VR Logo

Paying Commissions

Paying Commissions

There can't be much doubt any more that investments in equity funds are on a decline and primary cause is the abolition of entry load and the lower commissions that are available to fund distributors. I still think that this change will be for the better for investors and for the fund industry in general in the long run. SEBI's goal in making these changes is to create a fund industry where no one gets rewarded for just creating a transaction, which is what upfront commissions did. However, it will take time for the business to adjust to what amounts to a completely new business model.

Still, one of the decidedly undesirable side effects of this entire business has been how everyone had decided that distributors don't need to be paid anything at all by the investors. Remember, the only thing that the new regulations have done is to abolish entry load and prevent fund companies from paying upfront commissions out of the entry load.

The fund distributor is now paid by the AMC out of its own pocket. However, the original idea was that the distributor could also be paid by the investor directly. This payment could be anything that the investor and the distributor mutually settled as the worth of the distributors' services. It could have been a percentage of the amount invested or a flat amount per transaction or, for a high-volume regular investor, even an annual retainership. But as things have turned out, none of this has happened to any significant degree. Except for the large banks and some 'wealth management' style outfits, practically no distributors seems to have asked for a fee, let alone get one.

The idea that an investor could pay for services rendered was never there as part of investment framework in India, and hasn't entered it now. This is unfortunate. You, as an investor, should think about this carefully. Almost all the abusive practices in the financial realm in India come from the fact the seller is paid by the manufacturer and therefore looks after his own and the manufacturer's interests. While commissions levels have achieved cancerous growth only in the case of ULIPs sold by India's so-called insurance industry, if investors want good advice and good service, they'll have to think about how much money is the financial intermediary is getting and from where.

It is unfortunate that the concept of investors paying advisors has not been given any institutional backing. When SEBI originally aired the idea of abolishing entry loads, one of the alternatives that was thought of was that the fund application form would have a place where the investor would fill in how much commission the distributor should be paid. Another idea was that the investor would give two cheques, one for the investment and one for the commission. While these particular ideas may or may not have been practical, it would have been desirable to have some formal, official expression of the idea that investors should pay to the distributor whatever his services are worth. Not paying anything at all is OK only if you are saying that the services are worth nothing, in which case you should not be using them.