With the abolishment of the entry load in mutual funds, the industry is at crossroads as to how and who will pay the brokers. For the past many decades brokers were paid a small percentage of the entry load that was charged to the investors. For an investment of Rs100, the entry load was around Rs.2.25 meaning only Rs.97.75 of the investors’money was actually invested. The investors didn’t bother as to how much the brokers were being paid or who was paying them. They were content with their returns and never questioned the fund house about the entry and exit loads. Actually it was the investors themselves who were paying the brokerage, but now after the recent developments in the USA, SEBI has made it clear that investors are more important than the intermediaries.
This means that the fund houses have to pay the brokers from the trail commission that is charged to the investors on a daily basis. This has led to a drop in the collections of the fund houses as the brokers are not sure about their payments. The large fund houses can still afford to pay the brokers from their own pockets but this new regulation has put the small and new fund houses in a spot. They have to think of new avenues to generate their brokerage fees or pay the brokerage from the 1% exit load that is collected from the investors who make an early exit.
This has forced the fund houses to rethink their business models and also redesign their distribution networks. A new road map has to be formed and the brokers’ future is also to be considered.
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