The Association of Mutual Funds in India (AMFI) has reportedly announced a change in its policy regarding trail commissions for mutual fund distributors. This move is expected to have implications for both distributors and investors in the mutual fund market.
Previously, when investors switched from one distributor to another, no trail commission was paid for the transferred assets.
However,
AMFI's latest notice to members reveals that mutual fund distributors will now be eligible to receive trail commission from
asset management companies (AMCs) on such transferred assets, after a cooling-off period of six months.
Understanding trail commission
Trail commission is a form of compensation paid to mutual fund distributors for the ongoing assistance, advice, and services they provide to investors.
It is typically a percentage of the
assets under management (AUM) and serves as an incentive for distributors to offer continued support and guidance to clients over the long term.
Here's a breakdown of the key points outlined in the notice:
Payment structure
AMCs may now allow trail commission to distributors on transfers initiated by investors, with the payment being based on the lower commission rate of the transferor and the transferee distributor.
Exclusions
Apart from trail commission, no other payments of any nature, including incentives, will be made on account of the change in distributor.
This implies that any additional incentives or commissions related to the distributor switch will not be permitted.
Review of the existing rule
The decision to revise this rule comes after receiving requests from mutual fund distributors to reconsider the previous guideline, which was introduced a decade ago to address specific market practices.
The AMFI believes that the circumstances prompting the original rule may no longer be prevalent and that the transferee distributor provides the same level of support and service to investors on transferred assets.
Implementation
The payment to the new distributor will be based on the lower commission rate applicable on the date of the distributor code change, ensuring a fair and standardised approach to commission payments.
Investor impact
For investors, this change could potentially lead to more flexibility in choosing distributors, experts say.
The policy change is expected to foster healthy competition among distributors, as they vie to attract and retain investors by offering superior services.
This competition can lead to improved customer service too, better investment advice, and more comprehensive support for investors.
Investors switching distributors may now benefit from continued support and services without incurring additional costs.
