7.7 Distributors versus Investment Advisers, Nomination Facilities and Change of Distributor

Distributors and Investment Advisers Are Different Regulated Activities

Both talk to investors about mutual funds. The regulatory treatment is entirely different, and the boundary is examined regularly.

The single most examinable rule is the separation requirement: an individual, and the group or family to which they belong, may not provide both distribution services and fee-based investment advice to the same client. A person must choose which side of the line to occupy for a given client. This exists to stop an adviser charging a fee for supposedly independent advice while also earning commission on what that advice recommends.

Advice incidental to distribution is permitted. A distributor may and should explain schemes, assess suitability and recommend. What a distributor may not do is charge the investor a fee for that advice. Fee-for-advice is the activity that requires SEBI registration, not the giving of advice as such.

Nomination Facilities for Distributors and Payment of Commission to a Nominee

A distributor's trail income is an asset built over years. If the distributor dies, that income would otherwise simply stop, leaving the family with nothing from a book they may have helped build.

AMFI addresses this through a nomination framework:

• Every AMC provides a nomination facility to individual distributors at the time of empanelment, as a uniform industry practice. The nomination is registered at fund-house level, so a distributor empanelled with several AMCs must nominate with each.
• On the distributor's death, the nominee — or the legal heir where no nominee is registered — is entitled to receive trail commission on the investments already mobilised by the deceased distributor, until the assets under that ARN become nil.
• Two conditions apply: the deceased distributor's ARN must have been valid on the date of death, and commission payment or the ARN must not have been under suspension by AMFI at that time.
• Trail is payable to the nominee on systematic investment plan instalments as well, under long-standing AMFI guidance.
• The nominee or legal heir is entitled to trail on the pre-existing assets without holding an ARN, but to continue in the business — to service those investors, mobilise new assets or transfer the assets to their own ARN — they must obtain their own ARN within six months.

The design is coherent: the family inherits the income from work already done, but continuing as a distributor requires being qualified as one.

Change of Distributor

An investor may move their folios from one distributor to another, or to direct. It is the investor's right and requires no permission from the existing distributor.

The commission consequences are governed by AMFI's best practice framework. The cooling-off period is 12 months, with effect from 11 August 2025 — material still describing a six-month period reflects the March 2024 position, which has been superseded.

• A twelve-month cooling-off period applies. The new (transferee) distributor is paid trail only after 12 months have elapsed from the date the distributor code is changed in the unitholder database.
• The rate payable is the lower of the transferor's and the transferee's commission rate.
• If the code is changed back to the original distributor within the cooling-off window, the entire 12-month period resets from the date of reversion, and the lower-of-the-two rule applies again.
• No payment of any other nature, including incentives, may be made on account of a change of distributor.

Worked example. An investor changes the ARN code from Distributor A to Distributor B on 25 August 2025. Distributor B receives no trail until 24 August 2026. If the investor reverts to Distributor A on 25 June 2026, the clock resets and A must wait until 24 June 2027.

The Consent and Alert Process

The 2025 revision also tightened how a code change is authorised, because the abuse it targets is a large distributor pressing clients to move rather than an investor choosing to:

• A declaration form signed physically by both the investor and the new distributor is required; AMFI mandates wet signatures.
• The RTA sends the investor an SMS on the next working day after receiving the request.
• An investor who did not initiate the change must inform the RTA within 3 days.
• If no objection reaches the AMC or RTA within 11 days of the SMS, the change is processed, and an email confirmation is sent to the investor with both the outgoing and incoming distributors copied.

The position before 2024 was more severe still — the new distributor received nothing at all on transferred assets. The purpose of the delay, the lower-rate rule and the alert process is unchanged: to remove the financial reward for poaching another distributor's book, so that a transfer happens because an investor wants better service rather than because a distributor applied pressure or offered an inducement.

Moving to Direct

An investor may also change from a regular plan to a direct plan. This is treated as a switch: units in the regular plan are redeemed and units in the direct plan purchased. Two consequences the investor should be told about before acting:

• It is a redemption for tax purposes, so capital gains arise.
• Any applicable exit load may be triggered.

A distributor asked about moving to direct should state both plainly. Concealing the tax consequence to retain the assets is a conduct breach; failing to mention that the direct plan exists at all is also one.