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Moneylife » Investing » Regulations » Investment Advisor Regulation IV: Distributors write to Moneylife to point out numerous holes

Investment Advisor Regulation IV: Distributors write to Moneylife to point out numerous holes

Moneylife Digital Team | 30/09/2011 01:18 PM | 

Our discussions of SEBI’s paper on investment advisors have drawn a tremendous response. Here is the summary of the distributors’ perspective

Comments have been pouring in from distributors of financial products- apart from the ones that are already there in our website (Please scroll below for the earlier articles). We have decided to summarise some of them around a few critical areas.

Trail commission: What happens to trail commission which a distributor may have painstakingly built up over so many years, and also whatever upfront commissions he currently gets, if he wants to become an advisor? Indeed, if this sum is large, all advisors would not become agents and there would be no new advisors.

Qualifications: As per SEBI's proposal, a CA or an MBA or those having at least 10 years' experience can become advisors. Stockbrokers and sub-brokers are exempt. Does this mean that they are allowed to offer investment advice, especially since SEBI has allowed them to offer mutual funds as a traded product? Also, large distributors are mandated to have just two employees with relevant experience exclusively for this activity. Does this mean that their army of "relationship managers" is free to continue in its ways?

Freedom: Insurance regulation today does not allow agents to sell any product they like. They are tied to a manufacturer. Does it make them independent? To offer the best product to the customer, shouldn't an agent be allowed to sell any product across any mutual funds, insurance products, post-office offerings or bank deposits? If SEBI is so keen on customer interest, why hasn't it taken a lead in this regard in the High Level Coordination Committee (HLCC)? The fact is, if a fundamental customer issue like mis-selling will have to be addressed, all regulators have to come together or else it would create distortions.

Execution: The concept paper also says that an advisor cannot help in execution. Is this realistic, given the current state of products, lack of technology, multiple levels of KYC (Know Your Customer) norms? And does SEBI even know what customers prefer? Would they prefer to move from a mutual fund advisor to a mutual fund agent to an insurance agent to a banker for a fixed deposit?

Paperwork: The SEBI paper also talks about the documentation of all advice, suitability of products and storing of that information for five years. This only creates enormous paperwork without any purpose. One financial planner writes: "Maintaining records of all advice given to a client is bad enough... maintaining a record for five years of all conversations pertaining to advice is virtually impossible for everyone, but the biggest organisations."

Advisory scope: No investment advisor can deal independently across all financial products. One would need extensive and continuing research and also a compensation level from customers, which keeps advisors independent. In any case, it is not just about expertise and money. It is also about attitude. SEBI should find out whether it is even theoretically possible for a large bank to be independent in their approach.

These are just some of the issues that distributors have highlighted. If you have more points to share, please write to us at

You may also want to read:
Investment Advisor Regulation III: SROs have never worked in the past; will it work now?

Investment Advisor Regulation - II: How SEBI's do-gooding can be easily undermined

Investment Advisor Regulation I: SEBI's ideas are, as usual, far from reality; may increase mis-selling!

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PPM 4 years ago

The best option is to get SEBI out of MF arena and get a different regulator only for MFs.

SEBI is suitable for IPOs, secondary market only. They can not think beyond the trading mindset.

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JJN 4 years ago

Firstly, I agree with the following:
1. Financials advisors and intemediaries need to be better regulated in this country.
2. It is the job of the regulators/ SRO, such like to regulate them.
3. Preferably regulations should not be hasty and ill-thought, and the industry and stakeholders (investors, manufactuers & intermediaries) should be given sufficient time to make the changes required for them to work under the new rules – which will help in a smooth transition.
4. Proper education is required to be provided to all the stakeholders, on how to engage their partners under the new rules

However, having read through the draft paper, I feel it falls short in many respects and needs significant amends:
1. Though the concept paper says the Indian investors are not yet financially very literate (para 2.4), they expect them to understand and differentiate the services of the agent from the advisor – and thus feel the need to pay for the services of the capable advisor – an ideal situation, don’t you think? I feel the time has not yet come for this in India. It requires a lot more “financial literacy” – which the concept paper itself admits, we Indian mostly lack.
2. They quote the FSA in UK – like a benchmark – however, one must note that the FSA and other US bodies are making regulations for people who are used to living in a culture where children – from a young age – are trained to respect and pay for help rendered – like it is any other job. So culturally, the people in these advanced economies are used to paying for services that they use. Though this will come about as we progress, maybe it will take a while before the regular investor in India feels the same way, and appreciate the fact that he/she needs to pay for financial advice.
3. Why are Stock brokers being excluded from the rules of the concept paper? Aren’t they also financial advisers in every sense of the term – if they are going to recommend a stock to buy? Are they scared that liquidity will drastically drop in the equity markets if they do so?
4. SEBI says nothing yet about whether they will differentiate financial products/ schemes - whether mutual funds or others - that will give a benefit to advisors to market themselves – like mutual funds for agents and mutual funds for advisors. Obviously, we can expect “Investment Advisors” to put pressure on SEBI/ AMCs to create lower cost products for them… This is likely to play out. But SEBI has not given a mention about it.
One main amendment/suggestion to this concept paper is this –
1. Have rules / guidelines set for working as an agent and as an advisor, separately. Obviously, the rules for advisor will be more stringent with higher level of audit & eligibility requirements. This can be overlooked by an SRO / as well as respective regulators.
2. Allow all agents/ advisors to choose and work in both capacities if they meet the requirements set - Here, one would presumably start with being an agent, and then elevate oneself slowly to being an advisor. Some may choose to remain only as an advisor or an agent also.
3. Instead of every Agent/ advisor being made to choose that he be either as an agent or as an advisor (with all his clients), this choice should be made at each client level. Every client should be compulsorily be registered only as either one - “agent- relationship” or “advisor relationship” and subsequent agreements on fees etc should be drawn up at the start. This cannot be changed for each transaction.
4. This gives leeway for the agent/advisor to work up the value chain, while the client has the freedom to choose what relationship he wishes to have with the agent/ advisor to start with.

I hope that this suggestion is taken up. I call on distributors to write their suggestions/ feedback to the email id given in the concept paper.

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Nayan 4 years ago

Is there anything to worry? It is contradictory situation. Which CA or MBA will be interested in going to meet client now & then for meeting, advising. and even for peanut amount of fee. And in present scenario clients generally do not go for getting advise. Clients are presently getting advise free of charge or only with low amount of fee (as many are still very reluctant in asking charge).

Experienced CA : I do not think that already experienced CA would like to transfer their work skill from legal, accounting, auditing etc.

New CA : I really feel that even a IFA with no much edu quali but with experience will be much better than NEW CA. Mainly I am in accounting field. I have many CA but I do not think that CA do have much knowledge of mutual fund other investment field etc. Of course they can be considered good at personal taxation, personal taxation planning.

If we think deeply, abolishing entry load, was a really good step for investor. But We should not create such environment that IFA community become extinct. They must be given chance, warned to become educated etc.

Suggestion : Let present IFA work in the status quo situation but with warning that they should complete some education (like CFP) within some stipulated time. They should be given some incentive also to GET education. Some AMC should support him getting knowledge, withholding some of his monthly brokerage etc. And even after some tries, if they do not get stipulated knowledge, they should be labelled uneducated Agent.

In the meantime new mind should also come forward and get knowledge.

I really took a lot time in writing this. Any one can think further in this point.

New IFA should become educated on their own within some prescribed time.

I do not think that already experienced CA would like to transfer their work skill from legal, accounting, auditing etc.

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Nayan 4 years ago in reply to Nayan

I have not much practical experience of any MBA-Finance.

Can any one at which good they are?

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Brijesh 4 years ago in reply to Nayan

You seem to be living in another plant.

MBA today is what B Com was a decade ago

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Nayan 4 years ago in reply to Brijesh

So, practical they are not much strong. Right. That is what I am saying. CA is much higher. MBA Finance is much lower.

Where we are going?

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Pradeep 4 years ago in reply to Nayan

Not true. It all depends on the level of expertise the person has. A person who has done CA is not better than an MBA in Finance just by comparing the degree aspect.

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MAHESH DONGRE 4 years ago

whether it is Mr. Sinhna or Mr. Bhave or the next one- they all are chip of old block.

today the investors are more aware of things (Half knowledge ) than the agents/fin. advisors. to remove that block and establishing that equities create wealth only in long term- pations pays. etc. takes very long debate. they call for any tom dic harry of Post office manager, Bank manager. Now tell me these are our competatiors- Will they definately talk good about the mf? we can understand their stance because they should be loyal to their job. today i bet you ask any bank manager where to invest - i, putting my hand on my chest, can say that he will advise Life insurance. the way LI is being sold in Banks today, hardly being sold by LI people in Li office. they tell me, ARE THEY DOING RIGHT? WHO WILL REGULATE THESE PEOPLE?

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Balaji 4 years ago

SEBI is not clear about Advisor, in all advisory field all types of people available, if these kind of regulations come common get suffer why means his investment will be less & charges will become more, Advocates,Doctors, CA's are not charging less, if common man go to them even for investment also they surely die, SEBI should think practically what is possible & what is not, now because of SEBI our mutual fund industry not grown much with individual basis, not much Indians are aware of Mutual funds, how it works or how it is beneficial, to convince the prospect it takes much time , so how can it possible with less charge, now in India small common labour charge 300/- per day, not educationally qualified mechanique charge 20/- per consultancy @ his place, but we advisors need to call the prospect several times and visit their place several times to complete the sale. I request SEBI to think practically and publish.

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Krishna Gopal Gupta

Krishna Gopal Gupta 4 years ago in reply to Balaji

A TV mechanic charges Rs. 400/- for a visit & calls himself engineer. Other charges would be extra. Similarly, a washing machine/fridge repairer calls themselves as engineers and charge somewhere Rs. 500/- or so per visit irrespective of the fact whether the machines are in order or not? So, who is better? We as advisors have to update ourselves on many occasions even out of compulsions and then investors do not reward them properly and regulators affix unwanted undesired and dictatorial rules, which he has to comply...???

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