Your Money: Stick to your MF distributor

Shifting to a registered advisor may not necessarily ensure protection from mis-selling

If the Securities and Exchange Board of India (Sebi) acts on its proposal that no mutual fund (MF) distributor should advise investors before becoming a registered investment advisor (RIA), things would get trickier for investors who have been relying on distributors for a long time.

To separate sales from investment advice, the market regulator has proposed that only RIAs offer advice to investors. And, despite protest and representations from different segments of the financial sector, Sebi has not budged. So, should you shift to an RIA? While investing through registered advisors has merits, people who invest through distributors should wait until the market regulator implements the proposal. There are also chances that your distributor might become an RIA once the proposal sees the light of day. Changing your advisor does not guarantee that you will be protected from mis-selling, the key reasons for Sebi to propose these norms.

Usually, the fee of an RIA is based on the percentage of assets he manages. Experts say such advisors can invest part of the client’s portfolio in high-risk funds, hoping to make higher returns and thereby higher fees.

Kolkata-based Malhar Majumder has changed his business model. From being a fee-only adviser for seven years, he opted to become a distributor of financial products, a model he believes works more in the clients’ interest. “As fee-based advisor, I would shortlist schemes based on a client’s financial plan and tell them invest through anyone they like. When they went to an institution to invest, many times the distributors sold them unit-linked insurance plans or some other mutual fund scheme,” says Majumder. He says such mis-selling would continue if Sebi implements the proposed regulations.

Hemant Rustagi, a Sebi-registered investment advisor  and chief executive of Wiseinvest Advisors, said: “There’s no denying that investors stand to benefit from Sebi’s proposed move but it requires a complete change in investor behaviour. A majority of them may not be ready for it.”

When an investor buys MF units through a distributor, fund house pays him 0.5–1 per cent of the funds invested as commission. But, when an investor goes to an RIA, a fee has to be paid. In the long term, an investor would shell out much lesser when he invests through an RIA than a distributor. Investment advisors say even after telling clients about the lower costs and showing the maths, investors still prefer commission-based model. Clients don’t like to compensate advisor from their own pockets but don’t mind if mutual funds pay the former. Many RIAs are therefore selling products in the name of their family members and continue to earn commissions. Some have tied up with distributors, who pays a fee to the advisor. This way, they circumvent the Sebi regulations.

The existing regulations also allow RIAs to be distributors if they register their companies with Sebi, provided they maintain different departments for advisory and distribution. Then, there are also para planners in many wealth management firms. These are employees who may not be RIAs but they do the entire financial planning and recommendation. The RIA only signs the documents. Many feel that such models go against Sebi’s objectives of protecting investors.

For investors who save a few thousand every month, a distributor or an online investment platform are the only options. Most RIAs work with individuals that have a sizable portfolio due to high cost of operations.