Investment Advisor Regulation IV: Distributors write to Moneylife to point out numerous holes
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 firstname.lastname@example.org
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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