The Hindu Business Line : SEBI fiat puts mutual fund advisors in a quandary

Thiruvananthapuram, July 13 The recent order of the Securities and Exchange of Board of India (SEBI) on the mode of payment of commission to mutual fund advisors has made them a worried lot.

SEBI has prohibited mutual fund houses from paying commission to their distributors, with effect from August 1. Instead, it has been mandated that investors in mutual fund schemes pay the commission directly to the distributors based on individual negotiations.

According to All Kerala Individual Financial Advisors Association, SEBI has also prohibited the mutual fund companies from charging an “entry load”, which is an upfront charge levied by the companies for paying the advisory fee to distributors, and also to meet marketing expenses.

This will mean that from August 1, an investor will have to make two cheques – one for the mutual fund scheme and the other towards the commission of the mutual fund distributor whose service is being used, said Mr Suresh Nair, spokesperson of the association.

Entry load

Mr Nair said the entry load of 2.25 per cent was a one-time charge levied on the investor at the purchase of a scheme. For the distributor, the earnings amounted to approximately 2.1 per cent as service charges are collected by the companies and brokerage pay-outs are made later.

Out of this earning, the distributor has to provide service to the investor when the latter decides to change the bank account or the address, for obtaining the statement of account, to ensure compliance of “know your customer” norms and redemption of the scheme. This would entail visits to the investor and the company office many times and the expenses will have to be borne by the distributor.

In the light of the SEBI order, the association is confused if the distributor can charge the investor for each of the service and, if yes, at what rate.

Expense issue

Moreover, the association feels that the entry load of 2.25 per cent for the mutual fund industry is unfair as the life insurance industry charges an entry load of 20 per cent and upwards.

There are anomalies in the SEBI order in other aspects such as remuneration for promoting systematic investment planning where the investors make payments to the scheme on a monthly basis. The advisory fee in this case would have to be collected every month through cheques provided by the investor and for amounts as low as Rs 10, Mr Nair said.

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