Concept Paper on Investment Advisors' Regulations--Comments

Sir,

At the outset, allow me to introduce myself as an AMFI qualified Mutual Fund advisor.

I have read the Concept Paper on Regulation of Investment Advisors!

It is heartening to note that you are keen to make the world of investments a safer place for the investors at large. But the moot point is whether it is going to make the life of an IFA any better—an important link between the AMC and the investor-- whether we like it or not.

I believe that the said concept paper will not be able to deliver the results as anticipated by you.  One possible reason is that you are targeting just one segment of the financial market while investment world also covers secondary equity market and life insurance. An investor willingly pays upfront charges while buying an insurance policy but is hesitant in paying fees to his financial advisor is contradictory and self defeating.

The reasons why the said concept paper will fail to bring the desired changes are:-

• Low Level of Financial Literacy and awareness in India(Para 2.4):- 

There are 2 parties to any advisory business—the advisor—giving advise and the investor—the person receiving the advise. For an advice to bring desired results it is imperative that both the parties are on the same plane. Consider the real life case of a Client X who stopped all his SIPs only because he thought the markets would crash. (the SIPs had been started to build the retirement nest). The client—who holds an important position of Sales Head in a private insurance company—cannot be considered as a layman to investments. In such a situation, who is to be blamed—the investor or the advisor? If this be the case in case of an informed investor what more can we say about an average investor? The fact that client has to be informed/knowledgeable enough to appreciate the value of the advice given so as to enable him to meet a goal in his life. Further, since the level of financial literacy is low, the concept of paying fees to the advisor is also rarely accepted.

• Conflict of Interest(Para 2.3):- 

In any business, the distribution channel has a cost. Nowhere in the world would you find a distributor working for free. If churning is what you want to prevent, then is the MF industry the only place where churning happens? The possible solution to the issue of the so called divided loyalty is by doing away with upfront (and mostly differential) commission altogether. If there are no upfront commissions coupled with advisors being able to charge advisory fees, or better still, linking the quantum of commission to the age of the investment, then the urge to churn would not be there! The proposed regulation will in all likelihood kill the industry and then there will be nothing left for SEBI to govern. 

• FSA, UK model (Para 2.5):- 

You have quoted the case of Financial Services Authority, UK as a reference. However, what you have overlooked is that a market like UK is far more matured than ours. To expect an Indian investor to start paying advisory fees overnight is too optimistic given the level of financial literacy in India.

• Educate rather than regulate 

Having admitted that financial literacy is low in India and that roughly less than 10% of the population in India have access to equity markets, the key to healthy—enough to regulate-- development of financial markets is investor education rather than intermediary regulation. If investors are made to realize that equity markets are supposed to be a vehicle to plan and fulfill their goals and that a financial planner is a vital link between the investor and his goals by virtue of his expertise and knowledge. And that such expertise has a cost. A healthy industry is characterized by healthy growth of all stakeholders. Ensure that education and experience comes to play a distinctive role in the evolution of the industry a la medical profession.

Sir, a regulators job is to regulate the market and ensure healthy growth of all its stakeholders. Regulate by all means—but you should also see that the industry survives—for you to continue to regulate. The earlier regime of concurrent existence of entry load and no entry load structure was in my opinion fair enough. The investor chose for himself whether or not he is willing to pay fees?

Sir, an Independent Financial Advisor is an important link between the product manufacturer and the investor. It is imperative that he survives so that the investor can even dream about fulfilling his goals—meeting them successfully is another story! Hence, I request you not to implement the proposed Investment Advisors Regulation which will be nothing but a death knell to the already ailing investment advisory services industry!

Regards,

CA Vijay Mehta CFP^CM

ARN--1897