Amfi says trail commission in case of transferred mutual fund accounts be put in an investor education fund.
Last week, the Association of Mutual Funds in India (Amfi) banned charging of trail commissions from customers who have transferred their account to another distributor.
“After discussing various pros and cons, the board decided that the commission should not be paid to either distributor,” said H N Sinor, chief executive, Amfi.
This is significant. In recent months, the war to gain customers has turned ugly in the wake of the ban on entry load from August 1, 2009. Industry sources said agents of some bigger distributors were poaching customers of smaller ones, getting them to sign a form for transferring their account.
Amfi’s circular says that after the Securities and Exchange Board of India allowed customers to change distributors without a no-objection certificate from the current distributor, there has been a sharp rise in such requests.
The reason: Trail commissions, which asset management companies (AMCs) pay to distributors if the customer stays with a mutual fund (MF) scheme.
After the ban on entry load, distributors found themselves deprived of the money they made for wooing a customer to an MF scheme.
The entry load was as much as 2.25 per cent or more for equity schemes. Said a leading distributor, “Yes, there has been poaching. But, everyone is gaining and losing customers at the same time.”
The method is something like this. Approach a customer of a small broker and tell him he’s not being serviced properly. For instance, many customers were not aware of the ban on entry load and were carrying on with their systematic investment plans (SIPs).
The existing distributor, consequently, was earning his 2.25 per cent load every month from the AMC. Such customers are told by rival agents that shifting will ensure a saving of 2.25 per cent a month. And, those not paying the entry load are offered better service.
Then, the transfer letter signed by the customer is sent to the AMC. The AMC, in turn, issues a letter to the old distributor, saying the ‘broker code’ has been changed.
In fact, industry sources said some fund houses that sought a reason for the change, were sent transfer letters with the customer’s signature with an additional reason filled by the sales people.
However, many small players approached AMCs. They alleged that though they wooed customers, the trail commission was being paid to someone else.
Faced with a serious problem, AMCs approached Amfi for a solution. The circular, issued on May 7, mandated that fund houses need not pay trail commission to either the old or the new distributor. Instead, the amount should be kept in a separate account and used for investor education.
Said Rajeev Deep Bajaj, vice-chairman and managing director, Bajaj Capital, a leading MF distributor, “Though both old and new distributors will not be paid any trail commission, how does the investor gain? He has to pay anyway.”
Fund houses, on their part, said the interest among distributors to bring new customers had come down substantially because of the entry load ban. And, poaching for trail commissions was only complicating matters, they said.
All for a price
Industry sources say to get access to customers of other distributors, data of fund houses have been up for sale. For instance, the database of customers in a new fund offer (NFO) was for sale for Rs 1 lakh. The database contained details like names of customers, their PANs, telephone numbers, addresses and amounts invested.
Distributors say such databases have existed for a while now. Said a leading distributor, “All distributors have access to such databases, which is why they are sold at throwaway prices in the market. Even the database of banks and depositories with names of high net worth individuals can be easily bought.”
