2 cats and the Monkey: The Amfi story
There is an old story of 2 cats getting a piece of bread to be shared amongst themselves. Since the cats did not know how to share it, they decided to go to a monkey.
The monkey agreed to play the arbitrator. He breaks the bread into two pieces – then he finds one is bigger than the other – so he eats a little from that slice. That makes this piece smaller, so he eats a little from the other bread…..you can now guess what happened!
The monkey eats the whole bread!
For the mutual fund distributor there is a commission called the ‘TRAIL commission‘ – which comes from the N A V of the scheme. So it is the investor who is paying the trail commission to the DISTRIBUTOR. Today amfi has come out with a notification /clarification on who should get the trail in case of a ‘transfer of aum’ from one distributor to another. Many banks and other big distributors were supposed to be playing tricks to get Aum transferred.
So I have been SCREAMING that for a direct investor and for an investor who invests through a distributor there should be separate NAV. However this is not likely to happen. What happens to the TRAIL commission of the ‘Direct’ investor? Well the investor PAYS the trail…but it is kept by the mutual fund. Any accountant here, please help, I may be wrong..not sure.
However there was a new problem – if a distributor changed in the interim period what to do? AMFI has come out with a brilliant solution – the AMC pays not trail. Which means the AMC gets to charge the trail (remember all of us get the same N A V?). Why did this happen?
Simply because AMFI is not an industry body, it is a Manufacturer’s club. As a young A M C’s MD told me ‘a typical British Club with various classes of membership – Platinum, Gold, Silver, Earthen,…..
So now the old distributor and the new distributor both do not get the trail, even though the client pays it through the NAV, and the AMC gets to ‘spend it on investor education’. Congrats A M F I. I hope S E B I takes this with all seriousness and creates a fund into which this amount should be deposited AND GETS MONITORED BY N I S M.
I hope you still remember where we started…the cats and the monkey story!
http://www.dnaindia.com/money/report_no-trail-commission-if-distributor-changed-amfi_1380296
Srikanth
I don’t know whether to be offended by the comparison as a descendent of a monkey or as a mutual fund distributor – because I am both… 🙂
You are spot on with the allegory, however. I’m told that this was one more “gift” to the distributor community by the big banks who incentivized their salesmen to accumulate AUMs through any means that work.
This circular contravenes an earlier notification from SEBI that the trail should be paid to the new distributor. However, I can’t imagine AMFI would have sent this out without the blessing of SEBI.
One more episode in the soap opera that the MF industry in India has become…
Srikanth Matrubai
Well, the SEBI has done the worst thing, (of course, as expected)., it has banned Trail commission altogether!!
It has taken the easy way out.
Throw the baby out along with the water!!!
Who will now service the investor who does not want his relationship to continue with his old Advisor???
Barath Kumar
Repeated this process till all bread was exhausted then there was no bread left for the cats.