Lately, SEBI’s moves have been creating ripples and apprehensions among the distributor community. Be it the disclosure of distributor commission in absolute terms or the restriction on usage of the term “investment adviser” by unregistered advisers, everyone is interpreting the regulations in their own way. Some feel that it is an attempt to coerce the distributor to become RIA while others feel that it is all about making mutual funds more cost-effective. There is a lot of hue and cry from all directions which is causing us to miss the core proposition.
SEBI’s intent
Before forming any kind of presumptions over the regulations, let us focus on the most important point. In any kind of mutual fund investment, the entire market risk is borne by the client. Neither the adviser nor the distributor is party to it. This means client who is the sole revenue-generating factor bears the risk completely. It is therefore vital to be fair, transparent and client-centric while carrying out profession of distributor.
The basic intention of SEBI behind all the legal promulgations is to create a transparent and client-centric environment wherein distribution and advisory of mutual funds shall run as mutually exclusive activities. It is so because, in the entire pursuit of mutual fund investing, distribution has been regarded as a primary activity which does not necessitate exemplary credentials and technical acumen on part of the doer. As against this, advisory has been perceived as a relatively sophisticated activity requiring higher calibre, grasp of market developments and analytical skills. Thus, if an individual who is principally engaged in distribution of mutual funds enters the arena of advisory without the commensurate qualification then it may be detrimental for client’s interests.
The chronology of SEBI regulations
Though the intent was clear SEBI’s actions to accomplish the desired objective was ad-hoc and not comprehensive. Let’s begin from the year 2009. SEBI banned charging of entry loads on mutual funds simultaneously introducing disclosure of distributor commission. The objective was to curb the menace of churning whereby some distributors were encouraging clients to switch MF schemes solely for the purpose of increasing their commissions. Followed by in 2013, rolled out two new regulations. Firstly, it enacted the RIA regulations and secondly, in its Master Circular which superseded all previous circulars, permitted the distributors to carry on transactions either under advisory or transactional mode. Nevertheless, the circular was silent on the issue whether the distributors could charge a fee from their client for providing such advice.
At the back of the mind, SEBI expected distribution would eventually get separated from advisory and a lot of distributors would come up to get registered as RIA; however it did not happen. Finally, this year SEBI took a series of steps to make advisory & distribution mutually exclusive activities. It brought about the disclosure norms to make the client aware of the distributor commission in absolute terms which he bears in regular plans. It banned the usage of word “advisor” by unregistered distributors. Earlier the distributors were exempt from registration under SEBI if they advised the clients on only mutual funds. But now SEBI has proposed to take away the exemption which was earlier available to the distributors.
So, the basic premise is that if any individual/institution wants to advise clients on any investment product whether pertaining to mutual funds or anything else, then they need to fit the framework prescribed by the RIA regulations. If one tries to advice without having the registration, then he will have to face consequences. The message that is being conveyed is that if a distributor wants to expand the scope of his operations and enter the territory of advisory, then he should get the registration from SEBI as would be outlined in the RIA Regulations, which essentially means he has to forgo his distribution business and adopt to a fee based model. One important point to note is that he will continue to receive the trail commission even after the he becomes an Investment advisor for your AUM as a distributor.
What’s the final takeaway for the distributors?
It is being assumed at the moment that in due course, advisory will be separated from distribution of mutual funds and distributors would have to seek SEBI registration to act as advisers.
Now, it is your choice to choose the path to tread on. One alternative would be to get evolved as an Investment Adviser. SEBI is contemplating a 3-year window within which you may get the requisite qualification and the registration from SEBI and start as an investment adviser.
However, if you feel that the adviser model is not viable for you on account of operational and financial complexities, then you may keep functioning as a distributor focussing on mutual funds only without digressing into the advisory route. As a distributor, you may try the this three-pronged approach to boost your distribution business:
- Compliance
As per MF distributor regulations of 2009, you need to make certain disclosures before the client i.e. commission chargeable (trail & upfront), scheme related latest information, risk factors of the scheme, etc. So if you are already complying with the above the new commission disclosure norms effective this october should not really bother you. If you are not doing so, make sure that you do. Also make sure not use words like "investment advisor" "wealth manager" When you are representing your business.
- Process-driven
You can leverage technology to increase volumes to combat the income crunch owing to falling commissions. Introduce automation in all aspects of your business to reduce your back-office load. You may look for automating areas like client on-boarding & documentation, execution and report generation. You can help the client in selection of mutual funds in line with his goals and facilitate step-up in investments as per increase in client’s income. Moreover, you need to administer performance feedback periodically to the client.
- Add products to your offering
you may look upon expanding your bouquet of product offerings by adding products like insurance, pension, banking and other financial products. by being a part of IMF. Insurance Marketing Firm is an entity registered by the IRDA which, apart from soliciting or procuring insurance products, is authorised to distribute other financial products like Mutual Funds by employing licensed Financial Service Executive (FSE). Associating with IMF as an FSE or starting your own IMF (if feasible) is an ideal way to substantiate your income in face of gradually dwindling commissions.
The bottom line
The writing is on the wall. You can either be a distributor or an adviser. The proposed amendment by SEBI will not allow advise to be incidental to the distribution activity. Therefore, choose your path wisely.
Kishorkumar Balpalli is the Founder of MyMoneysage which provides technology solutions to advisers. MyMoneysage advisor provides tools which helps MF distributors as well as advisors(RIA) to manage and grow their business.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
