Fund distributors in a messy fight over trail commissions

Now that trail commission has started going to new distributors, banks and large distributors are scrapping over acquiring clients, which would soon land fund companies in a big mess

The dust has not yet settled on the trail commission issue and already fund distributors are gunning for each other to snatch clients.

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. Barely a month has passed and there is a new major issue as a consequence of the new rule. Since clients are now for the picking, it appears that some banks and fund distributors are aggressively wooing customers of other distributors in a bid to ensure commissions end up in their wallets.

An independent financial advisor (IFA), who spoke to Moneylife on the condition of anonymity, said that some entities are literally running an asset-under-management (AUM) transfer business. “HDFC Bank, NJ IndiaInvest and Prudent Corporate Advisory Services are running an AUM transfer business for the past one month. For instance, HDFC Bank pays 100 basis points (bps) as commission if a relationship manager gets new business. But if the manager captures the business of another, then he gets 150 bps. Clearly, the bank is encouraging its managers to capture existing AUMs rather than generating new ones. Prudent and NJ India have a team dedicated to transfer AUMs.”

The source also said that shifting to a new distributor will create a huge mess for the asset management companies (AMCs) and lead to fights between fund distributors. “The AMC will have to pay unnecessary registration charges. Plus, there will be a lot of back-office work. They will not benefit from it at all. This is not expansion of new business but snatching of each other’s business. It will only create a fight among us,” says the source.

The IFA also revealed that Templeton has an agreement with its distributor that it will continue to pay trail commission to the agent who first procured the business. It has a clause that says “trail commission shall be paid to the agent who has procured the application and put his rubber stamp.” How this squares with the new rule of paying commission to the new distributor is not clear.

The IFA is of the opinion that this stand should be taken by most of the AMCs but that they are afraid to speak anything against SEBI. “The bigger agents will capture smaller agents’ AUM and in turn will have a bargaining power with AMCs,” he added.

The confusion over trail commission has only been furthered by AMFI’s foot-dragging on the issue, instead of having an open debate on the issue. Moneylife had written earlier about how larger fund houses with vested interests and AMFI have been making last-ditch efforts to preserve the status quo. (see here, here and here). The friction, frustration and mess caused by client-snatching will again lead to a rethinking on the issue of trail commission. This time, it could well be that the trail commission does not go to anyone when a client shifts. AMFI, as the industry mouthpiece, should lead the debate. However, for that, a change at the top is essential.

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    Pereira Evarist

    1 decade ago

    Bhave has created an opportunity for his friend bharve with help from,birla,icicipru and so on.This has been cooked for the last 2 years.only now it has been in the public bleed the small distributor and small AMCs

    Ashit Kothi

    1 decade ago

    One solution would be to divide the trail commission in two part - one for the introducer and second for the servicing advisory. How practical it is from Fund Houses and Advisor's point of view is a matter of debate. As for client going to another advisor, it is not just the services which decides this change of advisors which everybody knows but noone wants to talk about. Otherwise why would any distribution house will have a team dedicated to acquiring existing business of other distributors.

    Nobody talks about deepening and expanding the market.

    Shashi Gupta

    1 decade ago

    The trail should go only to the introducer advisor, as he is the person who brought new business, and not the new broker/advisor

    Jigar Parekh

    1 decade ago

    it's nature's law....

    Survival of Fittest


    1 decade ago

    It appears from the above report that big distributors especially banks are gunning to kill the small fishes like IFAs. This would lead huge unemployment of lacs of IFAs . Although banks have basket of products and huge set up to back up with they are unfairly trying to snatch others food and AMFI big shots are playing puppets in their hands. These people should be shown the dooors immediately and bring in transpaerent people at the top.

    dheeraj kapoor

    1 decade ago

    I will say only one thing that SEBI chief had done wrong to the small distributors by eating away their money, and I will only Pray to God that He should live upto 90 years with no one to look after him and should die one day worst then a Street dog.


    1 decade ago

    Reference to the above, to whom shold AMC have to pay trail, is it not obvious that the advisor who serve the client will get the Trail ? If a client change the advisor it is only because of either Service or Advise he likes of new Advisor. I found almost all the client who change the advisor only because of Advise or Service.Oterwise he has no any interest to change the Advisor,


    1 decade ago

    Dear IFA friends-we r just commenting to deaf and blind authorities-so much said and criticised-but vested interests of few r taken care by SEBI with belly of IFA"s-have we ever seen any client approaching SEBI(the self proclaimed supreme authority for INVESTORS INTEREST-but actully serving interets of few hands)-had ever any retail client complained SEBI of abolishing entry load?i guess this is all done by GOVT OF INDIA to get huge money in pension funds-which wud lie in hands of corrupt beurocrats to be used in most of commission earning projects-peoples private money will go straighy in hands of govt when MF schemes fail-and SEBI is implementing this hidden agenda of our Govt-MERA BHARAT MAHAN-sirf kehne ke liye-in reality MERA BHARAT MAHAN HAI corruption or garbage ke liye-


    1 decade ago

    No upfront, No security of trail, no advisory fee from investor client. - for whom the small IFA is working. SEBI has become a puppet in the hands of few vested interest holders - FPSB - who is encashing on the hoopla. Industry & invstor both stand to lose. Fund houses are already bleeding.

    AMFI is mute spectator. It never took up any of the causes of MF advisors - e.g direct deduction of 10.3% service tax on MF Commission even from small IFA having total brokerage revenue of less than 10 lacs - the basic exemption limit for service tax. while insurance agents pay no service tax at all. GOD HELP OUR COUNTRY AS THE LOBBYING ALWAYS WIN IN THE LONG RUN.

    Max New York Life to invest Rs200 crore in two months

    Max New York Life Insurance plans a capital investment of around Rs150-Rs200 crore during this quarter

    Private insurer Max New York Life said on Tuesday that it plans a capital investment of around Rs200 crore by March this year to meet growth plans, reports PTI.

    "Depending on growth, we do expect capital infusion of around Rs150-Rs200 crore during this quarter," Max New York Life Insurance's chief executive officer and managing director Rajesh Sud said at the launch of its child nurture programme ‘I-Genius’.

    During the current fiscal, the company has made a small capital investment of about Rs2 crore, he said, adding that the paid-up capital stands at Rs1,784 crore.

    Asked about the business outlook, Mr Sud said that it is picking up and the industry is expected to witness a growth of 15%-20% in the next fiscal.

    Max New York Life expects better-than-average industry growth, he said, adding that the company has collected Rs1,365.79 crore in the first nine months of the current fiscal.

    The company, that commenced operations in 2001, expects to break even by 2011, he said. It has 715 offices across the country.

    Talking about the child campaign, Mr Sud said that the programme intends to support talent development of children by identifying and rewarding those who display all-round skills, he said.

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    ICAEW felicitates Deepak Parekh with outstanding achievement award

    HDFC chairman Deepak Parekh will be awarded the prestigious ICAEW award for his contribution to the finance and accountancy profession in March

    Housing Development Finance Corporation Ltd (HDFC) chairman Deepak S Parekh has become the first international recipient of the Institute of Chartered Accountants in England and Wales' (ICAEW) Outstanding Achievement Award.

    ICAEW in a release said that Mr Parekh received its accolade for 2010 in recognition of his outstanding contribution over many years to the finance and accountancy profession.

    "Deepak Parekh's achievements and the breadth and depth of his influence on the financial sector and business in general in India are phenomenal. Wherever business acumen, experience, insight and intelligence are required, his name is guaranteed to appear at the top of the list. It is a privilege to be able to recognise the contribution he has made to the international accountancy profession as the first international recipient of the outstanding achievement award," said Sir Michael Lickiss, chairman of the selection committee, ICAEW.

    In his acceptance speech, Mr Parekh said, "It is an absolute honour. I am overwhelmed and delighted to be the first international recipient of this prestigious award. I have always been passionate about finance & accountancy and nothing can be more gratifying than receiving my maiden award in this field from my alma mater, the ICAEW."

    The award will be presented at the ICAEW Annual Dinner at Chartered Accountants' Hall in London on 2 March 2010.

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