The changing advisory landscape

By Morningstar |  26-11-20 | 
 

Market regulator Securities and Exchange Board of India, or SEBI, has carved two sets of intermediaries and defined what they can and can’t do. For instance, mutual fund distributors are no longer allowed to use 'advice' or 'financial planner' term in their company name. Read how SEBI’s new norm could increase the cost of advice for retail investors.

At the Morningstar Investment Conference 2020, Nilesh Shah, Managing Director, Kotak Mutual Fund and Sandeep Parekh, Founder, Finsec Law Advisors, discussed the implications of new Registered Investment Adviser regulations on advisers and distributors.

Sandeep Parekh

Impact on distributors

The new Registered Investment Adviser regulations indirectly impacts distributors severely as they have to change their company name. Distributors have built their brand name over the last several decades. So it is disruptive for them.

SEBI has been receptive

For RIAs, the concept of segregation of advice and distribution was proposed after three concept papers. SEBI has proposed these regulations after taking public feedback. The new rules are not as stringent as they were proposed earlier. Now, the same legal entity cannot now provide both distribution and advice to the same client.

All kinds of players are required

Today, distributors outnumber RIAs. All the advice was so far being provided by distributors, largely. An investor wanting to invest Rs 500 through a systematic investment plan is not going to hire and pay Rs 20,000 per annum advisory fee. Thus, we need all kinds of players to cater to different segments of the market. Something like this happened in the U.K. The regulator there tried to segregate distribution and advice but it didn't work out. If the market is not viable there will be a dearth of advice-givers. But SEBI’s intention is noble. It doesn’t want conflict of advice.

Incidental advice

SEBI has not prohibited distributors from providing advice. They can give incidental advice. Again, we can debate what that really means. Distributors have to do product suitability check. So some level of advice is in fact mandatory. It's not just prohibited, but it's the opposite of that.

There was a lot of confusion when the regulations came out. SEBI will hopefully come with some clarification. The Association of Mutual Funds in India has clarified what nomenclature distributors can use.

SRO in the offing?

The incidental advice exemption is available only for mutual funds and not for other products. SEBI will find it difficult to regulate 40,000 distributors. Thus, it will push for a self-regulatory organisation, or SRO, for regulating distributors.

Nilesh Shah

Don’t micromanage

Distributors get commission from fund companies while RIAs get paid by clients. There is a clear differentiation.

When we try to micromanage the operations it doesn’t work because India is a heterogeneous market. There should be broader regulations and the implementation should be left to market forces and evolve with time. Distributors have to give some incidental advice but where do they draw a line and become an adviser, we don’t know. Such regulations create doubts in the minds of distributors and investors.

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