AMFI Allows Distributors To Get Trail Commissions For Asset Transfers; How Does It Impact Investors?

The Association of Mutual Funds in India (AMFI) on March 5, 2023, said that distributors are permitted to receive trial commissions from Asset Management Companies for asset transfers to them. Apart from this remuneration, it reiterated that mutual funds (MFs) should refrain from providing any other form of monetary or non-monetary incentives to their distributors for achieving sales targets foreign trips, gadgets etc. These commissions must be in monetary form, explicitly disclosed on the AMC website.

A trail commission is compensation paid by AMC to mutual fund distributors for the assistance, advice, and services they provide to investors as long as the investors stay invested.

How Does It Impacts Investors?

This decision comes in response to numerous appeals from Mutual Fund Distributors (MFDs) to reassess the existing norms governing AMFI Registration Number (ARN) transfers. Currently, these norms prohibit Asset Management Companies (AMCs) from compensating the new distributor with trial commissions when an investor transfers their assets to a new MFD. These erstwhile rules forced mutual fund distributors to redeem investors’ funds and switch to new funds, registered with a fresh ARN so as to earn commission.

Now as AMFI ordered AMCs can remunerate distributors with trial commissions if a client opts to transfer their assets from one distributor to another, it will promote competition in the industry.

From an investor perspective, this policy change offers them more flexibility in selecting distributors and may stimulate healthy competition among distributors. Now they are forced to provide superior services to attract and retain investors because their peers may attract investors with better service. Also, investors switching distributors can get better services without incurring additional costs.

To prevent unfair competition, AMCs are only permitted to disburse trail commissions after a cooling-off period of six months from the date of asset transfer by investors.

"In respect of change in distributor/ ARN code initiated by the investor, the AMCs may consider making payment of trail commission to the transferee distributor after a cooling off period of six months from the change of distributor code in the unitholder database," AMFI said.

Further, It said that the payment of commission to the new (transferee) distributor would be based on the lower commission rate of the transferor and the transferee distributor.

Other Guidelines

Further, AMFI stressed that AMCs are strictly prohibited from offering any other incentives, including gifts, vouchers, or entertainment such as foreign or domestic trips to distributors. It said that it came upon a sales promotion campaign on WhatsApp where such trips were offered in return for a certain amount of subscriptions in select mutual fund schemes.

Any deviation from these guidelines will attract disciplinary action, including the suspension or termination of registration of the distributor.