Large distributors set to poach clients following change in mutual fund commission guidelines

Another provision that will ultimately work to the advantage of the funds themselves is that the trail commission rate payable to the new distributor will be the lesser of the commission of the old and the new distributor.

Large mutual fund distributors are trying to poach clients from smaller rivals after the Association of Mutual Funds of India (AMFI) allowed commission to be paid to them if customers switch distributors, sources have said.

AMFI said March 5 that mutual funds will be allowed to pay "trail commission" to a new distributor in case fund portfolio transfers.

The association noted that distributors had sought a review of commission provisions and wanted it to permit asset management companies "to make payment of trail commission to the transferee MFD in case of change of distributor code initiated by the investor.”

Customers are eligible to move from one distributor to another, for the same fund, if they have any concerns with regard to the distributor or the services provided. Previously, the new distributor to which the customer had moved did not get a commission.

Also read: Will Sebi advisory on small- and mid-cap funds cause forced selling?

AMFI has now said that AMCs may consider making payment of trail commission to the transferee distributor after a cooling period of six months from the date of change of distributor code.

Understanding the distributor system

A distributor acts as an intermediator between a mutual fund house and an investor. In return, distributors receive a commission and they continue to get a trail commission as long as the client stays invested in the fund.

The commissions are decided by the AMC, based on the duration an investor stays in the scheme, with the amount depending on when the investment started.

According to a Moneycontrol report citing data from Prime Database, Indian mutual fund distributors earned a net commission of about Rs 12,049 crore in FY23. The biggest distributors were NJInvest, State Bank of India, HDFC Bank and Prudent Corporative Advisory Services.

Previously, trail commission was only available to the distributor who brought in an investor. Now, when an investor shifts to another distributor, the new distributor will get the trail commission.

Advantage for bigger distributors?

While smaller distributors seem to be concerned about this move because larger distributors can bait clients with services such as automated portfolio tracking and research on stocks, mutual funds said this is a fair move.

Peshotan Dastoor, group president and head of sales at UTI AMC, said the guidelines take care of the issue of "incorrect shifting" or making investors shift from one distributor to another just for the sake of it.

“This is why they have suggested have the six-month cooling period now, wherein the new distributor does not get the commission for a period of six months,” Dastoor said. The new distributor will not be entitled to trail commission if the investor exits within six months.

Another provision that will work to the advantage of the funds is that the trail commission rate payable to the new distributor will be lower than what is paid to both the old and new distributors.

If the original distributor got trail commission at 75 bps and the new distributor gets 95 bps, the original rate will be applicable even after the portfolio is transferred. The trail commission on every portfolio can be different because it is based on the rate set by the AMC at the point the investment is made.

Also read: Do mutual funds pay maximum commission to their associate distributors?

Some distributors concerned

Moneycontrol has learnt that some larger broking firms have been reaching out to potential customers and suggesting they move their fund portfolios. This could be a challenge, especially for smaller distributors.

Talking to Moneycontrol, a Muzaffarnagar-based distributor expressed concern. According to him, larger institutions have the advantage of offering services and support, making it attractive for clients to move to them. The transfer in trail commissions will accelerate poaching of clients.

“Earlier, bigger players did not want customers to move as the new distributor did not get commission. But now, not only does the customer not face taxation but the commission is also transferred to the new distributor,” he explained.

However, another distributor, Mumbai-based Sachin Rane, said it may be too early to comment on the impact.

“What we have seen is that often, when good working relationships are built between clients and distributors, they do not want to move.”

Moneycontrol has reached out to AMFI for comment.

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