‘Impact analysis a must before advisory norm amendment’

The Foundation of Independent Financial Advisors (FIFA) represents over 1,400 distributors of financial products, particularly of mutual funds. The combined assets that these distributors advise is over ₹70,000 crore. With SEBI intent on investors paying for advice on mutual funds instead of distributors earning commissions, Dhruv Mehta, Chairman, and Roopa Venkatkrishnan, Secretary, FIFA, discuss how the change might be detrimental to the industry.

SEBI had a consultation process on this change to the fee-based model. Do you think it was thorough?

Mehta: When SEBI proposed to amend the RIA (registered investment advisor) regulations, they sought opinions from the public. The time given was only one month for giving feedback. Typically, regulators give three-six months if the implications are far reaching. There were consultations but they are trying to crunch it too fast. The asset management industry itself didn’t get time to go through the problems and the possible solutions. We think, what is missing is an impact analysis. Regulators need to see what are the costs and the benefits of the change and whether there is any evidence that distributors are compromising client’s interest.

Roopa Venkatkrishnan: I as an advisor or a distributor go to my client and give him a product. My relationship is not that of a fly-by-night company; my business works on word of mouth. Both my business and relationships have been built over years. If I do something wrong, the customer will penalise me and not give me any more business. So, what is the percentage of mis-selling in the mutual fund industry? No one seems to have any idea.

Are investors mature enough to approach an advisor? What would be the cost of such an arrangement?

Mehta: Look at the country perspective. The government of India manages provident funds and 100 per cent of this is used to go in debt. Any financial planner will tell you that if you’re collecting money for retirement, you can’t go completely into debt instruments. When there’s so much mis-buying happening by the government itself, I don’t think people in general understand the importance of asset allocation.

RV: The average amount that a retail investor puts into an SIP a year is ₹36,000. Even if I charge 1 per cent of that as my fee, that’s going to be very low for me. My business is no longer viable. Also, I can charge a fee when penetration levels are much higher. Does anybody walk into my office telling me I want to make investments? Today I have to go to his doorstep and tell him if you’re not investing, you’re in trouble. There is no social security in this country, you need to save for retirement, for medical. That’s a cost I incur.

The fee I’m getting is not for selling a product, I’m getting the fee to emotionally handle the investor throughout the period he takes to create wealth. I am being paid because I have to handhold him for that period. Because every time the market turns volatile, he gets worried about his investments. It’s not just about sales. What about after that? If there’s a death in the family, I have to help the family deal with their investments. So, what is the value-add of all that? How do you put a value on that?

I have a client who lives in the slums of Andheri. Today, he is worth ₹33 lakh. If I tell him that he needs to pay me a fee, he will take his money out and invest it in real estate.

A number of countries have banned commissions in mutual funds in favour of fees to advisors. What has their experience been like?

Mehta: There was a recent Morgan Stanley report on this, on the additional cost an investor pays in the fee model. Let’s say, the fund charges 1 per cent for a direct plan and 2 per cent for a regular plan. If the customer who goes direct is also using an advisor, then his total cost will be higher than in the regular plan. We’ve seen this in Denmark, UK, Australia, and Netherlands, all of which moved to fee-based systems.

In the US they’ve allowed all three models, you can be fee-based, commission-based or be both, as long as you disclose what your model is. Countries such as Sweden, South Korea, Belgium and Germany have not adopted the fee-based model. So, their the total costs are lower.

RV: Also, what happens is that there will be eventually a drop in the number of distributors. Those who remain in business will migrate to charging fees. But these fees will not be viable to service the small retail investor. For instance, in the UK, advisors charge a minimum of £5,000 as a fee. But only clients who invest over £100,000 a year will find this fee worth paying. As a result, the minimum threshold for entry-level clients in the UK has increased. Also, there will be a service gap and the quality of service may be lower for those who invest smaller amounts. So, ultimately, this will become a rich man’s product, while a mutual fund should, ideally, be a product for everybody.