Mutual funds are leaving no stone unturned to keep
distributors in good humour.
Asset management companies (AMCs) are paying a higher upfront fee to
distribution subsidiaries of foreign and private banks nowadays to drive
'exclusive sales' of their schemes, mainly equity. This commission is in
addition to the upfront and annual trail fees that mutual funds pay
distributors for selling their schemes, said top AMC officials.
AMCs are paying large distributors anywhere between Rs 50 lakh and Rs 2 crore
this year as part of the so-called marketing support fees. Last year, such
payout was in the range of Rs 45 lakh to Rs 75 lakh. Fund houses said
distributors, who have been deprived of the entry load after its ban since
August 2009, are demanding a higher fee, citing difficulty in selling equity
schemes in unfavourable market conditions.
The marketing support fee would depend on the size of the fund house and
performance of the equity scheme, AMC officials said, "Fund houses with
large asset bases, performing funds and good credentials will have to pay less.
New and ailing fund houses will be required to pay higher fees," said the
chief executive of mid-sized fund house "The benefit of paying additional
fees is that bank distributors will strive harder to sell schemes of fund
houses which have paid the money," he said.
The chief executive adds that bank distributors sell only those funds that are
doing well. "They do not push products that are not in favour or are
losing money. Bank distributors take turns to include top performing schemes of
fund houses (which pay extra money) in their quarterly fund
recommendations," he said.
Most top bank distributors including HDFC, HSBC and Citibank, among others,
have hiked marketing support charges this year, say mutual fund industry
sources. But, the banks deny this. "We only accept upfront commission and
trail from fund houses to sell funds. We're an open architecture distributor;
we advise funds of almost all fund houses (to our clients), if they are
performing well," said Abhay Aima, head of equities, private banking and
third party products, HDFC Bank .
According to Aima, exclusive tieups are only done on the distribution side.
"The fund house pays for marketing expenses. Under such tie-ups, we give
them good shelf display, exclusive space for selling their funds, help them
host investor melas and arrange campaigns. But at no cost, we take money to
advise a particular fund," Aima added. A senior Citibank official,
requesting anonymity, said, "We only collect upfront commission and trail
fees from asset management companies. Citi sells funds of 21 fund houses. It
has no exclusive tieups with any particular fund house."
Fund houses pay an upfront commission in the range of 0.75 - 1% and 50 - 75 bps
as annual trail fees. Bank distributors are also promised an additional 25 bps
trail (termed loyalty fees) if investors stay for more than five years.
An email query sent to HSBC did not elicit a response. According to industry
sources, by accepting money for exclusive promotion and marketing support, bank
distributors are already working on tied-agency concepts, which the recently
constituted Sebi mutual fund panel is planning to introduce. Bank distributors
have always been accused of resorting to aggressive portfolio churning by fund
industry experts. Going by registrars' data, portfolio churning is high among
investors who are serviced by bank-promoted distributors. Only 21% of equity
AUM mobilised by banks remained with fund houses for more than 900 days
vis-a-vis 53% collected by independent financial advisors.
My Comments -
Many of our investors have suffered churning impact because of bank employees lack of knowledge & experience of the very product they recommend. Quite often they sold the product without understanding there exact need & requirement.
The best way is to go is by making an appropriate financial plan with the help of a professional. Proper cash flow analysis has to be done & portfolio has to be made not just by one measure rather by all the measures required like asset allocation, need analysis, goal orientation, risk appetite, insurance need, retirement planning etc.
One thing is for sure without trying, one cannot know its true benefits.
"TO HAVE A HAPPY LIFE PLANNING IT IS QUITE VITAL."
