Another potentially good move that has been messed up by SEBI due to thoughtless execution is permitting investors to switch distributors without obtaining their consent. Investors were permanently tied to their original distributors because mutual funds paid them a trail commission. This has triggered a war among banks and IFAs to grab clients and their investment by stealth in order to get access to free trail commissions. In fact, a back-check by two large mutual funds (UTI and DSP BlackRock) is understood to have revealed that a majority of investors don’t even realise that they are transferring an income stream when they sign a form to consolidate or update their existing mutual fund investments.
There is no easy solution to the trail commission mess. On the one hand, it would be unfair to stop investors from walking away if a distributor offers no follow-up service; but it is equally unfair to offer trail commission to a new distributor who had done nothing to facilitate the investment decision.
Technically, trail commissions were meant to ensure that distributors did not encourage churning of portfolios merely to earn a commission on new investment. If trail commissions are scrapped, that is what will happen. Since SEBI failed to come up with a thoughtful solution, maybe the industry will respond and offer a workable alternative. If not, the fund industry will continue to sink while SEBI stands by and waits for it to learn to swim. As one fund manager said, “SEBI set out to fix bank distributors, but its actions have only made them stronger. They will rip off investors even more and the only loser will be the fund industry which will see drastic erosion in AUM (assets under management).”