How SEBI killed the IFA: A murder investigation report
S Rodrigues 24 August 2010

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). The acronym is alternatively called in a parallel world, the Systematic Elimination of Brokers and Intermediaries

Now the distributor is on the incubator, on life support, suspected dead. We know how he got there - is SEBI going to revive him or remove the life support system?

Let us study the history of this crime, and discover what the investigation reveals:

1. The Golden Beginning:

The golden days of mutual funds (MFs) were when they were a hard sell. The IFA educated the investor about risk-control measures, liquidity, profitability over a gestation period, tax benefits and working of an MF and introduced them to asset allocation before putting down a single rupee. However, the investor wanted to hear about the 'guaranteed returns' that he was addicted to - thanks to the Unit Trust of India (UTI), fixed deposits, etc. So he missed the boat but not before dipping his feet into the swimming pool by investing small amounts. The IFA said to himself, "Today he is dipping his toes into the swimming pool - tomorrow he is going to jump in." Right enough!

2. The 'Unethical Practices' begin:

Once the investor started to take a dive into mutual funds, they (mutual funds with the active connivance of some IFAs) introduced their first unethical practice - 'dividend stripping'. They did not inform the investor that the net asset value (NAV) falls to the extent of the dividend amount and that there is no advantage in chasing dividends (in fact there is a disadvantage as the investor is paying a load on money merely returned to him - without any fund management).  It was dividend that attracted the inflows and not the client's investment goals nor the fund performances - the party continued.

3. The 'Unethical Practices' grow:

The next big 'con' encouraged by mutual funds was "NFOs" (New {and unnecessary} Fund Offers). Mutual funds did not educate the distributors and investors that the NAV does not generate any return (but rather the 'Portfolio' does) - thus whether the NAV is Rs10 or Rs10,000 does not make any difference - it is merely a mechanism for 'entry' and 'exit'! They instead sold 'Rs10 as 'cheap'. This resulted in thousands of superfluous schemes being launched. SEBI did a great job of stifling the NFOs by abolishing the entry load.

4. Some 'Greedy Distributors/IFAs':

The biggest evil is yet to be highlighted - it is the 'banker' - who sold MFs based on head office's recommendations, which in turn were based on target collection shortfalls - client needs were nowhere in the picture. If the client needed 'debt' - sell 'equity' because there lies the shortfall in targets and the HO's rewards for them.  To make things worse, these qualified MBAs would each come with their own ideas and churn the client's portfolio many times and get multiple credits towards their sales targets. Next they would get a job promotion based on this (churning) performance and the new MBA would take his place with his bright ideas and rape the investor again with another few churns.

Some greedy IFAs joined this circus and sold equity as a 'short-term' instrument and wrongly taught investors that 'share funds have to be bought and sold quickly' - they did not inform the investor that they merely have to make an 'asset allocation' and the fund manager will be doing the 'buying and selling' for them.

Thus I maintain my stand that it is not merely 'education/educational qualifications' that will revive the industry but rather 'dedication' - let the investor decide who is dedicated and who isn't!

SEBI, too, messed up over here. When MFs set the exit load on share funds as 1% for those who exit before three years (gestation period of equity product) - SEBI in its benevolence to become popular among the investors reduced this to one year - this move encouraged churning after one year - thus doing more harm than good to the industry, which is suffering from too much short-term money and views.

5. SEBI lands its death blows:
A person is satisfied and gives his best if:

a. He is well-paid - if you pay peanuts you will get monkeys - why should you attract a qualified and dedicated force consisting of the brightest minds if the payment is inadequate? Not only was the payment made inadequate, the upfront brokerage was hastily abolished without setting into place international 'best practices'.

b. He is sufficiently motivated - SEBI and the media continuously focused on the unethical practices of a few distributors. The whole distributor community got demoralised and was viewed with suspicion - as cheats. How can you expect performance from a demoralised force?{break}

c. He has the necessary job security - SEBI has released a diarrhoea of circulars and the entire MF industry is of the view that they all need to go on a long holiday. With the goalpost continuously being shifted, the IFA is totally disoriented and refuses to sell - this has rubbed on to the investor who is resorting to selling to invest in bank deposits and properties.            

Let me elaborate:

a. 'Investor Going Direct' is an injustice to a distributor:

A person approached me for the investment of a huge sum. I explained mutual funds to him in great detail. He wanted MF portfolio reports and performance comparisons - these were sent by email. He wanted a detailed plan with a suggested asset allocation - these too were promptly sent to him. After four months of discussion and deliberation - on 4 January 2008 I received an email 'Happy New Year - I heard that now we can now invest directly in mutual funds. Thanks for all the help and advice.'

Now do you think this is fair??? Why on earth should I spend hours of my time on an investor when I do not know whether I will be adequately remunerated? So thanks to this move of SEBI I have turned tight-lipped and sketchy in my explanations, I now give only 10% of myself - as against 120% previously and new investors are strictly taboo (at a time when SEBI wants them popularised).

Thus thanks to SEBI I am no longer doing justice to the investor community. This move to let the investor go directly is retrograde, with the abolishing of the entry load it has become obsolete - but SEBI will not remove it from the statute book as they will be losing brownie points.

b. The international 'best practices' remuneration structure was not put in place before abolishing loads and commission - death for the small investor:

The international practice of the investor and distributor mentioning a mutually negotiated commission rate on the application form and both signing against it should have been put in place before commissions were abolished. This would have resulted in a smooth transition to the new regime. The move on the part of SEBI of only implementing half the job has won a lot of investor brownie points, a place in the history books but has destroyed the remuneration and motivation of IFAs and has rattled the whole MF industry.

Mutual funds were formed to mobilise the savings of the small investor. But with no upfront brokerage and with the laborious and expensive billing process, who would be interested in the small investor who wants to make an SIP below Rs5,000 per month or invest an upfront amount of Rs5,000 to Rs25,000? The billing would cost more than the revenue earned. Thus this populist move has been self-defeating - the small investors are rejected and no longer welcome!

c. All financial products cannot be marketed on the same remuneration:

SEBI has not understood the marketing of financial products and it is for this reason I am most thrilled they were unsuccessful in taking over ULIPs (the most expensive and mis-sold con product in the financial world - which need drastic distributor cost restructuring for some profitability to emerge).

Here is an explanation:

i. Shares and stocks are sold by giving recommendations/tips - it requires no servicing/discussions. All servicing is done by the investor directly with the demat bank/institution. It is a high-volume business with hundreds/thousands of transactions conducted daily on a low remuneration.

ii. Mutual funds required detailed explanations relating to risk control, liquidity, profitability over a gestation, tax benefits, working, etc. Regular servicing for change of address, change of name due to marriage, change of bank details, death of holder, valuation & tax statements, account statements requests, year ending account statements requests, etc, etc - take up a majority of a working day. Such services are generally rendered free although they take up a lot of time and cost much money. 

Thus transactions are few and require a higher remuneration.

iii. With insurance a person sells the insecurity of death - which is a hard sell.

iv. With ULIPs they sell a combination of mutual funds and insurance. Both insurance and ULIPs have only a few strikes (if at all) in a month - so how on earth can all these products be sold and remunerated in a similar way? They each have their own dynamics and remunerative structure to retain quality talent. If SEBI took over ULIPs they would become extinct like the dinosaurs and crumble like the MF industry!

d. Unnecessary focus on commissions:

When SEBI abolished the entry load and upfront commissions and focused on commissions, it did the following:

i. Created huge entry barriers due to which bright and clever minds could not enter the industry. The commission given by mutual funds out of their own resources was too low - new entrants did not have the ability to charge a fee.

ii. Around 80% of the IFAs disappeared (100% would have disappeared if trail brokerage commission was also abolished) and enrolled in employment exchanges or joined call centres. With a depleting force how can there be increased market penetration?

iii. All expansion plans into rural areas and branch expansions, etc, were abandoned.  In fact many of my colleagues shut down branches.

iv. The lack of remuneration de-motivated persons from getting professionally qualified thus stifling the quality of growth in the industry.{break}

v. The whole focus was drawn to commissions, compiling commission sheets, etc rather than reading news articles, studying portfolios, learning/using tools of financial planning, meeting clients needs, etc - the quality of advice deteriorated as more time was spent on such useless activities.

The SEBI chairman does not pin his salary structure on his shirt, Value Research or any financial magazine does not mention how a big article was published due to the support of an advertisement - so why should a mutual fund distributor reveal his (now - token and miserable) commissions when he meets an investor? In fact, the task is daunting and could take months to prepare - as the commissions on 'all competing schemes' need to be displayed i.e. thousands of schemes - an impossible task! This is how the bureaucracy burdens you with burdens nobody can bear - so that they can crucify you anytime!

All this shifts the focus from the client's needs to the commission structure - thus getting everyone 'out of focus'. With the current rule even the best scheme attracts the suspicion of the investor if it pays the most commission! 

It would save a lot of time if instead the regulation provided that:
a. The investor can log into CAMS/Karvy/AMFI and find out the commissions payable by all schemes by entering the distributor code.

b. Each mutual fund scheme is rated by CRISIL (or any other rating agency). And only those selling funds below a certain rating should be forced to reveal the commission received thereon and competing schemes. My 25 years experience in this line tells me that focusing on commissions is a bad idea, puts the emphasis on the wrong thing and get everything 'out of focus'.

vi. The distributor also suffers from the stigma of other injustices in relation to commissions, e.g.:

a. While everyone is exempt from service tax for service income up to Rs10 lakh, the mutual fund distributor's commission is subject to service tax deducted at source from Re1. Why is SEBI not acting in this matter and making representations to the government? It is now three years and this injustice continues - distributors earning more than Rs10 lakh have lost more than Rs3.6 lakh due to this move.

b. A manufacturer does not ask a wholesaler how much of the produce he is going to personally consume and charge him a retail price thereon. An Insurance Distributor gets a commission on his own policy!

So why has an MF distributor to disclose his personal investments and not be paid thereon? It does not make sense especially since upfront commission payment from investor money has been abolished.

This rule was introduced so that persons would not become distributors merely to earn commissions on their own investments. With the professionalization of the distribution business this provision has become obsolete and needs to be abolished.

c. AUM (Assets Under Management by a distributor) is tantamount to goodwill created, as an investor is free to change his broker if he is not happy with him. Thus AUM is nothing but 'retained assets' i.e., goodwill. However there is no uniform mechanism to transfer the AUM on change of the organisational structure, for the distributor to sell the AUM on retirement, for the heirs to sell the AUM within a reasonable time after the death of the distributor. Thus the distributor's 'gold nest' can easily get frittered away and is without any legal protection.
The fact is that for the mutual fund industry to succeed two things need to be done:
a. SEBI, MFs and distribution channels need to work ethically together as a team.  Right now there is a major conflict with SEBI. And SEBI is hated by MFs and distributors with all their might (and rightly so!).
b. The investors must be given proper product knowledge and MFs must be sold ethically. Each investment must be tied to an investor's need - so that he remains invested with a purpose.

Until this comes about, the MF industry is not going to expand but will instead stagnate. 
(Ms S Rodrigues is a financial and investment consultant based in Pune. She has, of course, used a pseudonym).

1 decade ago
I used to sell mutual fund and give good advice to my investors.where to place ur hard earned i will sell ULIP and UNIPAY2u.and say that mony will double in 3yrs and 10 months.I think every body has heard of UNIPAY2U.So why should i sell mutual fund.I will tell my investors to put money in unipay2u.Can mr bhave do anything against unipay2u.
1 decade ago
kishore ghiya
Replied to SM DHOLE comment 1 decade ago
In all business there are cycles up and down u r passing thru rcession,where investors is getting out at every rise,this will continue till real rate of interest in one yr fd rates become negative because of inflation. Then they will come but you should be happy with entry load and yearly trail.You must keep pn feeding news about ongoing achemes and pl stick to one fund only where u think amc is fair to distributor AMCs will also have to change and will have to pay more for loyal distributors.You may visit site of usa small investors called or motley the and learn all about idea of investors club.Pl tru to form atleast 2 investors clubs and let ur old clinets educate them how to invest, dont expect businees think as promotional cost. I f they are saitisfied with ur service at reasonable cost they will give business.PL ALSO MEET OTHER hni WHO HAVE NEVER INVESTED AND TRY FOR 1% OF THEIR INVESTMENT BY OFFERING PRODUCT, DO NOT HARD SELL LET HIM BE CONVINCED THAT HE IS BETTER OF TAX WISE AND RETURNWISE THAN INVESTMENT IN fdS,THE NEW FIRST TIME HNI INVESTORS ARE YOUR FTURE.pL LOOK AT 9% GROWTH AND RETAIL INVESTORS ARE BOUND TO COME BACK. BUT PLEASE NEVER NEVER ADVICE THEM HOW TO INVEST SOLVE THEIR QUERIES AND THEY WILL GIVE BUSINESS. nEVER BRAG WITH THEM AND NEVER COMPARE RETURNS BASED ON PAST STATISTICS. pL UNDERSTAND THEY HAVE SURPLUS FUNDS TO INVEST SO THEY R MUCH SMARTER THAN US BELIEVE IN CUSTOMER IS OUR GOD AND HE IS ALWAYS RIGHT JUST PROVIDE THE SERVICE AT COMPETITIVE RATES.iT IS FREE ECONOMY WE HAVE TO STRUGLLE.I WISH YOU ALL THE BEST.
1 decade ago
abhishek bhaiya
kis duniya main rahte to bhai.yahan to invester chawanni bhi nahin nikalta.woh sochta hai ki woh hampe ahsan kar raha hai invest karke.service charge dene ki chhodo ,woh to hamse hamara brokerage bhi mangata hai.
kabhi sales ke field main akar main baithkar badi badi sochane se kuchh nahin hota
Abhishek Gupta
1 decade ago
I see so much non-sense in this column that its laughable. Are investment banks not required to disclose the fee payable to them in Offer Documents. Why should an MF distributor shy away from this?

The rot in the system was the unadequate advise doled out to gullible clients because one Fund was willing to pay higher commission to the distributor than the other. SEBI had no choice but to slash it all out.

As for the way ahead of MF distributors, they should utilize their knowledge in their domain to charge advisory fee from investors willing to invest. May range from smaller Rs. 200 fee for sub-5000 investments. But the business model needs to change for sure.
kishore ghiya
1 decade ago
I am small town mf distributor since last 10 years working on very reasonable margins. Today amfi code says i cannot give rebate to lue investors but they are silent when i call them i am getting large amount and my client asks for rebate.My client has got every right because on rs 5 lac amount i get rs 3750 upfront and yearly rs 3000 as trail,but amfi officials never reply sauing you will be pealised you cannot give rebates. All the banks and big ifas give kickback in form of foreign joints and free stay etc but disocunt in form of rebate by check oh my god you must ring up amfi and listen to lady in charge first she shouts give your arn number then she threatnes you will be penalised for gvg rebate she cannot differniate between large business deals and misselling to lure customers. I am afraid amfi bosses are not aware of old mrtp and are afraid of competition by small players. I request forum what is wrong if i want to work on meagre margin for benefit of my clinet as long as it is fair business deal how can amfi prevent me from giving rebate by cheques when they cannot prevent banks from foreign trips.
Rajkot mob 9825217857
Replied to kishore ghiya comment 1 decade ago
Mr Kishor-u seems lucky that you have investors who can invest 5 lacs in one shot-but how many are such HNI clients?what about a 5000 Rs investor or 1000 Rs SIP-will u give him same treatment?please get into shoes of other IFA's who have retail business-and retail is real backbone of MF industry-I stay in Surat which is wealthiest city in gujrat-but none of investor is paying fees for services to 2% level-if Surtis dont want to pay-i know Rajkotiya would never pay willingly-bcos i have spend childhood in kathiyawad-so pl dont ask IFA's to compromise to situation created by SEBI-this is going to only reduce retail participation of investments-
kishore ghiya
Replied to Roopsingh comment 1 decade ago
retail participation is decreasing because of risk aversion by investor because of hugh fall of sessex from 21000 to 9300 in one year in 2008.This is not due to us.I handle trust,school accounts and meet investors who have parked hugh amt in fds. business is slow but all funds have on going contest for sip get 10 and earn 1000 etc. What IFAs want is they get commision collected by amcs and give. Worldwide direct participation is allowed so we have to adjust to syste.We do not get commission on helping our clients park money in baks in FD, MF investment is also same.It is monopoly broken by sebi and retail investor gone is hurting us, well it is free economy so we have to live and compete and sufvive.
Replied to kishore ghiya comment 1 decade ago
U have stated that retail participation is decresing due to markets volatility-thats true to only some extent-retails are not coming not due to volatility-but because 5000 rs applicant or 500 Rs SIP is not rewarding advisors to their efforts-a SIP application needs half day work for a advisor-and he gets not more then Rs 100 per application as fees-will he enetertain such client-are we agents liable to earn only rs 200-300 per day(SEBI has made agents even worst then a labour-bcos he earns Rs 300 per day without burden of next service).earned and forget of last day-but we have to service clienst till he remains invested-so pl dont say that only markets are responsible for decreasing retail participation-
kishore ghiya
1 decade ago
Nobody has a right to advice that this is the way you must invest.World over investors are allowed to directly invest in mutual fund.AMC or banks both collect my money and try to give me returns. In bank there is no entry load same way AMC should compete banks for funds by being transparent and should encourage investors club provide them learning tools all free and then whole cycle of revival will start.
If IFAs do not get customers it is there own fault, they have to do soul searching and move away from bad practices. 90% of them are CAs or tax experts and do mutual fund business on side.Till sebi lowers entry level for small amcs to enter and competition in stalled nothing is going to change.In small town like if i want to start small amc with 1 cr capital why prevent me from entering capital market.If i cannot generate faith in my customers it is my problem i cannot blame sebi or other govt agencies.The constant worry abt scams by small players is a hype created by vested interest who are afraid of competition.
Open up capital market to small players and let their be level playing field and let best service provide get the business..Stop worry abt public money will be lost away by small companies,satyam rs 24,000 cr scam is enough example and ipo scam of reliance power marketed by lead managers, is it not eye opener.Any action taken against lead managers for grey market premium of rs 900 on reliance power issue that bought lacs of investors to the slaughter house.
Pl make market open to all and please let there be competition.
Kishore ghiya rajkot mob 9825217857
1 decade ago
sebi is trying to protect investor but how ? mf in demat form
de mat charges......
transaction charges......
amc ........
how will sebi stop all that

god knows what sebi want to do
listing all funds ...small amc will be finished(listing charges)
ONLY BSE,NSE,BROKING HOUSES,CDSL,NSDL will going to be benefited
i am challenging sebi chief that come to any town of india especially uttar pradesh or bihar and sell mf or any other financial product
for just a week & earn your livelyhood you will know how we had made our ...........
sitting in ac room with all modern facilities & making law or making policies in 5 or 7 * hotels is easy
once again i am challenging .........come...........
1 decade ago
Tks Rodrigues. Ur inputs are apt and timely. Being an IFA and focussed on clients welfare for own good, I often get demoralised as the upfront income from selling MF ( especially through SIP/STP route) is painfully low.
1 decade ago
Forward this article to SEBI chairman and other SEBI officials.
Replied to Paresh comment 1 decade ago
who will do this great job because SEBI boss is in accessible to any person except stock exchange brokers and NSE officials-he runs his office as hidden den in mountains to protect from enemy attack-and he never comes in public -he never talks about issues which common people are eager to talk-he holds a position of MAI BAAP or SARKAR of stock market.
Replied to Roopsingh comment 1 decade ago
good answer bro...
1 decade ago
If SEBI really want to bring financial advisory service at par, they should keep entry load at par in all investment products whether it is Mutual funds, ULIP's, whatever equity products. This will make an advisor non partial, and will advise product on the basis of merit.
balkar singh
1 decade ago
this is correct can SEBI chief Mr. Bhave display is salary structure on his shirt, so how he can ask from others.
or other research sites shows their ad. revenue for any article.
then why they are pulling legs of IFA.

the impact of the same is that indian investor is still unaware of MF products thanks to SEBI
1 decade ago
bharath bhaiya, india main chirag leker dhoodhane se do char milte hain fees dene wale.har koi ifa se comission share karna chahta hai.uske baad bhi expect karta hai ki usako best service mile.
1 decade ago
really atlast some one explain our pain bhave will go to hell.
1 decade ago
SEBI did the right thing. The financial advisor should be able to prove his worth. If he is really good, investors will hire him and him for consultancy. But he has to prove his worth.
1 decade ago
why torture a poor IFA sebi should kill him so that he does not have time to think.Sebi should also close down all the brokers and stock exchanges as sebi itself is very partial. who wins an election is the majority so instead lets finish sebi which has a hand-full of irresponsible people and if elections take place than they will lose so stop dictatorship. Dictators never prospered for long
Replied to faria comment 1 decade ago
Life span of dictators gets shortened when they loose faith of masses and common man-other wise dictatorship works better then democracy-dictatorship fails when it gets corrupt and individual centered-means when dictator starts looting masses for his individual grredness-Hitler was born out of aspirations of millions of deprived Germans who were crushed by Britain and ally forces-but what Mr Bhave is doing is just trying to work for few stock brokers and their nexus with NSE in cheating retail clients-thats why we all are here to stop this dictator who is greedy for his individual gains and calling all his actions as ""invetosr welfare"".
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