The securities market regulator’s recent proposal to distinguish between mutual fund distributors and investment advisors appears premature at best, and misdirected at its worst, say distributors.

Last week, the Securities and Exchange Board of India (SEBI) said it wants to bring in rules that will clearly differentiate between distributors of mutual fund products, who earn commissions from a mutual fund company, and registered investment advisers (RIAs), who earn their fees from investors who buy products based on the advice given to them. To this end, the Securities and Exchange Board of India (SEBI) published a consultation paper on Friday, proposing amendments to the SEBI (Investment Advisers) Regulations, 2013.

According to the new proposals, mutual fund distributors will no longer be allowed to provide incidental or basic investment advice on any mutual fund schemes they sell, unless they register separately with SEBI as investment advisers as well. They will be given three years to become advisers and until then, will have to refer to themselves as only “mutual fund distributors” and not as “wealth/financial advisers”.

“While it’s a good idea to differentiate between advisors and distributors,” the CEO of a leading financial product distribution company said, “SEBI hasn’t created a proper roadmap on how this is to be done. I don’t think forcing (this differentiation) on the market is the right strategy.

“For instance,” he continued, “the proposal includes a three-year migration period. Does it mean a distributor can become an RIA only after three years? But he can become an RIA even now, if he chooses to. Or does it mean that the window to become an RIA closes after three years?”

The costs of becoming an advisor also go up, with the new proposals, says the head of another national distributor institution for financial products. “There’s going to be more paperwork involved with the new system, more risk profiling, higher compliance costs come into the picture if you want to be an advisor, and now all of this is going to be legally binding.” Anybody who can’t bring these costs down is going to find it difficult o survive in the new environment, he foresees.

What several distributors find particularly galling is that the new rules only apply to distributors of mutual funds, and not those who distribute more complex structured products, portfolio management services, alternative investment funds, many of which have very high in-built costs for investors. The rules cannot be product-specific when it’s the same regulator overseeing different kinds of financial products, all of which fight for the same wallet share, they say.

“I don’t think the proposals have been well thought-out,” the person quoted first who requested anonymity, said. “I think we’re moving from a slightly safe environment for investors to a slightly more unsafe environment.”

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