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Wednesday, June 24, 2009

No clarity yet on MF fee structure

Leading private sector banks, among major distributors of mutual funds (MFs), have approached market regulator Sebi, highlighting administrative and commercial issues relating to the flexible commission structure mandated by the regulator last week.

With Sebi banning entry loads altogether, the commission payable to a distributor will now be mutually agreed upon by the investor and the distributor. In addition to the 2.25% commission that distributors, including banks, used to get from MFs till last week, they would also get a 25-50-bps fee as ‘trail commission’ if the investor stayed with the scheme for a year.

However, bankers say this concept of mutual banking may well become a dormant activity after the Sebi diktat. “MFs and banks share load and trail income. Take one away, the other, by itself, may not be enough for a bank to continue to distribute these products. Fund houses also lose out as collections will drop. The spread of MFs will take a hit,” said a banker with a large private sector bank.

Abhay Aima, country head of private banking and third-party products, HDFC Bank, is all for full disclosures and for a customer deciding on how much he wants to pay the distributor. “But let those options be made available in the form itself. All a customer has to tick whether he wants to pay zero or 4% fees. Why two cheques?,” he added.
Another issue under focus is the modality of payment.

According to the new ruling, investors will have to issue one cheque to the scheme, and a separate one to the distributor for the commission.

Issuing two cheques for a single transaction is expected to push up transaction costs for banks.

“This will also widen the scope for malpractices. If a customer insists on paying a commission of Rs 100 (on Rs 5,000 at 2%) by cash for his convenience, there is a spurt in cash circulation. Also, there is every possibility that the relationship manager may pocket some share of it and it’s very difficult for banks to keep tabs on such activities,” Sonu Bhasin, president, retail financial services, Axis Bank.

Industry experts point out funds will find other ways of rewarding distributors. Given that the exit-load concept has not been touched or discussed, fund houses are likely to raise it.

source: ET
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