In its response to the consultation paper floated by SEBI in September, AMFI has recommended that mutual fund distributors should be allowed to continue to provide incidental advice to their clients. Cafemutual has a copy of this letter.
In its letter sent to SEBI, AMFI has said that incidental advice is intrinsic to the activity of mutual fund distribution and is different from ‘investment advisory’ including financial planning and risk profiling.
AMFI has said, “Incidental Investment advice should be defined as basic research and product recommendation done by the mutual fund distributor and which is not in the nature of financial planning and risk profiling of the client. The mutual fund distributor may be asked to clearly disclose to the client that he is providing only Incidental advice.”
Sharing the rationale behind this suggestion, AMFI has said that retail investors would be at risk of becoming unadvised and under-serviced, if distributors are not permitted to offer incidental advice which is essential for such investors and increasing the investor base in an under-penetrated market. Investment advisers on the other hand, could potentially charge high fees making their services unaffordable to such investors, said AMFI.
Further, AMFI has said, “Without the financial support of commission received from AMCs, advising on mutual fund products will not remain feasible. This would result in such agents/intermediaries advising their clients to invest in other financial products where the IA registration is not mandatory, such as insurance products (which offer a higher commission) even for investors investment and wealth creation needs, resulting in potential mis-selling.”
AMFI has also acknowledged the role of mutual fund distributors in increasing the investor base. “The growth in the size of the industry has been possible due to the twin effects of the regulatory measures taken by SEBI in reenergizing the MF Industry in September 2012 and the support from mutual fund distributors in expanding the retail base,” said AMFI.
Here are some of the other key recommendations:
- Allowing a mechanism through which AMCs can pay fee to RIAs on behalf of the investors. AMFI has said that getting investors to pay for advisory services has been one of the key challenges for RIAs. “In order to facilitate an automatic mechanism in this regard, SEBI could consider permitting the models obtaining in the U.S. under SEC Regulations, which is used by companies such as Envestnet, Inc. (NYSE: ENV) for providing unified wealth management technology and services to investment advisors,” said AMFI.
- Individual RIAs should be allowed to continue to provide execution services. AMFI has said, “Many advisors have migrated to partnership and/or LLP legal structures, as their business has evolved. Not allowing such distributors an opportunity to serve both types of existing customers may lead to many existing investors being untended to, depending on what model the individual distributor is required to choose. Giving such individual distributors a framework to operate both models, with compliance checks, such as enhanced due diligence done by independent audit firms on such individual distributors can be an alternate solution.”
- The requirement of being a graduate with 5 years of work experience in financial advisory to become an RIA should be done away with.
