The IFA (Independent/Individual Financial Advisor) is on life support, suspected dead — and the prime suspect is the Securities and Exchange Board of India (SEBI). What can be done to revive the industry?

In the last article (see: http://www.moneylife.in/article/72/8477.html) we had explored how the measures taken by SEBI have delivered a body blow to the mutual fund (MF) industry. In this piece, we try to examine the issue further.

Change always hurts. However, when necessary, it should be brought about in the face of resistance from all sides - because this change necessarily involves trampling on someone's toes and upsetting some apple carts.  In this respect, hats off to SEBI!
 
I do agree with 95% of the changes made by SEBI. I disagreed with the dual load structure - one for institutions and one for retail investors. I complained about this to the industry CEOs and it was like banging one's head against a stonewall - they would not listen - because it was convenient for them to ignore me. 

However, I disagreed with a few changes e.g. making the Sensex and Nifty as the sole benchmarks for equity funds - this does not make sense as MF schemes should be pitched against a similar rival if their performance is to be properly gauged.
 
While dealing with human beings, one has to be extra sensitive and careful because changes can cause irreversible psychological damage - which leave permanent scars. It also affects a person's ability to live e.g., pay bills, meet commitments, pay for the education of children, etc. The distributors have been damaged severely - both psychologically and financially - many have actually become nervous wrecks.
 
In advanced countries changes are made in a more caring and humane manner. The persons affected are given 3-5 years before a change is made, so that they can prepare for it. If they do not prepare for the change they have no reason to complain, because they have ample time to gear up for any eventuality. However with our wild bureaucrats, we cannot expect anything other than the 'rough and ready' treatment because they want to show that they have achieved something during their tenure and want their names in the 'Hall of Fame' - irrespective of the damage they have caused. Adolf Hitler and Genghis Khan come to mind when you examine their behaviour.  
 
In this respect, SEBI has been extremely unfair to distributors. To make things worse, the ones affected are those who have been serving their clients diligently and honestly and so do not understand why they are being punished. The ones who have mis-sold are essentially the bankers and a few big/ignorant/dishonest distributors. The bankers have got promotions from the mis-selling and are enjoying the fun. The big distributors have piled up huge assets and now have the holding power with their huge trail brokerage. The persons affected are the honest and sincere medium/small-sized distributors who have been serving their clients diligently - also there is a huge entry barrier for new vocations in this line - which is stifling talent.
 
If SEBI merely wanted transparency then they should have first put the new remuneration structure in place and then abolished upfront brokerage. They should have printed uniform forms across the MF industry with a column for the commission rate to be mentioned - it would have had the transparency that was required and also would have been fair to the distributor - there would have been a smooth transition. SEBI actually wanted to punish and destroy the distributor community because they have not understood the need for a distributor - this is the truth of the matter. The regulator's aim is to replicate its success in share regulation upon the MF industry - which is not possible - MFs are different products altogether.
 
SEBI has effectively abolished the remuneration of the distributors by asking them to collect them from the investor - when in fact, commissions have never been collected from investors in this manner. Thus investors are refusing to pay even the brightest minds for excellent services.  SEBI's 'solution' is quite utopian.  SEBI's staffers are earning fat salaries, CEOs of MF houses along with their staff and fund managers are earning fabulous packets - but the distributor (who is a soft target) is expected to work for free! This is not fair. This has made distributors stop working; and the industry has screeched to a grinding halt. You cannot blame the distributor for not working for free - but you can blame the authorities for wanting them to do the same. So thanks to the new regulations, the MF industry has been held at ransom for one year and investors, whom SEBI is supposed to protect, have been left stranded.
 
Before I end, let us look at how abolishing the remuneration structure has defeated the very purpose of the mutual fund industry:

• MFs sell units i.e., small amounts. They are meant for the small investor - richer players can afford consultants of their own.
   
• MFs are meant to garner money from schemes like Systematic Investment Plans (SIPs) where monthly investments can be as low as Rs1,000.
   
• Again, in an SIP of Rs1,000 - assuming the distributor is charging 1% as commission - do you mean to say that he has to send a bill of Rs10 every month to the investor? So these small investors - for whom the MF industry has come into existence - are ignored. It cuts into the very heart of the formation of MFs; SEBI should amend its rules before the industry collapses completely.

(Ms S Rodrigues is a financial and investment consultant based in Pune. She has, of course, used a pseudonym).