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IFAs miffed by growing transfer of assets under management

An increasing number of HNIs are openly bargaining with fund distributors to get a share of trail commission

The confusion over accounting of trail commissions continues to rattle the mutual fund industry. On the one hand, there was a clear need to stop the practice of tying investors to a specific distributor in perpetuity or to ask them to get a no-objection certificate in order for them to shift to another distributor.

In late December, the Securities and Exchange Board of India (SEBI) directed the Association of Mutual Funds in India (AMFI) to implement its own earlier decision that said that funds should pay trail commission to new distributors when the client has moved away from one distributor to another.

Moneylife Digital has reported earlier (see here) on the confusion arising over implementation of this rule without examining all the issues and consequences. It has led to a raging battle to transfer assets under management (AUMs) by hook or by crook. Distributors tell Moneylife Digital that investors are being asked to sign a scrap of paper where the fine print permits the transfer of their AUM to a new distributor; these sources say that banks have been especially active in obtaining such a transfer under the guise of consolidating investors' accounts.

With independent financial advisors (IFAs) reluctant to service small investors after SEBI scrapped the entry load, it has been a happy hunting ground for banks to get the business of such customers. Naturally, IFAs are outraged. They are especially angry at mutual fund companies that are in a hurry to accept and act on these requests to transfer AUMs. The game has shifted from serving the investor to running after trail commissions.

Moneylife had earlier reported that the chase for trail commission business is gaining traction among the largest banks and financial advisory firms like HDFC, NJ IndiaInvest and Prudent Corporate Advisory Services who are actively encouraging their team to snatch AUMs.

"Now I am getting threatening calls from high net-worth individuals (HNIs) saying that now that you are getting paid (trail commission), how much (of the commission) are you ready to part with me, or I will transfer the AUM. I have no option but to agree, otherwise he (the HNI) will move to some other broker," says an IFA.

But many agree that who deserves the trail commission is the moot question. When an investor who has bought a scheme from distributor A and transfers it to B, the general understanding is that B will begin to earn the trail commission. And hence the rush to get investors to sign a transfer form. But B has done nothing to earn that investment, so some IFAs themselves admit that it seems unfair that B has to be paid. On the other hand, A cannot continue to earn the trail when the investor has moved away. So should trail commissions be abolished when an investor shifts to another distributor? Some agree, even though it would deal yet another blow to the IFA industry. The solution is obviously to find another way to compensate advisors.

What is worse, the only beneficiary in all of SEBI's actions seems to have been banks and bank distributors. Was this the end goal that SEBI had in mind when it scrapped entry loads? And shouldn't the regulator have examined the issue of trail commissions fully over the past couple of years, when investors had been complaining about not being able to switch IFAs?
Top SEBI officials have taken the position that the industry will learn to swim and find a solution. But as things stand, mutual funds are only sinking with large sums of money flying out of the industry. That result defeats the government's stated objective of encouraging retail investors to participate in the capital market through mutual funds. Isn't SEBI completely out of sync with this objective?
 

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COMMENTS

sudhir

5 years ago

to mr. vijay kumar,
the ADAG group is not highly trustworthy.

Bosco Fernandes

6 years ago

Every action taken by regulators must keep long term perspective in mind and must be in the best interest of all

MANISH LAKHANI

7 years ago

IF THE SHIFTING IS NOT ALLOWED THEN THE DISTRIBUTORS WILL TELL INVESTORS TO REDEEM AND AND INVEST IN THENEW DISTRIBUTOR CODE AND THISWILL LEAD TO LOT OF REDEMPTIONS UNNECESSARILY AND HARMFUL FOR THE INDUSTRY GROWTH SO LET THE INVESTOR DECIDE WITH FROM WHICH DISTRIBUTOR HE WANTS SERVICE AND THE TRIAL COMMISSION TO BE PAID TO HIM ULTIMATE DECISION SHOULD BE WITH THE INVESTOR AND IF ANY INVESTOR COMPLAINS THAT THE SIGN IN FORM IS TAKEN WITHOUT HIS KNOWLEDGE THEN THE ACTION CAN BE TAKEN AGAINST THE DISTRIBUTOR AND PENALTY OR F RECOVERY OF COMMISSION CAN BE DONE BYTHE AMC CONCERNED WHY THE INVESTOR SHOULD SUFFER IF GENUINLY HE WANTS SERVICE FROM ANOTHER DISTRIBUTOR IF THE OLD DISTRIBUTOR ISNOT GIVING SERVICE THEN THE INVERSTOR HAS EVERY RIGHT TO CHANGE THE DISTRIBUTOR AND THE NEW DISTRIBUTOR SHOULD GET THE TRAIL COMMISSION FOR HIS SERVICES

Vijay Kumar

7 years ago

I have redeemed many mutual funds on 10th March 2010 here is the list

sundaram selcet focus - sip
Religere psu
Tata p/e
reliance growth
Reliance Natural Resource
SBI Midcap
Tata infracsture
Birla ,95
SBI Multicap
HDFC multicap

I have received all the DD/ Cheques/Warrents and the money has alredy come to my account, except Reliance.

Till today i haven't got the DD and once I get it, it will take 3 more days to get the money. We are really disappointed with Reliance.

Next time I will never suggest Reliance to any one.

IFA

7 years ago

The hasty step of abolition of entry load & with that abolition of upfront brokerage payment to MF Distributors is one of the hasty decisions implemented & one of the biggest blunders by SEBI. SEBI has done this as a 1-way step without implementing this step in a phased e.g. within 1 year timeframe. Also, SEBI has done this without making sure to educate investors that NOBODY except for NGOs & Saints give any free service anywhere in this world. EVEN AMCs & SEBI is not giving any free service to investors. Even, SEBI is being funded thorugh & SEBI Officials including Mr. Bhave are paid salary thorugh taxpayers' money. Hence, investors also need to pay advisors for each & every service rendered by them & should not expect any free service. But unfortunately, this has NOT been done by SEBI.

Vinayak Kulkarni

7 years ago

Dear Anurag Bhasin,I didn't pass intentionally any comment on bank's marketing(Cheating their customer?) of mutual funds.I have mentioned Two specific points i.e. 1-Just passing AMFI / IRDA exam person is becoming so called Advisor.2-With some exception majority IFAs are involved in malpractices.
Other point highlighted is financial literacy.Unfortunately nobody is interested,neighter SEBI/MFs/Banks nor IFAs.With blaming watchdog is simpler process than changing attitude.

bhaskar mukherji

7 years ago

who is actually misselling?just go to a bank & the banker will force u to buy a mf or an insurance.and u to satisfy the banker, will purchase without knowing the details of the fund.then when the service part comes the banker will say, are yeh toh mf hai jaake unke paas dikhaiye.now the investor will start getting harassed by a chain of people. registrar will say the bank mandate is wrong, signature not matching etc.,also will come in the picture.analyse this situation mr bhave, the most idiotic officer. come to the earth,

ROOPSINGH

7 years ago

EVRY EFFORT OF MONEYLIFE IN REAGRD TO RAISING ISSUES RELATED TO INVESTING ARE HIGHLY APPECIATABLE-LOOKING TO SITUATION WHERE MOST OF OTHER MEDIA PUBLICATIONS ARE MOUTH SHUT-THE POINTS RAISED ARE GROUND REALITIES WHICH PEOPLE SITTING IN AC ROOMS NEVER CONCERNED-THEY JUST THINK THEY HAVE BEEN GIVEN POWERS TO ISSUE FATWAS LIKE TUGHLAKI FARMANS-IT SEEMS THEY ARE LEAST CONCERNED TO BURNING ISSUES ARISED DUE TO THEIR WRONG DECISIONS-THE FACT IS THAT''BADSHAH KO KAUN BOLE KE WOH EK NUMBER KA BEWKUF HAI''

A V Shah Rajkot

7 years ago

I congratulate Moneylife for highlighitng this issue in the interest of ifa and investors.
thanks again.

K N Swamy

7 years ago

I am really surprised to find that sebi has abolished entry load since last 6 months and IFA are compalining about it but not a single ifa has files petition in court.
sebi must be challenged in court for removing entry load.

DILIP MEHTA

7 years ago

SEBI HAS BECOME DICTATOR AND FASCIST BY ITS SEVERAL ACTS-BEING PORTRAYING ITSELF AS 'SUPREMO OF STOCK MARKET''BUT THE REALITY STANDS QUITE OPPOSITE-SEBI HELDS MEETING WHICH R NEVER PUBLICISED LIKE RBI OR LOKSABHA-IT MAKES CLOSED DOORS MEETING WITH UNKNOWN PEOPLE AND NEVER SPEAKS WHAT THE PARTICIPANTS EXPRESSES-LIKE WHO WERE PRESENT IN MEETING AND WHAT AGENDA WAS TO BE DISCUSSED-THE ONLY OUTCOME IS VARIOUS FATWAS WHICH R FOOLISH AND ILL INTENTIONAL TO INDUSTRY AND IFA'S-IF CHURNING WAS THE REASON FOR BANNING ENTRY LOAD-SEBI OFFICIALS MUST BE HANGED IN PUBLIC WHO ENCOURAGED CHURNING BY PERMITTING MONTHLY NFO'S BY AMC'S-INSTEAD WHOLE BLAME HAS BEEN GIVEN TO POOR IFA'S-THIS IS ALL CORRUPTION DONE BY SEBI PEOPLE TO MAKE NEW FATWAS-LIKE NEW FATWA OF ATMS'-THESE FOOLS WHO R TAUGHT BY AMC' PROFESSIONAL TO ISSUE FATWAS DO NOT KNOW-ATM'S R ALWAYS FULL FOR MONEY TENDERING-THEN WHAT WILL HAPPEN IF PEOPLE WILL QUE UP TO LEARN abc OF MF,JUST SEE FATE OF FATWA OF TRADING THROUGH BOLT-IT SEEMS THAT ONLY REASON FOR SUCH ACTS IS NOT SERVING INVESTORS BUT SERVING FEW TOP BRASSES OF MF INDUSTRY.

MANAV

7 years ago

MR V S KULKARNI MUST REMEMBER THAT MOST OF BANKS USE CASH CREDIT FACILITY AS GATEWAY FOR PROCURING INSURANCE AND MF BUSINESS FROM CLIENTS FORCEFULLY-THERE R THOUSANDS TESTIMONY TO PROVE THIS-MOST OF CLEINTS OF IFA'S HAVE FOUND CLIENTS BEING FORCED TO TAKE INSURANCE AND MF FROM BANKS IF THEY WANT LOAN OR CREDIT FACILITY-WHERE R MORALS GONE MR KULKARNI?DONT BLAME IFA'S-THEY SERVICE CLIENTS AT DOORSTEP WITH LEAST FEES AND BEST ADVICE-BANKS WERE LARGEST CHURNING MACHINES WHICH IS PROVED BY HEFTY COMMISSIONS GIVEN TO BANKS BY AMC'S-IFA'S EARN BY SHEER HARD WORK-AND DEDICATED SERVICES-BUT THIS UNFAIR GAME HAS BEGUN BCOS TOP REGULATOR IS ITSELF CORRUPT AND SOLD OUT-SO WHATEVER IS CRIED WILL REMAIN UNHEARD-BUT SOME DAY ''PAP KA GHADA BHAREGA''.

MANAV

7 years ago

SEBI ka pap ka ghada bhar gaya hai(its sinful activities have begun to flow out of pot-just see todays news headlines of SEBI official caught with one crore in CBI raid-it seems this pampered organisation of finance ministry has become unresposible and unanswerable to none-sign of clear dicattorship-which ends with corruption and malpractices-thanks to CBI which made the skeleton to dig out-and it is surity that top most officials of SEBI have become corrupt after they became puppets to some vested interests of the industry leaders-bcos most of times-SEBI chief conducts closed door meeting with top brasses of industry without any information getting leaked on the agenda-and it is very secretly done without involvement of any retail investors or IFA's-this all dirty tricky game is clear indication of malpractices and corruption involved in SEBI officials-thats the reason some scriprs can go 130 times on listing day-oh god-u r too tiny in front of these self claiming gods sitting in SEBI.

Anurag Bhasin

7 years ago

Dear Sadagopalan,
you are qualified CFP , why hyou should worry about trail fees, you can easily charge your investors for your advise and services.
All IFA are not as lucky as you who gets mileage of appearing through articles.
Would you accept a investor who just want to invest Rs.10,000 .would you prepar a financial plan for him?

Anurag Bhasin

7 years ago

"With loyal & honest dedicated service with knowledge bank do get good clients who are not interested in your part of brokerage"
I have strong objection on above quote of V S Kulkarni.
RM of Banks are one of the worst category where what is important is only their "target" and not the investor.
more than 50% of the bank a/c holder/investor do not know-how much charges debtited to theri a/c.
axis bank is still fighting over reversal of advisory fees which they charged to invesotr without informing while "SELLING"(I mean selling not advising)
Banks can easily sell ULIP to a 70 yr old person but IFA can not because he has to face investor eye to eye.
All IFAs are not as beautiful as female RM of bank(No need to explain further) and smart like Bank's RM.
Bank RMs are not taught product knowledge but soft skill how to misrepresent products.

Bias is still up

As suggested last time, we got a weak rally. The market trend is still up. Watch 16,500 on the Sensex

Last week, we had said that we expected a weak rally under which the Sensex  will reach about 16,500 and possibly to 17,000 before pausing or going down again. There was a rally and it was weaker than we thought. It stopped at 16,200. At the end of the week the Sensex gained 237 points. The trend is still up. 

The market perked up following strong global cues after debt-stricken Greece was rescued. However, fears of a possibility that the government may start to unwind its fiscal stimulus in the forthcoming budget continues to weigh on market sentiments. On Monday, 8 February 2010, the Sensex was up 20 points from Saturday’s close, ending the day at 15,936 while the Nifty closed at 4,760, up 3 points.

According to EPFR Global, that tracks foreign inflows, emerging market equity funds lost $1.60 billion in weekly withdrawals, the biggest outflow in 24 weeks. The report further added that investors pulled out almost $1 billion from global emerging market stock funds in the week ended 3 February 2010, the most in more than a year.

On Tuesday, 9 February 2010, the Sensex shot up 107 points to close at 16,042 while the Nifty closed at 4,793, up 32 points. However, on Wednesday, 10 February 2010, the Sensex declined 120 points from the previous day’s close. During trading hours, Subir Gokarn, deputy governor, Reserve Bank of India, said that he was not in favour of targeting inflation and also said that domestic growth drivers would depend on significant increases in capital inflows.

Finance minister Pranab Mukherjee said that the economy could grow at around 7.75% in the 2009-10 financial year ending in March. He said that with latest GDP data for 2009-10 indicating 7.9% growth in the second quarter, the growth outlook for the next two quarters and for the whole year is expected to be in the higher range of most predictions for the Indian economy.

C Rangarajan, chairman of the prime minister’s economic advisory council, said that the government could provide a roadmap for exiting from the fiscal stimulus when it presents its budget on 26 February 2010. He also said that the stimulus exit should be a gradual transition. The RBI will watch the price situation before taking any action on the monetary front, he said.

According to reports, commerce secretary Rahul Khullar said that the finance and commerce ministers are scheduled to meet later in the week to take a decision on the continuation of the stimulus package for exporters. He also stated that exports grew 13% in January 2010 over a year ago.

On Thursday, 11 February 2010, the Sensex shot up 230 points, while the Nifty closed up 70 points. The stock market was closed on Friday, 12 February 2010, on account of Mahashivratri.

Meanwhile, data released by the government showed that annual food inflation rose for the third straight week. The food price index rose 17.94% in the 12 months to 30 January 2010, higher than an annual rise of 17.56% in the previous week. The fuel price index rose 10.44% and the primary articles’ price index rose 15.75%.

After trading hours on Wednesday, the central bank said that it would introduce (from 1 April 2010) a new base rate to price credit more transparently, replacing the existing benchmark prime lending rate (BPLR). The apex bank said that the base rate will be the new reference rate for determining lending rates. According to draft guidelines, the RBI has proposed that the actual lending rate charged to borrowers would be the base rate plus borrower-specific charges including product-specific operating cost, credit-risk premium and tenure premium. The base rate will be applicable for all new loans as well as for old loans that come up for renewal. Existing borrowers who want to switch to the new system before the expiry of their contracts should agree on the revised rate structure with the banker, it said. The base rate could also serve as the reference benchmark rate for floating rate loan products, apart from the other external market benchmark rates, the RBI said.
 

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Street Beat: Sugar-coated

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