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Mutual fund (MF) distributors are concerned at the Securities and Exchange Board of India's hinting at an advisory-based model for them.They say it is premature to expect Indian investors to pay for financial advisories. MFs continue to be a 'push' product, not a 'pull' one. Distribution is key, they contend, for penetration of financial products like MFs; an advisory-based model will take time.
In a recent Wealth Forum conference, Dhruv Mehta, chairman of the Foundation of Independent Financial Advisors, said: "I do not see it (advisory model) taking off unless Sebi enforces it. I think in the next three years there might not be much change. From an advisor’s point of view, it is unfair to say you can't do both (advisory and distribution)."
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Last month, U K Sinha, chairman, Sebi, had said, "The concept of distribution and advice going together is perhaps not going to last very long...I have asked my team to look at it, as this is a policy we can't endorse. One has to be either an advisor or a distributor. Our thinking in this direction is very clear through our advisory regulations.”
There are around 100,000 distributors registered with the Association of Mutual Funds in India. Sector executives say not more than 10,000 are active, addressing the needs of nearly 10 million MF investors.
According to Neeraj Choksi, joint managing director at NJ India Invest, "If advisory is enforced, a lot of customers would be under-serviced. (One needs to) look at it practically, not philosophically. Advisories will happen in the future but not at least in three years."
Chief executives in the Rs 12 lakh crore sector agree with these concerns. "Our product is an under-penetrated one. Before forcing an advisory model, there is a need for educating customers. Cost of acquisition of a client is too high and can't be met only by advisory fees. Investors' knowledge about financial products is still not at par and to reach them, distributors are the only channel we can depend on," says the head of a large fund house, who wished not to be named.
Sinha says the Financial Stability and Development Council, headed by the Union finance minister, has already set up a committee to look into the commission, cost and fee structure of all financial products. A Wealth Forum survey of independent financial advisors suggests a rising trend in the proportion who expects to earn nothing from fee-based advisories. In 2013, about 31 per cent of them expected zero income from this, 35 per cent in 2014 and 39 per cent in 2015.
