Are mutual fund investors ready to pay a fee to distributors?  

April 5, 2010

Mutual fund (MF) distributors across India are finding new ways to remain in the business. They are now thinking of charging their clients for investing in MFs.

“I have kept my clients informed about what is happening in the industry. The 0.50% commission paid by the asset management company (AMC) will not continue for a long time. AMCs are bleeding. I charge 2% from my clients. We are able to charge only our existing customers who know our quality of services. It’s difficult to charge a new customer,” said Thiru Murugan, CEO, Wealth Creation & Management Services.

“I know a typical case where a person who went to deposit Rs10 lakh was sold ten different ULIPs (unit-linked insurance plans) for the entire family. Next year he received a notice that he has to pay Rs10 lakh as renewal. The Securities and Exchange Board of India (SEBI) says that it is protecting investors, but I don’t know who will regulate banks,” adds Mr Murugan.

But there are others who feel that if the fund does not perform well, then investors will rush to their office to demand a return of the fee.

“Customers only pay to banks and big institutions. Clients invest Rs5,000 initially after taking advice and then invest Rs1 lakh directly. If an MF doesn’t gives good returns then clients will come and ask me to pay back the fees,” said a certified financial planner (CFA).

A distributor gets Rs6 as commission for a client investing Rs500 per month in a systematic investment plan (SIP) for one year (a total investment of Rs6,000). Distributors are finding it unviable to continue providing service to such clients. There are talks among the IFA community of charging a uniform rate. IFAs are planning to come up with a rate card enumerating various charges.

However, this uniform fee model would not be relevant across India for all distributors. The charges are likely to differ from one distributor to another depending on the advisory. As of now, distributors are thinking of charging anywhere from 1% to 2% of the total investment from their clients. SEBI had earlier mandated that the upfront commission to distributors shall be paid by the investor to the distributor directly. — Ravi Samalad