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Those who have a simple financial objective or only a small sum to invest may go with a mutual fund distributor

For some time now, the Securities and Exchange Board of India (Sebi) has made it clear that it wants the mutual fund industry to move to a model where there is clear segregation between advice and distribution. To end any conflict of interest that still exists, it came out with a consultation paper on Tuesday, which attempts to plug the loopholes being utilised by many individuals and entities to circumvent Sebi's plan of not allowing those who offer advice to also profit from being distributors.

For individual advisors, the consultation paper says that those offering advice should not distribute products through immediate relatives. “Until now, many people kept the advisory business in their name and the distribution business in the name of a relative. That avenue is being closed now,” says Srikanth Meenakshi, founder and chief operating officer, Fundsindia.com. Adds Kunal Bajaj, chief executive officer and founder of Clearfunds.com, a Sebi-registered online investment advisor, “Sebi’s January 2018 paper leaves no room for advisors to conceal any potential conflict of interest.”

Segregating advice from distribution

• Mutual fund distributors will have to ensure the ‘appropriateness’ of the products they offer   

• Experts say that the regulator needs to clarify what a mutual fund distributor can/ can’t do to determine the appropriateness of a product for a client

• If these provisions get implemented, an investor may have to find two reliable entities

Corporates, banks, NBFCs, etc will not be permitted to distribute financial products, either directly or through a holding, associate or subsidiary company. “Earlier, corporates were allowed to carry out distribution through separately identifiable department or division (SIDD). Now that route has been shut,” says Brijesh Dalmia, founder, Dalmia Advisory Services. 

Mutual fund distributors, while distributing their products, will be allowed to explain the features of the product to clients. According to the paper, they should ensure the ‘appropriateness’ of the products they offer. Says Sandeep Parekh, founder, Finsec Law Advisors: “The last paragraph seems contradictory because how can a distributor assure appropriateness without knowing the age, children and other details. And once he knows, he is actually offering investment advice.”  As part of selling mutual funds, distributors are currently allowed to provide what is termed as 'incidental advice'. The regulator will need to spell out whether appropriateness is the same as incidental advice. For the moment, of course, investors should wait and watch till the provisions in the discussion paper are actually implemented. But what when they do get implemented? “Some are do-it-yourself investors. There is another set of investors that needs hand holding for both advice and execution. The latter will have to find two reliable entities to work with,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. He adds that those who need comprehensive financial planning and advice on multiple products should go to a Sebi registered investment advisor (RIA). On the other hand, those who have a simple objective and a small sum to invest, may use a distributor as an intermediary because they won’t need advice.