Ban on upfront commission hits new individual distributor registrations in FY20; plummets 51% YoY

The ban on upfront commission seems to have dampened interests of those wishing to become Mutual Fund Distributors (MFDs).

According to data from the Association of Mutual Funds in India (AMFI), new MFD registrations witnessed a sharp fall of 51 percent in the new registration.

The industry added 8,594 new independent mutual fund distributors in FY20 as against 17,625 new registrations a year ago.

Industry experts attributed the fall in new mutual fund distributor registrations to revision in commission structure for mutual funds which has forced most distributors to sell insurance schemes instead of mutual funds.

The changes in total expense ratio (TER) structure by market regulator SEBI may have impacted the feet-on-street fraternity.

Related stories

Himadri Buch

Assistant Editor|Moneycontrol.com

• 
  Society Tea striving to become a national brand, says Director Karan Shah
• 
  This week in hospitality industry: Night curfew dampens year-end cheer; license fee gives some relie...
• 
  Bar owners welcome Maharashtra government’s move to cut license fee

In September 2018, the Securities and Exchange Board of India (SEBI) banned upfront commissions paid to MF distributors.

SEBI directed fund houses to move to an all-trail model. After SEBI’s circular, trail commissions have dropped 20-25 basis points (100 bps=1 percentage point).

Sebi has mandated that there should be no upfront commission or upfronting of trail commission when it comes to distributor payouts. The industry must now shift to an all-trail commission model. An upfront commission is paid by the AMC to the distributor at the time when the sale is made and trail commission is paid annually as long as the funds remain with the AMC.

The total expense ratio (TER) is a measure of the total costs associated with managing and operating a mutual fund. The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which represents the TER.

SEBI has further trimmed the annual TER that very large size MF schemes would charge to 2.25 percent.

Earlier, TER was below 2.5 percent but there was scope for market competition to determine distributor commissions.

With TER now reduced to critically low levels, the distributor community is seeing a decline in new entrants, leaving investors all alone to decide on MF schemes.

"Our income has come down due to reduction in the commissions by SEBI. Most distributors have already switched to seeking insurance schemes as the commissions are appealing," said Mumbai-based distributor Amol Joshi.

“Most commissions in insurance is between 2 and 8 percent of premium. So we make good money there instead of mutual funds,” he added.

AMFI data also showed not only individual distributor registrations but also corporate employee registrations have come down in the last fiscal.

The industry received 32,022 new ARN registrations from corporate employees compared with 37,048 a year ago.

Overall, the fund industry added 41,501 new distributors in FY20 as against 55,955 in FY19 across all categories.