Fund houses pay fat commissions to sponsors

Mutual Fund (MF) houses are increasingly falling back on their parent companies to sell their own products. This is, especially true in the case of bank-sponsored fund houses or those funds that have sister companies in the financial distribution space. And parents are happily obliging. 

As per the fund houses’ disclosures of commissions paid to distributors, most bank-sponsored fund houses have paid a large chunk of their commission to their parent bank or company. In other words, a significant chunk of their inflows come through their parent company’s branch network.

For instance, roughly 66.50% of commissions that Axis Asset Management Co. (AMC) Ltd paid to all major distributors in the fiscal year 2010-11 went to just one entity—Axis Bank Ltd, Axis AMC’s sponsor. Of the Rs. 96 crore worth of commission that SBI Funds Management Co. Ltd paid to its major distributors, it paid Rs. 40.62 crore to State Bank of India and its affiliates such as State Bank of Travancore and State Bank of Bikaner and Jaipur.

Small wonder then that 11 of the top 20 distributors in the Rs. 6.4 trillion Indian MF industry are banks and they earned a total of Rs. 645.2 crore in the fiscal year 2010-11, as per data provided by the Association of Mutual Funds of India (Amfi); the MF industry’s trade body. Combined with the rest of the top 20 that also consists of national distributors, they earned a total of Rs. 1,032.8 crore worth commissions.

The new rule

As per a circular that the capital market regulator, Securities and Exchange Board of India (Sebi), issued on 22 August, fund houses are mandated to disclose the commissions they pay to distributors once a year. They will need to disclose this information on their website and Amfi will need to disclose consolidated data on its own website.

Sebi rules say that fund houses must disclose commission of all distributors who are present across at least 20 locations and/or has got inflows in excess of Rs. 100 crore from their retail and high networth clients and/or have received commissions of at least Rs. 1 crore per annum across the MF industry and/or received commissions of at least Rs. 50 lakh from a single fund house. A cursory glance across disclosures made by large fund houses reveals that each of them had about 300 to 500 distributors in their fold that satisfied at least one or more of Sebi’s criteria.

Strong parent network

Bank-sponsored fund houses are only too willing to fall back on their parent bank’s branch network to get inflows. Both existing fund houses as well as newly launched fund houses have consistently tapped an in-house customer base. For instance, when Axis AMC launched its operations in 2009 with its first equity scheme, Axis Equity Fund, it collected Rs. 909 crore during its new fund offer period. Of this, Axis Bank mobilized around Rs. 700 crore or 75-80% of the amount. Out of 138,000 investors of Axis Equity Fund, 95,000 came through the bank’s network.

“After the regulatory changes and market volatility of 2008 and 2009, more and more funds have moved towards their in-house distribution channels to tap their captive investor database to be able to get the best bang for their buck. Earlier, most of your distributors got money for us because commissions were paid out of entry loads. But after Sebi abolished entry loads, life became tough for the MF industry,” says Akshay Gupta, managing director, Peerless Funds Management Co. Ltd. “It is very comforting having the support of SBI’s 18,000-strong sales force and its elaborate branch network all over the country,” said Deepak Kumar Chatterjee, managing director and chief executive officer, SBI Funds Management Pvt. Ltd, in an interview earlier.

Though fund houses like Axis AMC appear to have a disproportionately higher level of dependence on Axis Bank, it doesn’t bother the fund house. “Yes, Axis Bank does get us a significant pie of our inflows and it’s not a bad thing at all. But we do engage with all our distributors. As our asset base grows larger, I am sure that while Axis’s contribution will continue to be strong, other distributors’ share will also go up in our overall pie positively,” says Karan Datta, national sales head, Axis AMC. Axis Bank’s 1,500 branches spread across 600 cities are available for Axis AMC.

It’s not just banks that push their own subsidiary fund houses’ MF schemes. Large financial institutions that have their internal distribution network also appear to be pushing their in-house fund houses. For instance, of the Rs. 5.20 crore commission that L&T Asset Management Co. Ltd paid to distributors in the last fiscal year, Rs. 1.77 crore (or 34% of the total amount) went to two of its sister firms, L&T Capital Co. Ltd and L&T Finance Co. Ltd. In their pecking order, these two firms got the highest commission among all of L&T AMC’s distributors.

“In troubled times, we will depend on our in-house distributors to sell our products; it’s logical. Retail inflows hasn’t just dropped in India, they have declined globally. Therefore, a fund house’s promoter will put immediate pressure on his own distribution force to sell in-house products first,” says a chief executive officer of a fund house, who did not want to be named.

After Sebi abolished entry loads in August 2009, fund houses have found it tough to convince distributors to sell MF schemes. Volatile markets ever since the global credit crisis that hit in 2008 haven’t helped matters either. As per Amfi figures, the MF industry has seen a net outflow (more money went out compared with what came in) of close to Rs. 18,680 crore in equity funds between August 2009 and July 2011. Though since the entry loads got abolished, the amount of new fund offers went down significantly.

Leaving the nest and flying away may not be, after all, the best solution for the MF industry as more and more financial institution-sponsored fund houses—armed with an in-house distribution sales firm—aim to set shop.

Source: http://www.livemint.com/2011/11/17221422/Fund-houses-pay-fat-commission.html