AN investor-friendly measure adopted by Association of Mutual Funds of India (AMFI) has put distributors in a spot. As prescribed in Amfi’s best practices, the repealment of no-objection certificate (NOC) for shifting to a new financial planner (a mutual fund distributor or agent, in this case) has left a hole in the earnings kitty of large distributors.
Amfi had amended the clause regarding the no-objection certificate in a bid to empower investors over unscrupulous distributors. Freedom for investors to choose their distributor will, over the long run, promote healthy competition as distributors are forced to raise their service standards to retain customers.
However, the new rule is also being used as a weapon to poach businesses of other distributors by hiring well-networked relationship managers working with established product distributors. The modus operandi is simple. Fund distribution, as a business, is predominantly dependent on relationship managers, who push fund products to their regular customers. It is very rare for investors to approach the distributor directly for fixing problems or meeting requirements at the investor end. All aspects of investments (that the investor has with distributor) is taken care of by the assigned relationship manager.
The problem for distributor starts when the relationship manager quits the job and joins a new distribution firm. As a result of stiff targets, the relationship manager is forced to poach clients of his previous organisation to meet targets in the new firm. According to sources in the fund industry, most investors, invariably, agree to change the agent. There has been incidents where, relationship managers in dire desperation also forge the signatures of gullible investors and seek change in distributorship. The request to change distributor is forwarded to the asset management company.
In both the cases, the distributor (with whom the investor has account previously) loses out on loyalty commission or trail commission. In addition to the 2.25% entry load, fund houses pay around 0.5% per year of current investment value, as trail commission to the agents, for the period the customer stays invested in the fund.
Amfi had amended the clause regarding the no-objection certificate in a bid to empower investors over unscrupulous distributors. Freedom for investors to choose their distributor will, over the long run, promote healthy competition as distributors are forced to raise their service standards to retain customers.
However, the new rule is also being used as a weapon to poach businesses of other distributors by hiring well-networked relationship managers working with established product distributors. The modus operandi is simple. Fund distribution, as a business, is predominantly dependent on relationship managers, who push fund products to their regular customers. It is very rare for investors to approach the distributor directly for fixing problems or meeting requirements at the investor end. All aspects of investments (that the investor has with distributor) is taken care of by the assigned relationship manager.
The problem for distributor starts when the relationship manager quits the job and joins a new distribution firm. As a result of stiff targets, the relationship manager is forced to poach clients of his previous organisation to meet targets in the new firm. According to sources in the fund industry, most investors, invariably, agree to change the agent. There has been incidents where, relationship managers in dire desperation also forge the signatures of gullible investors and seek change in distributorship. The request to change distributor is forwarded to the asset management company.
In both the cases, the distributor (with whom the investor has account previously) loses out on loyalty commission or trail commission. In addition to the 2.25% entry load, fund houses pay around 0.5% per year of current investment value, as trail commission to the agents, for the period the customer stays invested in the fund.
