AMFI allows distributors to earn trail commission on switched AUM

In a best-practices circular released on Tuesday, the Association of Mutual Funds in (AMFI) India said distributors can now earn trail commission on assets under management (AUM) switched to them by investors. Previously, AMCs withheld this commission to discourage unhealthy competition among distributors. However, the industry body has stipulated a cooling-off period of six months.

Many young distributors were unhappy with the old rule, saying it forced distributors to redeem investors’ funds and switch to new funds, registered with a fresh ARN. Without this churn, the new distributor was unable to earn income on the funds. It didn’t benefit investors either.

The cooling-off period will put the brakes on AUM shifts. If the investor switches back to the old distributor within six months, the cooling-off period will be reset to the switch-back date. For example, if an investor switches from distributor A to B on 1 January and back from B to A on 1 March, the cooling off period is reset to 1 March if the investor switches again from A to B. At present, banks and national distributors account for a bulk of the mutual fund industry’s AUM of around ₹52 lakh crore.

“This will ensure that only genuine requests are likely to be initiated as there is no instant gratification for anyone in this,” said Amol Joshi, a mutual fund distributor and founder of PlanRupee Investment Service.

The circular also said, “The payment to the new (transferee) distributor shall be based on the lower of the commission rate (as applicable on the date of change of the distributor code) of the transferor and transferee distributor.” It also said any payments other than the trail commission, including incentives or commissions made on the account of change of distributor code, will not be allowed.

“There have been practical instances of distributors changing profession, the investor relocating to another city, or simply a break in the investor-distributor relationship. In such cases, the investor still wishes to see the portfolio managed by one entity, i.e. the new distributor. Servicing such a request was non-remunerative so far. This has been fixed by this circular,” added Joshi.