The Securities and Exchange Board of India’s (Sebi’s) move to ban entry load on mutual funds (MFs), in spite of being an investor-friendly step, has created a problem for smaller investors.
With a number of independent financial analysts (IFAs) shunning MF distribution, investors with small portfolios are finding it difficult to change distributors in the absence of no-objection certificates (NoCs) from the existing distributors.
“We have been getting a number of applications from clients who want to switch to our platform because their distributors or the IFAs are not servicing them anymore. Due to the ban on entry load, the income of several IFAs has been hit and they do not find it profitable to service smaller clients. In such a scenario, it has become difficult for clients to switch their investments as AMCs (asset management companies) are not accepting applications without NoCs,” said Maju Nair, head of mutual fund distribution at Sharekhan.
This is despite the Association of Mutual Funds of India (Amfi) asking AMCs to withdraw this clause. However, fund houses have ignored Amfi’s September 2007 circular, saying that this is not mandated by Sebi.
“The regulator has been active in empowering investors. But, it is the right of an investor to choose his distributor or agent. The NoC clause acts as a deterrent. AMCs are co-operating because many of them have strategic alliances with distributors. A number of agents consider MFs an annuity business in which they will continue to get trail commission even if the quality of service is diluted, which is not the case. Distributors and AMCs have been misusing the clause due to lack of regulation,” said Deepak Sharma, chief executive, Sarthi Wealth Management Consultants.
The main reason due to which distributors refuse to issue NoCs is trail commission. Trail commission is small ongoing amounts paid to advisors in the years after you buy the investment. After losing the 2.25 per cent entry load, distributors do not want to give up the trail commission, which is 0.50-0.75 per cent of the prevailing investment value and is paid annually.
Also, some AMCs, having allowed investors to switch distributors, are not willing to pay trail commissions to new distributors, say industry sources.
The NoC clause was introduced to stop large customers, mostly high net worth individuals, from changing their agents frequently on the basis of payments received from them. During the entry load regime, a number of IFAs attracted clients from banks by promising them some payouts.
“We have allowed customers to change distributors but are not paying brokerage or trail commission to the new distributor. Amfi is working on the issue and has sought our feedback. It may come up with something concrete,” said the chief marketing officer of a bank-owned mutual fund.
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