Comments on Concept Paper on Regulation of Investment Advisors--Part II

Sir,

At the outset, I wish to introduce myself as an AMFI qualified Independent Financial Advisor having ARN number 18533.

Sir, the broad mandate given to SEBI is to safeguard the investors’ interest. The said concept paper on regulation of investment advisors is another step—whether right or wrong only time will tell—in that direction.

Having read the Concept Paper on Regulation of Investment Advisors, I firmly believe that India is not yet ready for such sea change in the way investment advice is given and accepted. The reasons have been outlined as hereunder:-

• Para 2.1:- Tackling conflict of interest in Distribution of financial products:-       

You believe that because of conflict of interest, investors’ interests are compromised. Sir, may I humbly ask you to point out any industry where conflict of interest is absent? Just as a businessman strives to maximize his revenue/profits, the client hopes to keep his costs minimum-- can we say that there is a conflict of interest between his business and his clients? Every manufacturer believes that his products have an edge over the competitors’ products and rightly so! Similarly, the consumer buys the product only after doing sufficient research about the similar products available in the market; thereby mitigating the conflict of interest as far as possible. 

• Para 2.3(a):- You believe that a distributor—being only loyal to himself—would happily churn his investors’ portfolio and also squeeze more commission from the manufacturer. 

Sir, with due respect to your knowledge and expertise in the domain of investor protection, may I humbly state that today a  distributor is able to receive commission from the manufacturer as well as fees from his investors only because you have authorized him to do so. By abolishing entry load from mutual fund investments w.e.f. 01/08/2009, you have allowed not only the AMCs to pay upfront commissions to the distributors (albeit out of their own pockets), but also authorized the latter to simultaneously collect advisory fees from their investors as mutually agreed amongst themselves. How can you now blame the hapless distributor for an act authorized by you? At the time of abolishing entry loads, you should have barred the AMCs from paying any sort of incentives (upfront) to their distributors so as to prevent such conflict of interest! The first conflict of interest has only been accentuated by you rather than being mitigated.

You further go on to state that it is because of the dual stream of fees, the distributors are churning the portfolios of their investors. Sir, do you really believe that the today’s investor—whose cause you are championing—is so naïve so as to allow the distributor to churn his portfolio without any commensurate gains—direct or indirect? However, I do not rule out such churning done by a section of the distributors! But to paint the entire community of IFAs as irresponsible and un-ethical because of the act of a few is least expected of you.

• Para 2.3 (b):- Distributors to sell products of manufacturers offering highest commissions:- 

Sir, you have visualized a situation, where a distributor would sell products only of those manufacturers who offered highest commissions---is more hypothetical than real! If this had been indeed true, then in all likelihood the bottom 10 AMCs (by AUM) would have been the Top 10 AMCs (by AUM) since August 2009. However, since this has not happened only goes to prove that distributors as well as investors have started to subscribe to schemes of MF with regard to its past performance, funds’ suitability to their goals etc. and that commissions do not play a major role in fund selection.

• Para 2.5:- UK to phase out the upfront commission. 

Sir, please note that markets like UK, USA are more matured than ours and to expect India to adopt advisory fee system overnight is a trifle too early! Investors as well as distributors in UK have been given time for the said transition. It will be disastrous for the distributor community (and by logical extension—the investors) at home—many of whom depend on MF advisory to run their households—to move over to advisory without any safety net. There is still a significant amount of resistance amongst investors as far as paying fees for an advisory service is concerned. Investors have first to be educated that paying fees for advisory services is same as paying fees to a doctor! This resistance is visible in the metro cities itself—where the investors are supposed to me more learned than their counterparts in Tier II & III cities (where you plan to make mutual funds popular in time to come). Education and not regulation is the requirement of the time!

• Para 6.2:-- Chartered Accountants like advocates are exempt from registration:- 

The sole job of Chartered Accountants is to audit the books of accounts; while an advocate is supposed to render legal advice. Can a Chartered Accountant/advocate be the right person to offer investment advice or is it a Certified Financial Planner a better person to offer investment advice which is in sync with the financial goals of the investor? Mandate of a Chartered Accountant/Advocate is totally different from that of a CFP. I AGREE with you, though, that only those persons with a certain minimum professional qualifications should be allowed to offer investment advisory services. 

Sir, the distributor community has done a service to the investor and also to the nation by taking the Mutual Funds to Tier II & III cities. It is they who have tried to bring about an inclusive growth in Mutual Fund industry! In a study (conducted jointly by Boston Consultancy Group and CAMS) published in www.wealthforumezine.com it has been shown that over a period between 2003 and 2010, share of Mumbai, New Delhi and next Top 8 cities in Mutual Fund holdings have gone down from 90%(47%+14%+29%) to 75%(32%+12%+31%) respectively. Simultaneously, the share of next 90 cities+others has gone up from about 9% to 25% during this same period. Certainly, this shift would not have been possible without the MF agents/advisors! And now to expect them to work virtually for free—given the resistance to paying advisory fees—is akin to doing injustice to the entrepreneurial ability of the advisor.

Sir, at the end I only wish to state that what we need is an atmosphere where both the advisor as well as the investor—can work for each other’s benefit. Series of regulations have been counterproductive to investors’ interests— as it has only been directed at the so poor distributor –without any voice or lobby--leaving out the manufacturer as well as the investor. The earlier system of simultaneous existence of entry load & no entry load regime was to my mind the most transparent system where investors knew exactly what they are paying. Such a regime had worked perfectly-- in absence of dual commissions—for the growth of a healthy and transparent growth of mutual fund industry—the ideal vehicle to channelize the people’s savings to equity market.

Lastly, I only wish that you take a balanced view of the present ground realities while framing regulations for investor protection. 

Regards,

Neena V Mehta

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