The industry body will decide whether new distributor gets the trail if the existing distributor voluntarily opts out of MF distribution business
Mumbai: Should the new distributor be entitled to trail if the existing distributor voluntarily steps out of business? AMFI is said to be considering this proposal.
The current rule does not allow the new distributor to get trail commission if investors decide to change their distributor. Neither the new nor the old distributor is eligible to get trail. This rule was brought in to stop unnecessary transfer of assets between distributors for trail commission.
According to industry experts, the number of distributor change cases was high earlier when the new distributor was entitled to get trail. Some IFAs had even accused large distributors of poaching their clients.
“It has been observed that there has been tremendous increase in the trend of receiving requests for change of distributor and the data at R&TAs has revealed that the same has reached to an alarming situation,” states the AMFI circular dated 07 May, 2010.
According to sources, one of the online distributors has put in a proposal with AMFI to tweak this rule so that the trail goes to the new distributor. The distributor has suggested that all past business generated by the old distributor be given to the new distributor.
“If AMFI allows this to happen, it will encourage investors who are aware about trail commission to ask for pass back. It may lead to client poaching,” says a source privy to this development.
In order for the new distributor to get trail commission out of the business generated by another distributor, the new distributor has to redeem and then reinvest the entire AUM. This practice amounts to churning.
According to some, if AMFI were to accept this proposal, it will lead to violation of SEBI rule. The SEBI rule says that the unused trail commission should be utilized for investor education activities.
Some distributors welcome this proposal. “If I am servicing a client and a previous distributor has gone out of business then the trail should be given to the new distributor if it is mutually agreed upon by both. But AMFI needs to first confirm that the previous distributor has indeed gone out of the business. The number of distributors has gone down since the introduction of KYD rules,” says a Mumbai based financial planner.
Are you in favour of paying trail to the new distributor? Or should the trail be used for investor education purpose? Do give in your feedback.