SEBI wants more disclosures from AMCs

Investors will not question commissions in a good market but in a bad market they will make hell for the financial advisor.

Published: Mar 23, 2016 02:33:35 PM IST
Updated: Mar 23, 2016 03:28:24 PM IST
SEBI wants more disclosures from AMCs
Image: Shailesh Andrade / Reuters
Securities and Exchange Board of India has given more power into the hands of the mutual fund investor to make better decisions

The Do-It-Yourself (DIY) world of finance is much closer than we thought. On March 18, 2016, Securities and Exchange Board of India (Sebi), the capital market regulator gave more power into the hands of the mutual fund investor to make better decisions. Now funds will disclose information about the tenure of the fund manager as well as the holdings of the portfolio in the Scheme Information Document along with name, designation and remuneration received by all employees who receive an annual income of Rs 60 lakh or above working with the mutual fund.

But the killer blow comes in the part where the amount of actual commission paid by AMCs to the distributors or the agent will be fully disclosed in the consolidated account statement given to the investor. The commission will also include all the foreign trips or gifts or rewards received by the agent.

Abhimanyu Sofat, co-founder of advisesure.com, a financial advisory company feels that transparency is a good sign but investors will not look at numbers or commissions that agents are getting in good markets. “All these disclosures and salaries that fund managers are making will be ignored as long as the fund is outperforming. Advisors or intermediaries will face problems during bad market periods when funds under perform. And there will be some explanation that will be required from the financial advisor”, he says. He feels that the DIY customers are very few in numbers and the rest of the market needs advice.

The DIY models of Motif Investing and Betterment in the USA are in a position to service investors who want to do investment as a DIY model that exactly suits their individual profiles. Here people are ready to pay high fees as advice. Sofat feels that advisors in India will have to give a lot of value addition if they need to survive in this market.
But the biggest problem for the Indian mutual fund agent is not his low commissions but the high commissions received by insurance agents. Mutual funds and insurance companies compete for the same set of investors and traditionally insurance agents have always made more commissions than mutual fund advisors.

Their commission ranges from anywhere between 35 to 60 percent. But the bulk of the commissions for insurance agents are off balance-sheet items which include gifts and foreign trips. Now IRDA has decided to cut the foreign trips or all other items that are off balance-sheet but the 35 percent commissions received by insurance agents can go up significantly.

“There is a huge regulatory arbitrage that has been created in the system where insurance industry is at an advantage. Their agents get more commission and they come with the lowest possible transparency”, says Rajesh Krishnamoorthy Managing Director, iFAST Financial India, a platform for financial advisors.

His point is simple. From a customer point of view he welcomes the disclosures. But the fact that there is only one product with a high level of transparency while the other products like insurance and bonds have a long way to go. There the quality of the product is inversely proportional to the commission paid. What he means is that agents selling BBB rated corporate fixed deposits will get higher commission as compared to AAA fixed deposits or bonds. Insurance is one of the most opaque financial products with no accountability where insurance agents make anywhere from 35 to 60 percent in terms of commissions.

His argument is that Sebi’s proposal is on the right track but it is very important that other regulators follow on the same line as it will harm the overall market for financial products.

Krishanamoorthy’s argument touches a raw nerve for the mutual fund agent who has been selling a superior product at low commissions. And now when his fees are disclosed to his clients he is going to feel all the more insecure.

But then Krishnamoorthy also agrees that a fast moving regulator can also help the mutual fund agent to change his business model at a faster pace.  Sebi wants the mutual fund investor to move to the direct plan and become an advisor to the new investor. Over a period the new investor will become a seasoned investor and he will move to the direct plan. If an investor who understands the basics of investing and cost structures in a mutual fund will eventually be in a position to get into a DIY model. Investors are learning fast and they will ride the DIY model faster than most financial advisors can imagine.

There is growing awareness amongst consumers about the huge commissions received by insurance agents and some of them are already questioning their agents about the commission fees. These investors want to take their finances into their own hands. They won’t mind paying for advice but they want to know the fees that have gone as commission. “There are people who will always pay for good advice; and in the present era of transparency, we are more than happy to move our customers to direct plans and advice them for a fee”, says Sofat.

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  • Suresh

    Mr Palande, it would have been better if you had ventured out of your air-conditioned cubbyhole and spoke to any of the lakhs of small investors and distributors instead of just picking up the phone and talking to two people, both of whom have a lot to gain from the gradual decline in numbers of the distributor community! Your article was decidedly one sided! The ground reality has not been mentioned! And that is the majority of small investors do not wish to pay or cannot afford to pay an advisory fee! The article also fail to mention of the suitability of such a move in the Indian context! The investor community, whom SEBI, is so concerned about does not comprise just the HNI's only but lakhs of middle class people who outnumber the former by a very large margin! All of SEBI's moves in the recent years have been to cater to just the HNI community with whom he has much affinity! Has any survey been conducted by SEBI to ascertain whether the commission paid to the distributor community is disproportionate to the service their render to justify the publishing of commission paid to the distributor! It is abundantly clear that SEBI's moves are aimed to force the distributors in adopting the advisory model irrespective of the fact that it is ill suited to India for the time being and the majority of the distributors, will not be able to earn enough to sustain their business operations. If the idea is to remove the distributors altogether it would have been better if SEBI does it in one shot instead of the gradual slitting of the throat of the hapless distributor who has no voice and no one to take up his cause! But it appears SEBI and the powers that be do not have the cajones to do that! The distributors would much prefer such a move. They would just move on to selling other financial products or even become entrepreneurs! Could we have another article from Forbes highlighting the plight of the distributor community who have played such a stellar role in developing and popularising the market for mutual funds. Who has to bear an unjustified and illegally imposed service tax. Whose hard work in educating and bringing lakhs of investors to the mutual fund fold only to have them go direct. Who now also have to face the investors and justify the pittance that is being paid to them! I could go on and on and on! SEBI, in its action over the years, has been absolutely unfair, onesided and unconcerned about the plight, trials and tribulations of the dwindling distributor community!

    on Mar 25, 2016
  • Suresh

    Mr Palande, it would have been better if you had ventured out of your air-conditioned cubbyhole and spoke to any of the lakhs of small investors and distributors instead of just picking up the phone and talking to two people, both of whom have a lot to gain from the gradual decline in numbers of the distributor community! Your article was decidedly one sided! The ground reality has not been mentioned! And that is the majority of small investors do not wish to pay or cannot afford to pay an advisory fee! The article also fail to mention of the suitability of such a move in the Indian context! The investor community, whom SEBI, is so concerned about does not comprise just the HNI\'s only but lakhs of middle class people who outnumber the former by a very large margin! All of SEBI\'s moves in the recent years have been to cater to just the HNI community with whom he has much affinity! Has any survey been conducted by SEBI to ascertain whether the commission paid to the distributor community is disproportionate to the service their render to justify the publishing of commission paid to the distributor! It is abundantly clear that SEBI\'s moves are aimed to force the distributors in adopting the advisory model irrespective of the fact that it is ill suited to India for the time being and the majority of the distributors, will not be able to earn enough to sustain their business operations. If the idea is to remove the distributors altogether it would have been better if SEBI does it in one shot instead of the gradual slitting of the throat of the hapless distributor who has no voice and no one to take up his cause! But it appears SEBI and the powers that be do not have the cajones to do that! The distributors would much prefer such a move. They would just move on to selling other financial products or even become entrepreneurs! Could we have another article from Forbes highlighting the plight of the distributor community who have played such a stellar role in developing and popularising the market for mutual funds. Who has to bear an unjustified and illegally imposed service tax. Whose hard work in educating and bringing lakhs of investors to the mutual fund fold only to have them go direct. Who now also have to face the investors and justify the pittance that is being paid to them! I could go on and on and on! SEBI, in its action over the years, has been absolutely unfair, one-sided and unconcerned about the plight, trials and tribulations of the dwindling distributor community!

    on Mar 25, 2016
  • Shailesh Sampat

    In this type of situation one should show their experties to the investor and justify their commission. If Distributor can deliver the thing which is not possible in DIY model so distributore should come out from traditional investment patterns like SIP/STP and apply innovations in the field which is not possible under DIY model for an Investor.

    on Mar 25, 2016
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