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No trail commission if distributor changed: Amfi

The national distributors will now have no incentives to fleece lay investors for the lure of trail commissions.

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The woes of independent financial advisors, whose mutual fund clients were being taken away by larger national distributors, have now ended. The national distributors will now have no incentives to fleece lay investors for the lure of trail commissions. Albeit, the war has resulted in the loss of trail commissions for both these
independent advisors as well as national distributors, in
case and investors portfolio has been transferred.

This blanket ban on trail commission for transferred portfolio comes into immediate effect according to Amfi’s Best Practice Guidelines Circular No 15/2010-11, sent to asset management companies on May 7, 2010. This decision of Amfi was unanimously agreed to by members (asset management companies) at Amfi’s General Membership Meeting held on May 5, 2010.

Trail commissions refer to the amount paid to agencies, distributors or firms selling mutual funds on a regular
basis for the period that the investor remains invested with a mutual fund.

“It has been observed after the issuance of the said circular by the Sebi that there has been tremendous increase in the trend of receiving requests for change of distributor and the data at R&TAs has revealed that the same has reached to an alarming situation,” says the Amfi circular issued to all mutual fund houses on Friday by the new chief executive of Amfi H N Sinor.

“On change of distributor (ARN Code) and on transfer of AUM from one distributor (ARN Code) to another distributor (ARN Code), the trail commission in respect of transferred assets should not be paid to old distributor (ARN holder) as well as to new distributor (ARN holder),” states the circular.

However, mutual fund houses cannot rejoice about saving this money. “The amount of commission so saved be accounted for separately and utilised for the purpose of education of investor,” asset management companies have been instructed.

After Sebi had scrapped upfront commissions given to mutual fund distributors in August 2009, there were malpractices followed by distributors with a larger clout to gain higher trail commissions. After December 11, 2009, when Sebi clarified that a no-objection certificate is not needed to change your mutual fund agent, it is learnt that investors were asked to sign on papers stating that their mutual fund will not be serviced by their original agent, but by the national distributors themselves.

DNA Money had earlier reported how Sebi and Amfi were looking into the database of Karvy Computershare and Compute Age Management Services (CAMS) and observed a large shift in portfolios from one distributor to larger distributors including some banks.

A new technology-based mutual fund service provider, a couple of banks and some large financial advisories were issued warnings by Amfi.

But there was no respite for independent financial advisors. “Some of my clients who I had been servicing for five-seven years were shifted to national distributors even after the letters were sent to these distributors,” said a financial advisor not willing to be named. “Investors were made to sign letters, the implications of which they didn’t know. I lost all my hard work for seven years,” he added.

Some banks had been giving monetary incentives to investors, who shifted their mutual fund investments to them from an independent advisor, Nagpur-based mutual fund agents told DNA Money.

Another mutual fund distributor said, “In a bank a relationship manager gets 150% weightage of the business he has
got from another distributor, when his performance is assessed.” Some other banks had been promoting relationship managers who had managed to transfer portfolios of five financial advisors, a source told DNA Money.

“The bank’s mutual funds person (sales person) was visiting my clients. This was on days when they had a heavy transaction in their bank account. One of my client’s fixed deposit had matured and the next day the agent was at the client’s place. They are not keeping bank account information secret and tell the investor to start investing with them and move other investments to them,” said another south Mumbai-based financial advisor.

But Amfi’s blanket ban on all trail commissions will put investors whose existing agent is not servicing them into trouble as no new agent will want to service someone if he doesn’t get any trail commission. This trail commission is usually in the range of 0.4-0.5% of the assets that a distributor has helped contribute to a mutual fund house. It is paid on a quarterly basis.

A senior mutual fund official said, requesting anonymity, that genuine cases of mutual fund agent shift were not many. “There were hardly any cases of people who wanted to shift their agent. Thankfully, we had held on to the trail commission and had not distributed it to the new agents,” said the official.

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