Fund houses unclear on trail commissions

The distribution of trail commission when an investor shifts between distributors of mututal funds is not clear, say fund houses.

The Securities and Exchange Board of India (Sebi) has asked Asset Management Companies (AMCs) not to compel an investor to get a no-objection certificate (NoC) from a distributor for such a shift.

Trail commissions are presently as high as 1.7 per cent, thanks to the entry load ban which got effected from August this year. AMCS have had to increase these to ensure distributors’ interest is taken care of.

“It is not yet clear how to go ahead with payment of trail commissions once an investor changes his/her distributor. No distributor would like to lose its revenue flows by letting investors go away,” said the chief executive officer of a foreign fund house.

Fund market trackers say it is a contentious issue, though ideally the trail commissions should go to the new distributor. Another CEO, who wished to remain anonymous, said, “In case, commissions shift to the new, what about the costs incurred and effort put in by the existing distributor in attracting the investors?” He felt trail commissions on the incremental investment should go to the new distributor and the existing distributor could continue to get the commissions on the initial investments.

Mutual fund distributors are also unclear. “Though an investor is moving solely because of the better services being offered by other distributors, what would happen in case the client redeems money?” asked the head of a domestic brokerage.