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Decoding Sebi’s adviser guidelines

LiveMint logoLiveMint 03-07-2017 Kayezad E. Adajania

Is the Sebi-outlined roadmap in its consultation paper about registered investment advisers the only way to curb mis-selling? Will the guidelines deliver results? Industry experts share views with Mint.

Dhruv Mehta, chairman, Foundation of Independent Financial Advisors

The proposed roadmap is fundamentally flawed as it is based on the completely unfounded premise that advice should be separated from execution. It is the investor who needs to decide the type of service she needs and the mode of remuneration—whether fee or commission. Removal of the advisory element would be harmful to investors as this reduces the distributors’ obligations and level of service.

The whole approach should be focussed firstly on encouraging ‘Right Selling’ to the investor rather than on apprehensions of mis-selling and trying to prescribe revenue models (fee or commission). Let us start by defining ‘Right Selling’ as a process that focuses on achieving favourable outcomes for the investor and the realisation of financial goals. A self-regulatory organisation could be set up for both advisers and distributors to lay down the best practices and ensure compliance by its members.

The US, the leading mutual fund market, allows the investor to choose the type of model and level of advice and service she needs and the mode of remuneration—fee only, commission only or fees plus commission. International experience shows that regulations moving to fee-based regime has resulted in large retail investors not being serviced due to a reduction in the number of advisers and an increase in the total cost to the customer.

Vishal Dhawan, founder and CEO, Plan Ahead Wealth Advisors

The regulations by Sebi (Securities and Exchange Board of India) are focused on separating the process of advice, and the distribution of suitable financial products. We have traditionally lived in a financial services marketplace of buyer beware, and the transition to seller beware is likely to be painful for both sellers (advisers or distributors) and buyers (investors), till a stage of equilibrium is reached. The regulations protecting the buyer (investor) have been focused on giving advice, keeping the full picture in mind—financial goals, investment horizon, income, expenses, other assets and loans, so that the solution that is delivered to the investor is in her best interest. The regulations focusing on the seller have been focused on the process followed to deliver suitable advice, elimination of possible conflicts of interest, and how the sellers need to correctly represent themselves to the investor, i.e., are they acting as an adviser or a distributor? These regulations are good for investors to protect their interests, and good for advisers and distributors to build business models that resonate with the types of investors that they wish to serve. Since the transition is likely to take time, investor education by the regulator explaining the different types of providers, a road map for the industry over the next 5 years, and an adequate period of 2-3 years for transition needs to be provided.

Anup Bansal, co-founder and managing director, Mitraz Financial Services

There are two main proposals that Sebi has put up to curb misselling. One, separation of distribution or execution activities through a separate subsidiary for companies, banks and NBFCs (non-banking finance companies). Two, prohibition of advisory services by mutual fund distributors and provision for mandated disclosures.

The first proposal adds complexity for registered investment advisers (RIAs) in providing advisory and execution services. Clients want holistic advice with execution so that they can achieve financial goals and targeted portfolio returns. In my experience, clients find it very difficult to take timely actions on their own to execute the advisory recommendations. As a result, the financial plan may remain on paper for a long time. Direct plans and mandated commission disclosures are in clients’ interest without the additional complexity of a subsidiary. Mutual fund distributors are required to determine the suitability of a product but cannot provide advice, which includes financial goals discussion and risk profiling. It is not clear how the suitability objective can be achieved without understanding clients’ requirements and conducting risk profiling. Besides, the disclosure that “he/she may not be acting in the best interest of investor” does not indicate positive intent. While Sebi’s objective is clear, the practical aspects are not fully comprehended.

Amol Joshi, founder, PlanRupee Investment Services

Sebi has put in place two significant investor centric reforms over the past decade. One is doing away with the entry load in mutual funds from August 2009, and the second is introduction of direct plans with lower expense ratios for investments not routed through a distributor. With no entry load-no upfront (load), the industry has moved to trail-based remuneration where the intermediary’s interest is aligned with that of the investor. On the direct (plans) front, 41.40% of all mutual fund assets are now in direct mode, but only 9% retail investors are switching to direct. Why is retail not making the switch?

There are 14 million SIPs (systematic investment plans) with collection of Rs4,584 crore, implying an average SIP value of just Rs3,274. If an average investor has 2-3 SIPs, the annual investment will be around Rs1 lakh. Opting for direct by taking fee-based advice, costing Rs8,000-10,000 a year leaves the investor on the same ground as opting for regular. Smaller ticket investors would be paying even more, thus creating an ‘advice gap’ as seen in global context. During a market downturn, fee will be seen as an ‘extra’ cost and there is a chance of the plan being abandoned as well as an ill-timed exit.

Is there another way? Currently, ‘direct with fee-based model’ is available along with ‘distribution with incidental advice’. How about letting the investor choose?

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