The new mutual fund distributor portability norms may leave distributors with no commission during the six months mandatory cooling-off period, leaving them high and dry, especially if investors trigger multiple switches.
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A spin-off effect of the new norms is, it will help large distributors poach businesses from smaller players by offering better services and ease of investment.
A distributor is an agent recognised by AMFI and registered with AMCs. He advises and facilitates buying or selling of units between investors and mutual funds.
Investors 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 switches was not eligible for trail commission.
AMFI has now allowed AMCs to pay trail commission to distributors if an investor switched from one distributor to another.
The AMCs may consider making payment of trail commission to the transferee distributor after a cooling off period of six months from the date of change of distributor code in the unitholder database.
However, if the distributor code is changed back to the original distributor in the cooling-off period, then the cooling-off period of further six months will restart from such date of change, said AMFI.
Venkat Chalasani, CEO, AMFI said the new commission model will lead to investors getting better service from distributors and widen the reach of mutual funds to smaller cities.
While the new norms will help grab new businesses, distributors will be left with no income for almost one year if the investors switches twice during the cooling off period, said a MF distributor from Ghaziabad.
This will shake the business model of small distributors who are already impacted by trail commission model and reeling under the ever-increasing compliance cost, he added.
The trailing commission is calculated as a percentage of the entire investment brought to a fund by a particular intermediary. It is calculated on a daily basis and paid every quarter. In equity mutual funds, the commission can range between 0.20 per cent to one per cent and for debt funds it can vary between 0.10 per cent to 1 per cent.
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Parth Parekh, Head Investor Relations, Prudent Corporate Advisory Services said, as per the AMFI Best Practice circular, there will be a cooling-off period of six months since the inception of change of broker code wherein neither old or new distributors will be paid commissions. Post this cool-off period, new distributors will be eligible to earn commissions on the transferred assets.
“We anticipate this move to expand the mutual fund distribution community as relationship managers working in banks and wealth outfits, who are the key faces behind client servicing, can pursue the mutual fund distribution field as entrepreneurs,” he added.