The lack of any distinction between ‘agents’ who earn their commissions from financial firms, and ‘advisors’ who provide impartial counsel to investors for a fee, has for long been the bane of the Indian financial products industry. The Securities and Exchange Board of India (SEBI) has been fighting a lone battle in trying to fix this malaise, by requiring full-fledged mutual fund ‘advisors’ to register with it, eschewing commissions from fund companies. But investors have so far shown little inclination to make this transition. SEBI’s circular last week, asking for higher commission disclosures from mutual funds, seems to be the latest attempt to tighten the screws on the agent model.

SEBI has now decreed that the consolidated accounts statement mailed to investors must contain, at half-yearly intervals, the absolute amount of commission paid to the distributor and total expense ratio — with and without distributor commissions (direct versus regular plans). Non-monetary incentives are required to be shared too. These disclosures will certainly improve the quality of information provided to investors, as it will help them gauge the nature of rewards to fund distributors. The requirement that non-monetary rewards also be quantified ensures that gifts-in-kind, expensive junkets or gala events for distributors don’t go unchecked. While transparency is a good thing, it is essential for SEBI to ensure that MF investors aren’t actually misled by these disclosures. Unlike many other financial products, every mutual fund scheme is subject to a statutory cap on costs that it can charge to investors; distributor commissions are included in this cap. As the returns and Net Asset Values (NAVs) disclosed to MF investors are net of expenses, a fund house cannot really be profligate on distributor rewards at the investor’s expense. While SEBI is insisting on such minutiae, it is noteworthy that other financial products such as traditional insurance plans get away without making even basic disclosures on costs, which are easily 10 to 15 times those charged by MFs. It would be good if the IRDA and other financial regulators insist on similar commission information from their constituents, to bridge this regulatory arbitrage.

While cost-related disclosures may be useful to investors, the same cannot be said of the disclosures on managerial remuneration that SEBI has now added. It has made it mandatory for each asset management company to put up on its website, the remuneration paid to top executives, details of all employees with annual pay in excess of ₹60 lakh and the ratio of CEO pay to median employee pay. While such pay disclosures make eminent sense for listed companies where this number can have a direct bearing on shareholder profits, mutual fund schemes are a different animal altogether. As long as a scheme functions within its statutory expense limit and generates good returns, why should investors care what an AMC pays to its employees? SEBI can instead help push the advisory model by educating them on the benefits of unbiased financial advice.

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