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The Securities and Exchange Board of India is not alone in finding itself in a complex situation in regulating mutual fund distributors and advisers. Regulators in other countries are in a similar quandary.
SEBI’s recent discussion paper proposes banning banks distributing mutual fund products, from acting as investment advisors through a group company. Similarly, individuals registered as financial advisors should stop using close family members to distribute MFs. SEBI has given such entities the option to be either an advisor or a distributor. MF distributors are only allowed to explain the scheme contours to the clients.
SEBI’s stance cannot be faulted. They need to stop misleading investors by posing as advisors. Since these entities earn their income only through distribution, there will be no impact on their businesses through this. As far as regulating investment advisors go, SEBI can be a little more flexible. Most countries have been grappling with the issue of conflict of interest arising from investment advisers earning commissions for products sold to clients. Countries such as the UK, Netherlands and Australia have banned investment advisers from receiving commissions from fund houses.
But the UK Financial Advice Market Review , 2016, found that many banks in UK were advising only high networth clients and most were unable to afford the services of investment advisors. The EU has not banned advisors from taking commission but only asks for proper disclosures to clients.
While SEBI’s proposal is ideal, it could be put off for a few more years, else all advisory units might have to shut down in the country. Registered investment advisors could be allowed to receive distribution commission also, as long as at least 25 per cent of the entity’s income is from investment advisory fee. This will put an end to the charade of using family members or group companies to side-step the regulation. Distributors can, however, stop giving incidental advice and thus confusing investors.
Associate Editor
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