BackDid You Know ? | No agent gets trail commission if investor changes agent
Did You Know ? | No agent gets trail commission if investor changes agent
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Why it is so
One of the reasons why the mutual fund (MF) industry resisted allowing unitholders to change agents was the trail commission. Also called loyalty bonus, trail commission are paid by fund houses to agents for as long as investors stay invested. Typically, the commission is about 0.2-0.4% of the prevailing value of the investment. When the Association of Mutual Funds of India (Amfi; MF industry’s trade body) asked MFs to allow investors to change brokers, there was confusion as to who will receive the trail commission. Should the old agent continue to earn the commission or should the new agent get it? There were reported instances that unscrupulous agents were luring gullible investors to get them to change their existing agents so that the new ones could get the trail fees.
The background
It started in September 2007 when Amfi asked MFs to allow their investors to change their agents in view of numerous complaints from aggrieved investors. Amfi said if investors are unhappy with their existing agents on account of poor quality of services, investors have a right to change agents. However, most MFs continued to ignore the Amfi request since Amfi is just a trade body and not a regulator.
The problem here was that MFs used to insist on a no-objection certificate (NOC) from the existing distributor. In other words, it meant that they would need to tell the agent directly that they wish to sack them; a task that was both tough and awkward. Amfi could at best advise, not impose, unlike the capital market regulator, the Securities and Exchange Board of India (Sebi).
Finally, in December 2009, Sebi issued a circular mandating all MFs to accept the Amfi circular and allow its investors to change their agents without insisting on a NOC. All you need to do is write a letter to your fund house and request for a change.
Who gets the trail
No one will earn trail commission in case MF investors shift agents. Soon after Sebi made its stand clear in 2009, Amfi came to a conclusion and clarified that neither the old nor the new agent would earn trail commission. This was largely to ensure that only genuine transfer cases go through and no agent should get an excuse to lure investors to change to be able to gobble up all the trail commission. The money thus saved will be retained by the fund house to be used for investor education.
-Kayezad E. Adajania
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