SEBI’s recent consultation paper on investment advisory has received a mixed response. While some have welcomed the proposals, others are skeptical. The regulator has sought feedback on its amendments by July 14. Distributors say that AMFI has met with associations to take their feedback for preparing its response to SEBI.
We spoke to a few advisers to seek their views on SEBI’s latest consultation paper to understand its implications. Here’s what they have to say.
More confusion
Dhruv Mehta, President of Mumbai based IFA Association; Federation of Independent Financial Advisors (FIFA) is of the view that restricting the nomenclature of distributors as ‘MFD’ will only create confusion in the minds of investors. “Distributors are currently serving two crore MF investors. MF distribution is not a one-off sale; it requires ongoing service. So not allowing distributors to give advice would be an anti-investor move. There can’t be a sale without advice. New distribution models like robo advisory are evolving. You need to allow all models to co-exist and let the market forces decide. It should be left to investors to decide which kind of model best suits them. The nomenclature MFD/Adviser/IFA are just semantics. If distributors inform their clients that they are now MFDs and not IFAs or advisers it just adds to the confusion and creates doubt in the minds of investors,” says Mehta.
Individual RIAs need to corporatize
Hyderabad based RIA M S Shabbir welcomes SEBI’s move to demarcate execution and advisory.
“We need to appreciate that SEBI has not forced distributors to become RIAs. We welcome the move to relax the net worth requirement for body corporates to Rs 10 lakh from Rs 25 lakh. There is a wide gap between the net worth requirement of an individual and corporate RIA. Having an individual RIA license comes with its risk due to the unlimited liability. So SEBI should rethink whether it wants to keep this category. I think individual RIAs should corporatize their practice,” recommends Shabbir.
Let the market mature
A. K. Narayan, President of IFA Galaxy says that SEBI’s intention behind brining these amendments is good but the timing is wrong. “Many first-time investors are starting to invest in mutual funds due to the increased awareness about this category. They need hand holding. Also, without understanding the services and value add provided by distributors, they may not be willing to pay fee. I feel that the regulator should give some time for the market to mature. The proposal also says that we need to take a signature stating that we may not be acting in client interest. We get referrals from existing clients who trust us. If we say that we are not acting in their interest the prospect would never invest with us,” observes Narayan.
Retail may be left unadvised
Vinod Jain of Jain Investments says that if the proposals are implemented in its current form, it is likely to disrupt the industry. “It has taken more than five decades to build a 40,000 IFA base. If the proposals are implemented without deliberation, many distributors would go out of business. More importantly, it is anti-investor. Retail investors would not have access to advice because advisers would tend to service only the high net worth clients who can pay fee. We can’t expect a person committing 500 per month SIP to pay a fee. As a result, many retail investors would be left unadvised. Mutual funds would be a rich man’s product. Rather, the industry should create a level playing field for all types of investors to have access to affordable advice. I think both distribution and advisory should co-exist,” says Jain.
Can mis-selling be proved?
SEBI has already made mis-selling a fraudulent practice in 2012. It seems that the regular wants to see stricter enforcement of this law which it has reiterated in the consultation paper. Also, the regulator has proposed that MFDs should not offer any financial planning services which requires risk profiling. Distributors say it would be difficult to offer the right fund to investors that without assessing investors risk profile. Moreover, they say that it would be difficult to prove instances of mis-selling since the services offered by them are subjective in nature. “Investors would never complain when the fund performance is good. Client’s goals can derail due to a variety of factors. For instance, assume a client aged 60 years with life expectancy of 80 years is falling short of money to fund his post-retirement expenses. Should the client not invest in equity even if he doesn’t have the risk appetite? If the distributor has recommended some allocation to equity to meet his/her post-retirement goals and the client is unhappy with the volatility, will the distributor be liable for mis-selling?” explains a Mumbai based distributor preferring anonymity.
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