BENGALURU: Mutual fund distributors are unhappy with the Securities and Exchange Board of India (Sebi) proposing to bar them from advising clients. This, according to distributors, runs afoul of customer interests because investing in mutual funds requires some knowledge of the subject and clients will need expert advice to take informed decisions.
Under existing norms, distributors can sell products and also provide advice. The Sebi paper says, “Mutual fund distributors shall not be allowed to provide incidental or basic investment advice in respect of mutual fund products. If they want to engage themselves in providing incidental or basic investment advisory services... they need to register themselves as an investment adviser under IA Regulations.”
The Sebi proposal, mooted in a recent consultation paper, is meant to revise the Registered Investment Advisor (RIA) guidelines, says Dhirendra Kumar, CEO of Value Research, a mutual fund tracker. “Only the RIA can advise the investor. It’s not a directive yet and is up for public discussion which will be formulated based on the public feedback Sebi gets. It will become a law after the Sebi board passes it,” he adds.
Sebi’s logic is that there is a conflict of interest if advisors of financial products are also sellers because they’ll try to push their products, which might not be suitable to the client.
Experts, however, are not convinced. “Principally it is the right step but practically it’s difficult to execute and monitor. Can Sebi monitor all the advices that are being given everywhere? Just passing a law does not mean everyone will start complying with it. They need to define the operating procedure – what amounts to advice and what is just providing information,” explains Kumar.
Narendra Kondaji, an MF distributor, RIA and a financial planner, notes: “Even in the highly regulated pharma industry, people don’t just hand over medicines; there is always some communication over the counter. If the doctor prescribes costly medicines and the pharmacist says there are cheaper generic medicines available, that could be termed incidental advice....”
Keshav Moh, a Bengaluru-based MF distributor, says, “Indians tend to do everything themselves. If they try doing it for a product that is too complex to understand and very dynamic in nature, they might make mistakes and, as a result, might stop investing in future.”
Ramakrishna, another a distributor, says clients need someone to talk to know about products features etc and only distributors can take that space.
The distributor can help people in making investments, filling forms etc but an advisor is someone who will suggest appropriate financial plans and funds, says Srivastava. “The distributor tells you which fund is good, which is bad and draw a proper asset allocation. But, where to draw the line is the whole issue,” says Himanshu Srivastava, senior analyst – MF at Morningstar.
According to A K Prabhakar, research head, IDBI Capital, Sebi wants people to be professionally qualified to advise because “everyone cannot start advising just because they are in the market... the quality will be diluted. Sebi wants this market to be more educated and the funds to work. It wants to stop intermediaries that take away 15-20 per cent of the total investment as commissions.”
He notes that in the stock market, people are told the stock price they are paying, the brokerage cost, and what are the taxes. “MF clients should also know what they are paying and decide the commission they want to pay.”