Ravi Samalad speaks to AMC officials and veteran IFAs to find out what the implications of the proposals in the SEBI concept paper on regulating investment advisors for the industry and its stakeholders
Mumbai: The proposals in the SEBI concept paper, when implemented, could have a sweeping and long lasting impact on the distribution of financial products. We asked a few industry stalwarts – AMC officials and IFAs to share their thoughts and do some crystal-gazing. Here is a summary of their view points and predictions.
A majority of distributors will be Agents
Most distributors will not be able to meet the criteria of education or experience. Even assuming that 40% of IFAs could meet one of the criteria, would all of them opt to be Investment Advisors?
Given the facts that IFAs have met with only limited success in charging a fee to clients as also the ambiguity on trail commissions on existing AUM, many otherwise qualified IFAs may opt to be Agents as the compliance standards will be less stringent. If we assume only 1 out of 2 qualified IFAs opts to be an Agent, we are looking at an overall 80% of IFAs turning in to Agents with the balance 20% being Investment Advisors.
If 80% of IFAs are Agents, what happens to the quality of advice to be given to investors? A regulation meant to improve professional standards could have the unintended consequence of diluting the quality of advice that a majority of investors will get.
Will those selling insurance products be eligible to be called Investment Advisors?
With a tied agency system in prevalence, can insurance distributors give truly independent advice to their clients? If not, then will everyone selling insurance products, including banks, national distributors be considered ineligible to be an Investment Advisor?
Is the case for being an Investment Advisor too weak?
With most IFAs not yet being able or willing to charge a fee from the majority of the clients, will they have confidence to forego the lure of an upfront plus trail commission on existing AUM? Moreover, the elaborate compliance requirements mean that there will be a cost attached to it. Plus, there will be fee to be paid to SRO. So, other than self-esteem, there is little incentive for most IFAs.
How is a lay investor expected to differentiate between an Investment Advisor and Agent?
For most people, Investment Advisor and Agent are perfectly interchangeable titles. How is an investor, the intended beneficiary of this proposal, to know and appreciate the wide gap in responsibilities of each title? Disclosures is not the answer because as the SEBI concept paper notes, “in a country like India where levels of literacy are low and financial literacy even lower, disclosures have a limited effect.”
Confusion galore
Just a little more than a month after SEBI announced elaborate regulations for big distributors, this concept paper which proposes a different approach was published. So, while AMFI, AMCs and the big distributors are still grappling with the implementation of August 22 regulation, there is some confusion on whether the two sets are meant to co-exist or is the new set meant to replace the earlier August 22 set?
Also, the concept paper says, “In India Banks are allowed to perform only Investment Advisory Services.” Does this imply Banks can become Investment Advisors only?
Possibility of IFAs registering both as Investment Advisor and Agent through family
Qualified IFAs may register themselves both as Investment Advisor and Agent through another family member or associate. For instance, the Agent ARN could be used to claim trail from existing AUM and the Investment Advisor ARN to book business from clients willing to pay a fee.
Who will form SRO?
With no body or association representing a majority of distributors, who will form or sponsor such a SRO? More so, we have no successful precedents of SRO in India.
What is your view and opinion on this? Pl post your comment and share it with us.
