because it will force them to increase their marketing cost for product promotion,” said Akhilesh Singh, head (mutual funds distribution), Emkay Global.

The basic problem for most distributors is to quantify the quality of advisory services. And, they are worried if the retail investor is even qualified to understand the quality of services s/he is receiving. “This will lead to a lot of waste in time as customers have to be convinced that the amount we are charging is fair,” added another distributor.

Further, Sebi’s guideline that distributors will have to make disclosures of commission to the investor is yet another stumbling block. However, Hemant Rustogi, chief executive officer, Wiseinvest Advisors, agrees with the Sebi move because, he feels, it will introduce transparency in the long run and both retail and large investors will get equal treatment.

But solutions such as reduction in the entry load or a mandate that not more than 50 per cent can be shared with distributors could have been better instead of abolition of entry load, he said. Many experts agreed that now the onus would be on fund houses to compensate the distributors to sell their products and that would increase the MFs’ marketing costs.

Said T P Raman, CEO, Sundaram BNP Paribas Asset Management Company, “Initially there could be some problems. Distributors could ask for a better compensation from fund houses, but they will take this call, based on the economics of that AMC.”