The Securities and Exchange Board of India (Sebi) is finalising plans to introduce variable loads on sales of mutual funds, according to executives at banks and fund houses in Mumbai. The move will bring Indian pricing structures in line with international norms and may also help boost sales in the flagging funds industry.
Currently, investors that buy funds directly from fund houses pay no front-end load. If they buy through a bank, securities company or independent financial advisor, loads are fixed at 2.25%.
In return for allowing distributors to charge a variable fee, to be negotiated with the customer, loads will be made transparent and paid directly to the distributor, rather than be bundled together with a fund's annual management fee.
Freeing how distributors charge fees will benefit high-net-worth individuals or corporations that buy in volume, which would enable them to bargain for much lower fees. Smaller customers may find their fees rising, but would likely be presented with a scale of levels of service and advice that would determine the final fee.
The move is supported by larger banks and the fund houses, although IFAs and smaller distributors would prefer to keep the fixed 2.25% load, rather than compete on their service offering. Nonetheless they don't appear able to derail Sebi, which got the ball rolling last year when it allowed investors to go directly to fund houses and avoid front-end loads altogether.
"This could be an industry-defining event," says Sameer Kaul, business manager at Citibank's global consumer group in Mumbai. "It will force players to rethink their wealth-management models."
Several fund management executives also expressed support for the measure, which industry participants hope becomes official within the next six-to-eight weeks.
"Variable loads will open a dialogue between distributors and investors that gives both sides a chance to make a deal," says Ashu Suyash, managing director and country head at Fidelity International.
She explains that fixed loads discourage fund sales. In bull markets, investors are more likely to go straight to a fund house, and therefore distributors are wary of providing too much service if they fear the customer will walk out the door and go direct. In the current environment, which has seen equity sales screech to a halt, investors aren't going to invest unless they are getting good advice. So variable loads may help get a discussion going, which will translate into more transactions.
Nimesh Shah, managing director and CEO at ICICI Prudential Asset Management, says variable loads will also help align the interests of distributors with those of investors and manufacturers. Currently, with fixed loads, both fund managers and investors gain when equities are doing well -- both have an incentive to keep the money in the fund, while the distributor's main goal will be to churn.
The introduction of a variable load will lead market participants to revisit other charges, including the slice of the management fee -- the trail -- that goes to the distributor. "These will be under discussion if we have variable loads," Shah says.
Currently a typical equity fund's management fee is 2%, of which 50 basis points goes to the distributor (along with the front-end load). With variable loads, the level and the split of management fees will be renegotiated. If distributors win a bigger slice of the management fee, they will enjoy more of an annuity income rather than lump sums. This will allow them to reduce front-end loads, and give them a stake in seeing assets retained in a fund, rather than churned.