Representatives from FIFA met SEBI officials recently to present their views on SEBI's consultation paper which has proposed to bar them from offering incidental advice.
FIFA has shared these recommendations sent to SEBI with Cafemutual.
SEBI chief U K Sinha has been stressing on the need to bring down the TER. To draw SEBI’s attention towards the competitiveness of expenses charged by Indian MF industry, FIFA presented a study on expense ratios across 25 countries. FIFA’s study reveals that the average expense ratio was higher in countries with fee based model than those countries which followed commission model. Countries with fee model had average expense ratio of 2.77% whereas countries with commission model had an average expense ratio of 2.02%.
The association has presented findings from a study conducted by UK’s market regulator Financial Conduct Authority to SEBI:
- Increase in total cost to investor (MF expense + fees paid directly) paid now are higher than in the earlier embedded cost structure. In U.K. the pre-retail distribution review (RDR) cost was 1.75% which has increased to 2.25% post RDR. Click here to read the full report.
- The minimum investible amount for an investor to be serviced by an adviser has gone up substantially – leaving retail investors unserviced or to fend for themselves.
- This study confirms the creation of an ‘advice gap’; namely lot of investors being serviced earlier in the commission model are no longer serviced under the fee based model.
- Steep reduction in the number of advisers.
Highlighting the repercussions of banning commissions, FIFA presented a study titled ‘Indian Mutual Fund Investor’ done by research firm Finalmile which pointed out that doing away with embedded products is not beneficial for investors. “Evidence has begun to emerge, however, that when regulatory agencies seek to increase transparency by outright prohibiting embedded products from the industry-thus forcing current and potential investors to evaluate and negotiate the terms (scope of fees) of their advisory services- many investors either draw from the market or never enter,” states the report.
FIFA has cited some of the key findings of this report which bring out the unintended effects of transparency on investors:
- Difficulty assessing the real value of advice offered by advisors
- Unwillingness to pay for transaction and advice separately
- Investors get susceptible to irrational decision making during market volatility
- Lack of regulatory protection or recourse from self mis-selling
Stressing on the fact that commissions earned by MF distributors are not high, FIFA has done an analysis of data presented by SEBI to its Mutual Fund Advisory Committee. According to FIFA, the data shows that the percentage of commissions paid on AUM of Rs. 8.04 lakh crore was just 0.59% or Rs. 4,755 crore (before levy of service tax) in FY15-16.