AUM Transfer Norms: What It Means For Mutual Fund Distributors    Apr 11, 2019


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If investors are unhappy with their mutual fund distributor (for any stated or unstated reason), they find a new one and replace their existing distributor. That's the harsh reality.

In fact, it's entirely possible that some of your existing clients had issues with their previous mutual fund distributor/agent. As they say, one person's loss is another's gain.

What happens when an investor initiates a transfer of AUM?

The distributor loses a precious client...

And as we all know, in today's world, losing a client is as good as losing a valuable asset.

Nonetheless, when it comes to commissions, the industry's best practices protect a person or an entity that initially garnered business (built the AUM). Therefore, when investors initiate a change on their mutual fund distributor, the new distributor gets commissions only on the fresh business. This practice discourages one distributor from poaching the clients of another.

The Association of Mutual Funds in India (AMFI) best practice guidelines prohibit AMCs to pay any trail commissions on earlier business to the transferee. The only exception to this rule is when the transfer of AUM happens due to the voluntary cessation of business of an existing mutual fund distributor.

The practice guidelines pertaining to change of distributor code differ depending on who initiates the transfer of AUM-investor or the distributor. And if it' is the distributor, under what circumstances has the change been initiated.

AMFI Best Practice Guidelines Circular 135/BP/43/2013-14 dated January 22, 2014 deals with topics concerning the transfer of AUM. With changing times AMFI has decided to make some modifications to its best practices guidelines. For this purpose, AMFI released another circular AMFI Best Practices Guidelines Circular 135/BP/78/2018-19 on March 26, 2019.

The new circular suggests no changes in the practices guidelines when investors initiate the transfer of AUM. But, AMFI has modified some guidelines when the mutual fund distributor chooses to discontinue the relationship with the client (under same distributor code) and request a transfer to another code.

When a distributor initiates the transfer of AUM...

As per the old guidelines, distributors could initiate the transfer of AUM to the online platforms of new distributors. AMFI has modified practice guidelines disallowing such transfers.

In other words, the transfer of AUM on request of a distributor won't be affected if the distributor is going to transfer AUM to an online platform. Subsequently, the latest AMFI circular excludes all guidelines incidental to such transfers.

Hence, now as per the newly revised clauses of the AMFI's best practice guidelines, an existing distributor can initiate change in distributor code (i.e. a new distributor) only in the following circumstance:

  1. Change in name / legal status of the distributor (such as an individual mutual fund distributor converting his mutual fund distribution business to a partnership firm, a partnership firm converting itself into a Limited Liability Partnership (LLP), a private limited company converting itself into a public limited company or vice-versa;

  2. Merger / acquisition / consolidation / transfer of business / new code acquired within the same group in case of non-individual distributors;

  3. Transfer of AUM / consolidation initiative within the same family / close relatives in case of individual distributors; and

  4. Transfer of business by individual distributors.

Further, AMFI best practices guidelines state that a request for a change in distributor code may only be initiated by a distributor whose ARN is valid, who is KYD compliant, and has furnished all the self-certification due from him on the date of the request.

The recent circular has offered further clarification on this point. A distributor who has surrendered his valid ARN to obtain a fresh one can request a change in distributor code provided he applies for the transfer of AUM within six months from the date of cancellation of ARN.

The old best practice guidelines accorded the payment of commissions to the transferee (new distributor) only on valid assets, i.e. where commissions would have been lawfully payable to the transferor (old distributor). However, such payment of commission on transferred assets could be released only on cancellation of old distributor's ARN.

The new circular makes an exception to this, by allowing the payment of commission to the new distributor also when the old distributor becomes a sub-distributor of the new distributor to service clients, and hence retains his/her ARN.

In all such cases, the trail commissions payable to the new distributor shall be lower of the rates applicable to the old distributor and new distributor.

When the transfer of AUM happens due to the voluntary cessation of business of existing distributor...

According to the old guidelines, the new distributor, upon voluntary cessation of business of an existing mutual fund distributor, was entitled to trail commission on the business done by the old distributor from prospective basis at the same rate at which the commission was paid prior to the transfer of the said asset.

As per the modified best practice guidelines, the new distributor shall receive trail commissions on a prospective basis on the business done by the old distributor, at lower of the rates applicable to the old distributor and a new distributor after complying with the requisite formalities. This might help AMCs reduce their expense ratios.

To conclude:

The modifications in the AMFI Best Practices Guidelines offer solutions to the genuine concerns distributors face in the ever-changing business environment.

Instead of focusing on acquiring existing customers of the other mutual fund distributors, it would be sensible and more rewarding for mutual fund distributors to acquire new prospects by following high fiduciary standards and ethics, which in turn can earn you the trust of investors/clients and ensure that they don't shift to another mutual fund distributor.

Author: PersonalFN Content & Research Team

This article first appeared on Certified Financial Guardian.  


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