For the past few years, it has been tough being a mutual fund (MF) distributor in the Rs 16 lakh-crore industry. With the Securities and Exchange Board of India (Sebi) on a mission to change the rules of the game, little time has been given to this group to settle down.
Sebi’s latest salvo is a consultation paper introduced on October 6, which proposes amendment to the Sebi Investment Advisors Regulations, 2013. The most important proposal is one that will lead to the segregation of the advisory function from distribution. That is, distributors (also called agents or independent financial advisors) will not be able to give any advice to investors.
Earlier, they were allowed to offer advice “incidental to the sales processes”. In case distributors want to give advice, they need to become registered investment advisors (RIA) within three years. If they fail to make this transition, their function will be reduced to distribution and execution only.
The MF industry believes the advisory model will be the future and will curb mis-selling. But the model is yet to take off in India. There are some worries as well.
A K Narayan, ex-president, IFA Galaxy, an association of independent financial advisors (IFAs), voices the same concern regarding payment for advice: “If you ask customers for a separate cheque as payment for advice, they say this is not the general practice.” IFAs also argue that becoming an advisor may not be a sustainable proposition.
Another worry is that distributors may shift to industries where the rules aren’t so stringent, and commissions are better. “These rules will apply only to capital market intermediaries. What if these intermediaries decide that complying with MF regulations has become too difficult, and migrate to unit-linked insurance plans, term plans and NPS, where they will be free to offer advice and distribute products?” asks Aashish Somaiyaa, CEO, Motilal Oswal AMC.
Many are afraid that a harsh push by the regulator may hurt the industry because about 10 million investors are being served by distributors. Says Vijay Venkatram, managing director, Wealth Forum: “I believe RIAs as a proposition must be encouraged. But the manner in which Sebi is proposing to do this – by dumbing down distribution to merely describing product features in an attempt to encourage migration of distributors to RIA – is a dangerous gamble.”
According to him, if only a fraction of distributors eventually migrate to RIA, the industry will need to think how millions of investors will be served by distributors who cannot give any form of guidance. While there are an estimated 10,000 active distributors, there are only 486 RIAs. Anyway, the penetration of MFs in India is among the lowest globally.
Despite Sebi’s allowance of a higher commission for raising funds from outside B-15 cities, MFs constitute only seven per cent of investors’ financial holdings – the lowest among leading nations in Asia, according to a report by EY. In comparison, China has 11 per cent and Japan 30 per cent.
On its part, the distribution community is up in arms against Sebi already. They have approached the Securities Appellate Tribunal (SAT) against the regulator’s decision that commissions received by them must be revealed in the consolidated accounts statement sent to investors.
In contrast to distributors, financial planning professionals are looking at these proposals as a shot in the arm for their profession. Says Ranjeet S Mudholkar, vice-chairman and CEO, Financial Planning Standards Board India: “These changes will correct the current imbalance. A financial planner who has registered as an RIA has to forego commissions, while distributors, who earn commissions, can give advice.”
The proposals will also affect robo-advisory firms. “Robo-advisors who also run a distribution model will have to choose to be either a distributor or an advisor,” says Shard Singh, CEO, Invezta. In other words, those who sell regular funds and earn commissions from them will have to decide to opt for one of the two functions. Those that offer advice and sell direct funds will not be affected, says Singh.
Banks, too, will have to separate their advisory services from distribution and execution. In this matter, the Reserve Bank of India has pre-empted Sebi. In a circular issued in April, it said banks must set up a subsidiary for offering advice or do so through an existing one.