On the trail of a robust mutual fund compensation structure

Last week, the Indian mutual fund association set the cat among pigeons by announcing a number and a date. The circular dated 26 March 2015 put 1 April, that is today, as the day that the mutual fund industry will move to a cost structure that caps the upfront commission (the money that the seller of a mutual fund gets for vending the product) at 1% of the amount invested, and the trail commission (the money the vendor gets at the end of one year as a percentage of the value of the asset a year later) to be either level or decreasing over the years.

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Industry practice will ensure an only-trail commission model

High upfront mutual fund commissions are back. My colleague Kayezad E. Adajania collected data on commissions paid on 25 new fund offers (of the 32 launched) in 2014 (you can read the story here:http://goo.gl/ea8zZD ) and found two things. One, upfront commissions are back at top rates of about 8%. Two, commissions are paid according to the bargaining position of the seller. The individual financial advisers are the lowest in the pecking order and get the smallest commissions while banks appropriate the most.

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In defence of trail commissions

Expense Account, Mint

The Securities and Exchange Board of India (Sebi) has taken a welcome step to bring in a set of adviser regulations. It has released a concept paper on the regulation of investment advisers. India needs a new set of regulations to bring order to a marketplace that moves money between households and fund managers. Investors stay in inflation-unfriendly deposits and negative-real-return endowment insurance policies because they are unable to trust the intermediary who talks about putting their money in markets through mutual funds and pension products. The unit-linked insurance plan (Ulip) fiasco where investors were looted systematically by insurance companies, banks and distributors has not helped foster trust. The Ulip debacle was a case of misaligned incentives and for trust to be built we need to align the incentives of the investor with that of the intermediary, keeping in mind the fact that the bulk of the market finds it difficult to pay for services. There is still time before we come to a stage where there is a well-recognized designation such as MBBS or LLB that qualifies the person giving financial health advice to charge for services as an accepted part of the practice.

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