Upfront commissions: Should SEBI step in

Mutual Funds: The debate on upfront vs trail continues...

The market run-up has seen a spate of NFOs, closed-end NFOs in an exercise seen by commentators as an exercise in AUM gathering. It has been widely reported in the press that upfront commissions between 5%-8% has been paid by AMCs to distributors. Banks and National Distributors having the widest reach have obviously been paid the highest amounts. Surely we can expect miselling with such high commissions. Churning would make easy money wouldn’t it?

It’s been close to two months now since the Association of Mutual Funds of India (Amfi) members have been discussing idea of abolishing upfront commissions that fund houses pay to distributors. However, the industry has not come to any conclusion on retaining only trail and abolishing upfront commissions. Some commentators are suggesting a mid-path with a lower upfront (with a cap) combined with trail.

Alarmed at the high upfront commissions and seeing no consensus on the issue by AMFI, it has been reported that SEBI would step in and regulate the payment of commissions. Read this piece in the ET.

I do believe that Fund houses have gone overboard in the series of closed end NFOs with an AMC even launching a Series1 and Series 2 at the same time, being closed end for a different period!! I have also seen a few people subscribe to such NFOs, being informed that it is good to invest for a long term for 3 years!!!

The question arises now – Should SEBI step in??

Normally I would be against any regulation in what is a business decision. AMCs should decide how much to pay for acquiring and retaining assets. However, I also believe that AMCs continually launching unnecessary NFOs are really harming investor interests.  Certainly the high upfronts are causing churning and the fear of widespread mis-selling is valid. AMCs are divided on the issue as you will see in the below twitter conversation. There is a case for a bit of intervention or a  rap on the knuckles by SEBI. 

Do see this nice discussion on twitter.