Sucheta Dalal :Fund distributors in a messy fight over trail commissions
Sucheta Dalal

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Fund distributors in a messy fight over trail commissions  

February 2, 2010

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.
 Ravi Samalad and Sanket Dhanorkar

-- Sucheta Dalal