New Rules For Mutual Funds Distributors Can Prompt Increased Competition, Client-Poaching
AMFI has announced that commissions will now be paid on the existing portfolios of clients that shift to a new distributor.
A flurry of competition for clients is likely to hit the community of distributors of mutual funds, which includes brokers and banks.
This after the Association of Mutual Funds in India sent a circular to asset management companies with revised guidelines on distribution of 'trail commissions'.
To understand the change, an understanding of the previous practice is a prerequisite.
Mutual fund schemes are available in two options — direct and regular —based on the method of distribution. Schemes that are available to be invested in on the website of an AMC or on certain platforms are direct, while those that are sold by distributors are regular. Regular schemes include a distribution fee, which is paid to distributors in the form of a monthly commission.
Earlier, to curtail poaching of clients and other such practices, the AMCs would withhold the distribution fee if a client transferred to another broker or distributor. In such cases, the distributor that sold the scheme would stop earning a commission and the new distributor would not earn one either. The new distributor would only earn commissions on schemes they sold to their clients.
The Change
AMFI has announced that commissions will now be paid on the existing portfolios of clients that shift to a new distributor, but after a cooling period of six months.
This is to limit the aggressive poaching of clients, according to the head of a domestic mutual fund who spoke on the condition of anonymity.
The Implications
For the investor, the change is likely to be positive because in the event of a change in service provider, the new distributor is no longer incentivised to encourage a wholesale restructuring of the portfolio. As commissions were earlier not earned on existing schemes, distributors were more likely to encourage their clients to sell their old schemes and buy new ones.
A Mumbai-based mutual fund distributor said there is likely to be significant competition on account of the payment of trail commissions and that "good distributors" would benefit from the change.
This could also prompt sub-brokers that work with large national brokers to break out on their own by asking their clients to make a switch, he said on the condition of anonymity.
