Fee-on-advice model for MFs on back burner

The Securities and Exchange Board of India (Sebi) is unlikely to proceed with an earlier plan for moving to a fully fee-based model, from the current commission-based structure, for the Rs 17-lakh-crore mutual fund (MF) sector.

According to sources, the regulators now favours continuing with both models till it does a deep analysis of such a transition. This is in contrast to the earlier stand, of wanting the commission-based model to be done away.

The proposal had gathered more steam after the Sumit Bose committee’s recommendations in August 2015, on mis-selling of financial products. The panel recommended phasing out of commissions in MF products.

Distributors and asset management companies had argued with Sebi that these were ‘impractical’ recommendations.

The commission structure was discussed in detail at Sebi’s International Advisory Board (IAB), which has representation of global financial market experts. The board advised that transition to a fee-based model be gradual and only after examination. Also, investors need to be educated about the benefits of both.

“Increasing the reach of MFs without intermediaries and incentives is challenging. Structurally, we fund houses are not designed to bring clients; that is better served by distributors. In return, we need to offer incentives to them. I believe a full advisory-based model might not be possible for another three to five years at least,” said the chief executive officer (CEO) of a large fund house.

Concurs another CEO: “India is not ready to transition to a complete fee-based mode. Sebi seems to have taken a similar view.”

“Before undertaking any effective steps, Sebi may consider undertaking a study of migration to a fee-based advisory model,” IAB said in a note.

Dhirendra Kumar, CEO of fund tracking entity Value Research, said: “Sebi’s push for the MF sales process to shift to the advisory model might have been postponed indefinitely if one goes by the statement of its IAB. A rapid switch would likely leave smaller and beginner investors under-served. It would also make MF even more disadvantaged compared to insurance products, which are entirely driven by high commissions.”

There are a little over 50 million MF accounts. Since an investor could have more than one, sector officials estimate the number of investors at 15 million.

At a glance

• Sebi now favours continuing with both fee-based and commission-based model
• This is in contrast to the earlier stand, of wanting the commission-based model to be done away
• The Sumit Bose committee in August 2015, on mis-selling of financial products, recommends phasing out of commissions in MF products
• International Advisory Board advised that transition to a fee-based model be gradual and only after examination
• Also, the investors need to be educated about the benefits of both the models
• There are a little over 50 mn MF accounts and around 15 mn investors