Can Distributors Give Some Advice?

Sebi’s third consultation paper on investment advisory guidelines says that distributors and advisers can’t both distribute and advise.

Sebi’s third consultation paper on investment advisory guidelines says that distributors and advisers can’t both distribute and advise. Also, distributors need to sell “appropriate” products. We asked the experts if some advice is part of mutual fund distribution.

Ashish Shah, founder of Wealth First

I appreciate the Securities and Exchange Board of India (Sebi) consultation paper, but let’s consider the ground reality.

Distributors have been providing advice, informally, for years and many of us take care of those portions of our clients’ portfolios that don’t earn us any revenue, such as Public Provident Fund and National Pension Scheme, where there are negligible commissions.

A lot of clients come to us after they have been mis-sold insurance policies and we clean up their portfolios. We don’t earn anything from here as well. Now, all this is at stake if the distributor strictly acts as per regulation. Investors will suffer.

On another note, why should we stop our relatives from doing the same business? This is a restrictive practice in an open-market economy. The last decade has seen a lot of action in terms of regulation tightening on mutual fund distribution business by the Association of Mutual Funds of India (Amfi) and Sebi. Twenty-three years of hard work done by fund houses and distributors is now bearing fruit; look at the inflows. This industry is at a stage of jumping to the next stage.

Now, we should focus now on fund management and performances, which is more important than distributor commissions. Sometimes, status quo is the best approach.

Joydeep Sen, founder,

A mutual fund distributor, going by the purport of the definition, can only ‘distribute’ products. This means, she cannot give any value-added advice, cannot do financial planning for her client, cannot do risk profiling, cannot do portfolio review and cannot gauge where the ‘appropriate’ product fits into the portfolio of her client.

To take an analogy, if I visit a medical shop and ask for an appropriate medicine for flu, the shopkeeper (distinct from qualified pharmacist) would give me an appropriate medicine. However, by definition, she cannot do diagnosis like a doctor and has to take me at face value. If I am suffering from something other than a flu, the medicine would not be appropriate.

On the same plane, it would not be appropriate for a mutual fund distributor to recommend a sectoral equity fund to a person who is a retiree.

However, if the retiree says she wants a ‘high-return’ fund and has the risk appetite, the mutual fund distributor will go by that. Sebi says appropriateness is defined as selling only that product categorization which is identified as best suited for the client. But then, if the mutual fund distributor cannot do risk profiling, how is she supposed to know what is best suited?

It is appropriate that Sebi comes up with a more appropriate definition of what is appropriate.

Kunal Bajaj, chief executive officer and founder,

The wide definition of the term ‘appropriateness’ in the Sebi paper would mean that a distributor can continue to perform nearly all the activities of an adviser—identifying the customer’s objectives, resources, investment time horizon, risk profile, and preferences; and explaining the product features. Assuming he narrows to five products that suit the client, the only activity that a distributor will now not be allowed to do is recommend a specific product. But even recommending a fund could be easily done under the guise of ‘explaining product features’; an activity permitted to distributors under the proposed regulations. Unless Sebi resists the lobbying by vested interests and limits the activities of a distributor to merely highlighting product features (as in its earlier papers), its efforts to segregate distribution from advice will come to naught. Any suitability assessment should be the exclusive domain of Registered Investment Advisers, who are required by law to operate as fiduciaries, and are subject to a higher, ethical customer-first standard. To address legitimate concerns on pricing smaller investors out of the financial advice market, Sebi could permit distributors to give basic investment advice to ‘retail investors’; defined as those investing, say less than Rs2 lakh per year, across all mutual funds.

Amol Joshi, Founder, PlanRupee Investment Services

Sebi defines appropriateness as ‘selling only that product categorization that is identified as best suited for investors within a defined upper ceiling of risk appetite’. Successful Amfi campaign ‘Mutual Funds Sahi Hai’ adds: ‘After you know what you want, it becomes easier to plan for it and invest for it’. Concluding from these, risk appetite assessment and a well thought-out plan remain the two building blocks of successful mutual fund investment journey for investors. The term ‘appropriateness’ should include these two and other aspects like product features and disclosures.

Sebi’s latest consultation paper asks distributors to not provide investing advice. This does not sit right with two building blocks mentioned earlier. If distributors are disallowed to assess risk appetite and build a financial plan specific to mutual funds, it is impractical to expect an investor to go ahead and commit to mutual funds for her long-term investment needs. Original investment adviser regulations have provision for incidental advice. That should stay. It is a different matter altogether that there are not enough Registered Investment Advisers to the service advice needs of millions of mutual fund investors. We have to get this regulation right for mutual funds to be mass market product and not just cyclical bull market phenomenon.


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